Security of Payment Update – June 2013

Service by Email – Effective?

Construction contracts can permit the service of notices by email, however, determining the time at which the email is deemed to have been served or received is problematic and may have implications in the event that a matter proceeds to adjudication.

For example, if the notice is deemed to be received:

• at the time when the email is sent, the problem is that there is no provision to account for any delay between when the email is sent and when it is received;
• when the sender receives a ‘delivery receipt’, the problem is that people can elect not to have their email system send delivery receipts and so the sender may never receive the ‘delivery receipt’, despite the email being received; or
• a specified period of time after the email is sent, there is no guarantee that the email is received within the specified time, or at all.

Uncertainty can also arise when the sender is made aware that the email has not reached the intended recipient, such as when the email ‘bounces back’ if it is too large for the recipient’s inbox, or when the recipient is away from the office and the sender receives an ‘out of office’ auto-reply.

In relation to security of payment, the New South Wales Supreme Court decision of Bauen Construction v Sky General Services¹ held that an email serving an adjudication response that was caught by the spam filter of the receiver (an authorised nominating authority) was capable of being retrieved and therefore had been validly lodged by the sender in accordance with section 20 of the NSW Act.

The email was deemed to be received at the time it was captured by the spam filter. The Court held that it was enough that the authorised nominating authority was able to access the email; it was not necessary for the email to have been read or opened.

In this case, it was the recipient who disclosed the fact that the email had been captured by its spam filter. A sender would not usually know whether an email sent by it had reached the recipient’s server.

With this decision in mind, we suggest that you calculate carefully when an email will be deemed to have been received if you are serving (or agreeing to serve) notices by email and make sure that you will be in a position to prove what time the email was received.

Note: the VIC Act also uses the word ‘lodge’ in relation to serving an adjudication response, whereas the ACT Act uses the word ‘give’, so may be interpreted differently.

Cost of Rectifying Defective Work is Not an ‘Excluded Amount’ (Victoria)

The recent Victorian Supreme Court decision of Maxstra Constructions Pty Ltd v Gilbert & Ors² considered the conflict between sections:

• 10B(2)(c) of the VIC Act, which provides that an amount claimed for damages for breach of the construction contract is an excluded amount and is not to be taken into account in calculating the amount of a progress payment (excluded damages); and
• 11(1)(b)(iv) of the VIC Act, which provides that construction work is to be valued in accordance with the contract or, if the contract makes no provision for this, having regard to the estimated cost of rectifying defective work (rectification costs).

Note: the ‘excluded amounts’ provisions are exclusive to the VIC Act.

In this case a respondent, in its payment schedule, sought to off-set delay and rectification costs. The claimant alleged the off-set amounts were excluded damages for breach of contract caught by section 10B(2)(c) of the VIC Act.

Justice Vickery held that these sections had different tasks to perform. The point of section 10B(2)(c) was a claim for damages where the object is to put the party, who has suffered loss, in the position it would have been had the contractual obligation not been breached. Justice Vickery found that delay costs fell within this excluded damages category, whereas the compensation contemplated by section 11(1)(b)(iv) is of a different character; it is a specific statutory concept providing that rectification costs for remedying defective work be taken into account when valuing construction work.

Justice Vickery noted that:

• assessing a claim for damages is different to estimating the rectification costs. For example, elements such as consequential loss, which could be included in a claim for damages, are not contemplated by section 11(1)(b)(iv) which deals only with rectification costs;
• section 11(1)(b)(iv) would be superfluous if the decision maker was precluded from taking rectification costs into account for the reason that they are excluded amounts; and
• his approach was consistent with section 10 of the NSW Act (which provides that the estimated amount of rectifying work that is defective should be taken into account), the difference being that the NSW Act does not have the ‘excluded amount’ provisions contained in the VIC Act.

Australian Capital Territory

The Building and Construction Industry (Security of Payment) Act 2009 (ACT) commenced on 1 July 2010 and is yet to be subject to judicial consideration. The ACT Act is largely based on the NSW Act. It is likely that the decisions made in relation to the NSW Act will be followed.

Clarification of What ‘Other Arrangement’ May Include in Relation to a ‘Construction Contract’

In the recent case of Cranbrook School v JA Bradshaw Civil Contracting³ the Supreme Court of New South Wales looked at what may constitute a construction contract as defined by section 4 of the NSW Act:

“construction contract means a contract or other arrangement under which one party undertakes to carry out construction work, or supply goods and services, for another party” [emphasis added]

Note: the same definition of ‘construction contract’ is used in the VIC and ACT Acts.

In this case the head contractor withdrew from the project after a breakdown in its relationship with the principal. The principal wanted the subcontractors to be novated to it. The subcontractor in this case did not want its contract with the head contractor novated to the principal until certain outstanding payments were resolved.

The head contractor subsequently went into administration and the subcontractor submitted its payment claim to the principal. The principal argued there was no construction contract between it and the subcontractor.

The court considered whether the situation in question was an ‘other arrangement’ as contemplated by the definition of construction contract.

Justice McDougal held that there was no construction contract, as defined, and said that ‘other arrangement’ denoted something falling short of a contract and for there to be such an arrangement one party must undertake to perform construction work for another.

His Honour required the facts to show that the subcontractor undertook to carry out construction work for the principal but, given that the payments which the subcontractor wanted resolved before it would agree to novation had not been resolved, the subcontractor could not have undertaken construction work for the principal because that would be inconsistent with the position it took regarding novation.

Accordingly, Justice McDougal held that there was no ‘other arrangement’ and therefore no construction contract meaning that the principle was not liable to the subcontractor.

¹ [2012] NSWSC 1123.
² [2013] VSC 243
³ [2013] NSWSC 430