Progress Payments in the Construction Industry

Progress payments refer to the amount of money that a person who has undertaken to carry out construction work or the supply of related goods and services is entitled to from the principal. The payments could be a final payment, a one-off payment or a payment based on an event or date. The Building and Construction Industry Security of Payment Act 1999 (NSW) (‘SOP Act’) governs progress payments. The case J Hutchinson Pty Ltd v Glavcom Pty Ltd [2016] NSWSC 126 recently shed some light on the interpretation of this legislation. This article will explore the law in more detail. In particular, it will answer whether you can set preconditions for progress payments. It will also detail whether you can deduct liquidated damages (i.e. a contractually agreed sum in the event a party breaches a term) from the calculation of progress payments.

Facts of the Case

Here, the master contractor Hutchinson subcontracted some design, fabrication and installation of joinery work to Glavcom. This subcontract was in return for payment of $5.3 million. Under the contract, Hutchinson was meant to have allowed Glavcom access to the site in mid-August 2014. However, Glavcom was not given access until March of 2015.

When Glavcom served a claim on Hutchinson, Hutchinson served a payment schedule in return that set off the claim in liquidated damages to a total of negative $6.3 million. Hutchinson asserted that this was due to Glavcom’s delay in completing the work.

What Does the SOP Act Say About Progress Payments?

This case revolved around the interpretation of a few key provisions in the SOP Act, namely:

• Section 34, which renders void any provisions of a construction contract that restricts or modifies the SOP Act;
• Section 8, which provides that a construction contract may fix a reference date or provide a method for fixing a reference date;
• Section 9, which allows for a construction contract to set out the method in which parties can calculate progress payments.

Main Legal Issues

The court looked at two main issues in this case:

1. Whether parties can set preconditions to progress payment; and
2. The ability or right to deduct liquidated damages in the calculation of progress payments.

(1) Preconditions to Progress Payments

The court focussed on a particular clause in the construction contract. The clause stated that before Glavcom could make a claim for a progress payment on the reference date, they needed to make a statutory declaration that Hutchison had paid all money due and payable.

The Court held the entire clause to be void in that it violated section 34 of the SOP Act. In particular, the wording of section 8 does not mean that conditions could be attached to the setting of a reference date or to a right to receive progress payment. If you gave it that meaning, you would be modifying or restrict the circumstances where a person was entitled to a progress payment. This modification or restriction would give rise to section 34.

(2) Right to Deduct Liquidated Damages

Both parties accepted that the contract did not provide a method for calculating the amount of a progress payment. As the calculation method was not defined, the Court determined the amount under section 9 of the SOP Act.

The Court held that because section 9 stated nothing about a set-off, it was within the parties’ rights to contract a clause which deducted liquidated damages from the progress payments.

In looking at this issue, the Court briefly discussed the existence of the prevention principle. This legal principle is one of fairness in that it prevents a principal or the main contractor from levying liquidated damages in circumstances where it has caused the delay.

However, for set-offs to be valid, it must be specifically and expressly provided for in the calculation of a progress payment. Since the parties did not do this, the Court stated that no set-off was allowed for Hutchinson.

The Court’s Decision

Concerning the first issue, the Court ultimately held that any contractual clauses that restrict or modifies the SOP Act will be void. Furthermore, parties are allowed to deduct and set-off liquidated damages. However, the contract must expressly provide for it to be valid.

Key Takeaways

The case provided two key legal points that building owners, contractors and subcontractors should be aware of:

1. That clauses which provide additional conditions to the right to receive progress payments will be seen to restrict the SOP Act, and be rendered void; and
2. The construction contract must expressly provide for the right to deduct liquidated damages from the calculation of progress payments. Otherwise, parties must rely on the method set out in the SOP Act.

***

Need help in drafting your building contract? For help or advice in drafting your building contract, get in touch with LegalVision’s construction lawyers on 1300 544 755.