A recent case in the Federal Court of Australia, Protectavale Pty Ltd v K2K Pty Ltd [2008] FCA 1248, dealt with issues of identifying valid payment claims and schedules under the Building and Construction Industry Security of Payment Act 2002 (Vic) (“SOP Act”).

The main issue was whether a valid payment claim had been issued and therefore whether there was a valid basis for a claim for summary judgment. The relevant invoice issued by the contractor was not held to be a valid payment claim or, alternatively, was held to be a final payment claim, the operation of which was suspended until such time as the contract prescribed. The contractor’s claim failed. The case discusses the formal requirements of payment claims and payment schedules in accordance with the SOP Act.

This case appears to be inconsistent with the decision of the New South Wales Court of Appeal in Nepean Engineering Pty Ltd v Total Process Services Pty Ltd (In Liquidation) [2005] NSWCA 409 which held that, if the contractor had made a reasonable attempt to identify work the subject of a payment claim, it was not open to the principal to defend a claim for summary judgment on the basis that the principal could not ascertain all of the work referred to in the payment claim.

Background

Protectavale Pty Ltd (“Protectavale”), the first applicant, and K2K Pty Ltd (“K2K”), the first respondent, were joint venturers in a residential and retail development (“Chadstone Gate”). They engaged Lorne Bay Pty Ltd (“Contractor”), the second respondent, to carry out construction work at Chadstone Gate.

Protectavale commenced proceedings against K2K and the Contractor to recover damages for delays and increased costs. The Contractor issued an invoice on 2 May 2008 for $635,448.06 (“May Invoice”), brought a cross-claim to recover this amount and moved for summary judgment on the basis that Protectavale had not issued a payment schedule.

Issues

Finkelstein J dealt with the following issues:

• Whether the May Invoice met the requirements of a payment claim under s14 of the SOP Act
• Whether the May Invoice was a progress claim or a final payment claim, and
• Whether Protectavale provided a valid payment schedule under section 15 of the SOP Act.

Payment Claims

A payment claim must meet the requirements of s14 of the SOP Act. It is an objective test which requires the document to clearly state the necessary information (Walter Construction Group Ltd v CPL (Surry Hills) Pty Ltd [2003] NSWSC 266 at 82). The May Invoice claimed three amounts as follows:

• $215,850 calculated by taking the contract sum ($6,295,000) less payments received from the principals ($6,000,400) and the amount equal to half the retention money ($78,750)
• $232,772.45 for variations which were evidenced by a variation register including short descriptions of each item of work, the subcontractor who performed the work and the claimed amount for each item, and
• $129,058 in delay or disruption costs, also evidenced in a schedule including short descriptions of delayed work, any extension of time to be granted and the daily rate at which the extra work was charged.

The claim for $215,850 was not accounted for on the May Invoice and the only information provided as explanation was that the amount was referable to the “Contract Sum” and “Payments Received”.

Finkelstein J held that the variation, delay and disruption costs were set out in sufficient detail however the May Invoice did not identify the work previously completed and paid for and the work (other than variations) to which the invoice relates.

In order to satisfy s14 of the SOP Act, the Contractor needed to either identify the construction work relating to the May Invoice or state that the claim was a contractual entitlement similar to a milestone payment. This information was material to Protectavale’s ability to value the work and make an assessment of the amount payable in the form of a payment schedule.

Finkelstein J held that the invoice did not identify the construction work or related goods and services to which the progress payment related and therefore did not meet the requirements of s14(3)(a) of the SOP Act.

Identifying a Final Payment Claim

Although Finkelstein J did not think it necessary to consider the issue any further, his Honour went on to discuss whether the May Invoice was a claim for a progress payment or a final payment. The SOP Act confers an entitlement on the contractor to make payment claims and recover progress payments however, prior to 2006 the definition of a payment claim did not include final claims. Finkelstein J followed Jemzone Pty Ltd v Trytan Pty Ltd (2002) 42 ACSR 42 where Austin J decided a request for final payment was not a request for a progress payment under the corresponding provisions of the Building and Construction Industry Security of Payment Act 1999 (NSW). The legislation in both jurisdictions has now been amended to extend the definition of “progress payment” to include a “final payment”, a “single or one-off payment” and a “milestone payment” and, in Victoria, applies to contracts made after 30 March 2007.

Finkelstein J was of the opinion that the meaning of the expression “progress payment” can be found in the construction contract itself. Clause 42.5 of the contract required that as a final payment claim, the May Invoice should have:

• Been provided to the superintendent “within 28 days of the expiry of the defects liability period”
• Been endorsed as a “final payment claim”
• Identified the “the value of the work carried out by the Contractor in the performance of the Contract to the date of the claim”, and
• Identified “all claims for moneys which the Contractor considers to be due from the Principal arising out of any alleged breach of the Contract”.

The timing of the final payment claim was discussed by Finkelstein J, who considered that “within 28 days of the expiry of the defects liability period” could mean:

• Within 28 days before or 28 days after the defect liability period expires
• After the defects liability period expires but no later than 28 days beyond that time, or
• Any time that is not later than 28 days after the defects liability period expires.

The May Invoice was served after practical completion but before the expiration of the defects liability period. Finkelstein J favoured the interpretation of the contract that meant a final payment claim must be issued within 28 days after the defects liability period.

Finkelstein J’s view was that the May Invoice was intended to be a final payment claim, not a payment claim for a progress payment, and because it was not issued within the correct period for a final payment claim to be issued, its operation was suspended until the time the contract permits the claim to be made.

In this case, there was no evidence as to how the retention money was held, however, it was noted that the May Invoice did not claim the balance of the retention fund. His Honour ventured that once a fund is established, the principal’s obligation to pay that amount is discharged and the contractor’s right to payment is confined to the fund itself. Finkelstein J considered that a conditional trust had been created in favour of the Contractor who was not entitled to call on the money until all its obligations under the contract are fulfilled. That is until the defects rectification work has been completed.

Identifying a Payment Schedule

Finkelstein J refused to accept Protectavale’s contention that an aggregate of communications, including several emails referring to previous letters, faxes and other emails passing between the parties constituted a payment schedule.

Notably, Finkelstein J said that:

• One purpose of a payment schedule was to articulate the reasons for withholding payment or offering to pay less than the claimed amount with a degree of precision and particularity to apprise the contractor of the case it will have to meet if it decides to pursue an adjudication (Multiplex Constructions Pty Ltd v Luikens [2003] NSWSC 1140 at 69 to 70).
• Another purpose was to set the limits for an adjudicator if there is to be a dispute about the claim.

As such, it was held that a payment schedule could not be constructed ‘artificially’ out of a series of documents in combination. It should be clear that the intention is that the documents constitute a payment schedule.

This decision appears to be inconsistent with a decision of the New South Wales Court of Appeal in Nepean Engineering Pty Ltd v Total Process Services Pty Ltd (In Liquidation) [2005] NSWCA 409 (“Nepean”) which held that if a contractor has made a reasonable attempt in the payment claim to identify the work in respect of which the claim is made and the principal does not provide a payment schedule, it is not open to the principal to defend a claim for payment by summary judgment on the basis that the principal could not ascertain all of the work referred to in the payment claim. In these circumstances the principal should serve a payment schedule stating that “it does not propose to make any payment in respect of that work because it cannot identify the work, and because for that reason it disputes that the work was done or done to a standard justifying payment, or was within the contract or within any variation of it, and that any pre-condition to payment was satisfied” (Nepean Engineering Pty Ltd v Total Process Services Pty Ltd (In Liquidation) [2005] NSWCA 409 Hodgson JA at 35).

Although Finkelstein J cites Nepean at paragraph 12 as authority for a principal’s obligation to “respond appropriately in a payment schedule” following a decision to reject a payment claim, his Honour does not go on to discuss the case.