I am pleased to be able to say that my arguments have prevailed in the Victorian Court of Appeal in Yuanda Vic Pty Ltd v Façade Designs International Pty Ltd [2021] VSCA 44.

In short, the point was this. Under the Victorian security of payment legislation, if the respondent does not put a payment schedule in on time, the claimant can either go to adjudication, or alternatively can ask the court to give judgment. But under the relevant provision[1], such judgment is not to be given unless the court is satisfied that the claimed amount does not include any excluded amount, and by the definition section of the Act, the claimed amount means the amount that was claimed in the original payment claim. There are some somewhat complex provisions in the Victorian legislation is to what those excluded amounts are. In this decision, the Victorian Court of Appeal has said that this provision means what it says: if the original payment claim includes claims for excluded amounts (in this case, it was a claim for interest, and perhaps other claims) the court cannot give judgment, and in particular, cannot sever out the excluded amounts and give judgment for a lesser sum.[2]

It is not uncommon, particularly in larger cases, for the original payment claim to include claims for excluded amounts. Such payment claims are not usually drafted by lawyers, and it is all too understandable that they often include claims for excluded amounts (such as interest, or certain contested variations or time-based claims). It is also not uncommon for the respondent, by administrative oversight, to fail to get its payment schedule in on time. In those circumstances, the claimant should not be tempted to take the “shortcut route” of an application to the court, but instead should go to adjudication, where the adjudicator is tasked with identifying any excluded amounts, such that those excluded amounts not find their way into any determination of what is due. Claimants should only go directly to court if they are confident that their claim is “squeaky clean” of excluded amounts.

The majority (McLeish JA and Niall JA) needed just 13½ pages for their part of the judgment. Dissenting, Sifris JA kept going for another 58 pages.[3] He began his dissenting judgment by noting that the legislation provides a “pay now and argue later scheme” and that:

This case exposes the danger that parties may argue now and if required to pay later.

There is force in that observation. In this case, the original hearing of the application for judgment (in which I was not instructed, but my junior was) occupied the court for several days, with lengthy cross-examination of witnesses. That is clearly not what the legislation envisaged.  The first instance Judge gave judgment for the claimed amount, less the amounts that were eventually conceded by the claimant to be excluded amounts.

Since then:

• we persuaded the trial judge to extend the temporary stay on execution pending an application for a further stay to the Court of Appeal;
• we persuaded the Court of Appeal to further extend the stay on execution until the disposal of the appeal itself (https://feconslaw.com/2020/10/11/the-meaning-of-the-claimed-amount/);
• we have now persuaded the Court of Appeal to allow the appeal.

Hopefully, this judgment will restore some welcome simplicity. The whole concept of, “pay now,  argue later” as originally envisaged back in the 1990s in the UK Parliament was simply to address this question: who should hold the cash pending a lengthy court case or arbitration of a construction dispute? It was supposed to be a relatively short question, to be answered by an adjudicator. I know this, because I coined the phrase, in discussion with Lord Howie in the House of Lords tearoom.[4] The scheme was devised in order to keep the courts out of it at this “cash flow” stage. The underlying concept was that, absent and adjudication process, the traditional court or arbitration system favours the defendant: the defendant holds the cash throughout what may be a very lengthy process, and that of itself is a factor which stokes the fires of dispute. We predicted (as it turned out correctly) that if there is a prompt, if somewhat rough and ready, decision by an adjudicator as to who should hold the cash pending eventual resolution, then a lot of disputes would disappear. Unhappily, as it is been translated into Australia, this concept has been somewhat mutilated by extraordinarily complex security of payment legislation.  Bizarrely, every State and Territory has different legislation. Probably, the Victorian version is the worst, although some might say that New South Wales has been coming up fast on the rails for that dubious prize.

The decision also vindicates Yuanda’s stance of challenging this claim, which was in this case very far from what some Australians would call “fair dinkum”.

 

Further note

 

Since posting the above, it appears that there is an appetite for a bit more explanation about this decision.

 

There were five grounds of appeal, and the Court of Appeal gave leave to appeal on all five of them. The strongest ground was always ground 2, described above, and that is the ground on which the appeal succeeded. However, there is also interest in the other grounds, and Façade’s notice of contention.

 

Severance

The respondent’s notice of contention sought to rely on the doctrine of severance. The majority found that this argument failed at the threshold.[1] In truth, the Court of Appeal said, the argument failed to accept the proper construction of the Act.

 

In any event, the court noted that the doctrine of severance applies where part of an instrument is invalid: in limited circumstances, the remainder of the instrument may be preserved by severing that part. Here, there was no such available instrument. There was no question as to the validity of the Act itself. Nor of the payment claim; a payment claim is still a valid payment claim even if it contains an excluded amount.[2] in short, there was no instrument for the doctrine of severance “to get its teeth into”. This is in contrast to the position where an adjudicator’s determination gets something fatally wrong.[3] A determination is an instrument that might well be invalid unless a bad part of it is severed out. That is why, per Gantley v Phoenix and other cases, the doctrine of severance might well apply to an adjudicator’s determination.

Ground 1

The first ground of appeal concerned the meaning of the words “must not include any excluded amount”. As the majority noted, this is open to more than one interpretation. They described the choice as follows:

42 Reading [Sections 14(3)(b) and 16(4)(a)(ii)] together, a payment claim ‘includes an excluded amount’ if such an amount has been taken into account in calculating the claimed amount indicated in the payment claim…

43 Accordingly, the payment claim itself will have ‘included’ those amounts and provided an explanation for their inclusion. There is a subtle difference between this and saying that the claimant has ‘included’ the amounts. That is because, if it is said that the claimant has ‘included’ the amounts, the inquiry into whether an excluded amount has been included would logically examine the factual basis relied on by the claimant. In contrast, where it is the payment claim that ‘includes’ an amount, the equivalent inquiry might logically confine itself to the material disclosed in the payment claim.

The interpretation that the Court of Appeal chose as according better with the policy of the Act was the more limited construction: the court confines itself to the material disclosed in the payment claim, and does not look at the facts. In other words, the court just looks at the face of the payment claim, and not the reality. If the claimant has a dog, but calls it a cat, then it is a cat for these purposes.

 

The moral emerges is that if a claimant wants to include a claim which is, in truth, a damages claim, then it should be careful to characterise it in the payment claim as a claim for a variation, even if there is no conceivable way in which such a characterisation is justifiable.

 

What happened in this case is that the payment claim had included a claim for interest. Until the last day of trial, the claimant had maintained the fiction that this was a claim for a variation. However, on the last day of trial, the claimant changed tack, conceding that the interest claim was not a variation, and was an excluded amount.

Ground 3

The ground 1 point was illustrated by ground 3. The claimant had included in its payment claim claims for idle time, when no work had been possible because the whole site had been shut down. The appellant’s argument went like this:

 

• This claim was in respect of periods of time when the claimant was unable to do any work, there being no change in the construction work which was in fact carried out;
• by the definition section in the Act, variation means a change in the scope of the construction work;
• accordingly, the claims for idle time could not be claim for variation under the Act (although it could, of course, be a claim for damages, or even perhaps for variation as defined by the contract);
• accordingly, not being claims for a variation at all (as defined by the Act), the claims could not be claims for a “claimable variation” under section 10A;
• accordingly, the claim was a claim for an “excluded amount” under section 10B.

The court was not interested in this analysis. The item had been included under the heading “variations” and that was essentially the end of that matter.[4]

As a sidenote, the claimant had previously gone to adjudication in respect of an earlier payment claim under the same project, and that earlier claim had also included a claim for idle time in exactly the same circumstances. The Act requires an adjudicator to identify and excise excluded amounts from any determination, and that is what the adjudicator did: he found that this claim was in fact for an excluded amount and he disallowed it. This suggests a difference in approach depending on whether the claimant goes down the adjudication route, or the shortcut route:

• if the claimant goes down the adjudication route, the adjudicator looks at the reality of whether something is an excluded amount, but
• if the claimant goes for the shortcut route, the court looks just at the face of the payment claim, and sees how the claim has been described, without any enquiry as to whether that description is accurate.

 

Grounds 4 and 5

These are grounds concerned a bogus “settlement agreement”. It is undesirable to anything about that issue here. The conclusion of the court[5] was that:

200 In the circumstances, it was unnecessary and undesirable to deal with the efficacy and validity of the settlement agreement ‘on the run’. It was not pleaded, not part of a payment schedule, not precisely articulated and raised at trial only as an evidentiary matter. However, most importantly, it was irrelevant to the claim which was otherwise supportable. This is not to say that the allegations are not serious and may be required to be dealt with in due course, with potentially drastic consequences, but not at this stage.

Accordingly, the court did not follow the approach that “fraud unravels everything” in the same way as Justice Vickery in Sugar Australia Pty Ltd v Southern Ocean Pty Ltd & Anor [2013] VSC 535.

 

 

 

 

 

[1] At [30].

[2] At [31].

[3] it is not, of course, fatal to an adjudicator’s determination that it gets some matter of fact or law wrong. But it is ordinarily fatal if the adjudicator assumes a jurisdiction that he does not in fact have, or fails to observe the applicable rules of natural justice, or if he fails to do his work in good faith.

[4] At [47] and [154].

[5] The majority adopting the minority reasons of Sifris JA at [48].

 

 

 

[1] s 16(4)(a) of the Building and Construction Industry Security of Payment Act 2002:

(4) If the claimant commences proceedings under subsection (2)(a)(i) to recover the unpaid portion of the claimed amount from the respondent as a debt—

(a) judgment in favour of the claimant is not to be given unless the court is satisfied—

(i) of the existence of the circumstances referred to in subsection (1); and

(ii) that the claimed amount does not include any excluded amount; …

[2] The suggestion to the contrary at Security of Payment Marcus Jacobs 6th edition [SOP15.120] (page 249) is thus wrong.

[3] In fairness, it is right to note that the majority adopted Justice Sifris’ lengthy outline of the issues in the appeal, so it would not be fair to accuse him of prolixity.

[4] Lord Howie passed it on to Lord Akner, who use the phrase in debate in the House of Lords. Hence it found its way into UK court judgments, and then into Australian court judgments.