06 October 2004
Payment provisions in standard form and custom contracts alike may need review, following a recent decision by the New South Wales Supreme Court.
Justice McDougall’s judgment in Minister for Commerce v Contrax Plumbing & Ors [2004] NSWSC 823 is the most recent decision to consider the balance between freedom of contract and protection of statutory rights under the Building and Construction Industry Security of Payment Act 1999 (NSW).
The construction contract considered in this decision (based on AS 2124-1986) entitled the contractor to make payment claims, with the restriction that the aggregate of the payment claims was not to exceed the contract price. The contract further included a mechanism to adjust the contract price in the form of a cascading process of submissions to the superintendent's representative, the superintendent, expert determination and finally arbitration.
Justice McDougall held these provisions to be void by virtue of section 34 of the Act, which stipulates that any provision of an agreement "under which the operation of the Act is, or is purported to be, excluded, modified or restricted" is void.
Section 8(1) of the Act provides that a claimant who carries out construction work, is entitled to a progress payment on and from each reference date.
He held that the effect of the payment regime under this contract was that the contractor had no entitlement to be paid for construction work done under the contract until the adjustment regime was worked through - which, as submitted by the contractor, may take over six months from the next reference date for payment.
Justice McDougall held that provisions such as these are more than valuation provisions within the meaning of section 9 and 10 of the Act because they did not just provide for how progress payments are to be calculated or work to be valued. Rather, they purported to defer the entitlement to a progress payment for work until the adjustment regime was completed, and that was inconsistent with the section 8(1) entitlement to a progress payment on and from the reference date occurring next after the work is performed. He also concluded that the general limitation that the aggregate of the payment claims was not to exceed the contract price was void.
The judgment has already sparked an intensive debate. The judgment is highly relevant not just from a litigator's perspective, but also for those who are involved in contract drafting and contract administration. It also raises some further questions, such as whether a provision which is deemed to be void under section 34 of the Act is void for all purposes or just for the purpose of the operation of the Act.
There are many provisions in current standard form contracts which might be affected by this decision. It will undoubtedly require review of all construction contracts (standard form contracts as well as custom drafted contracts) to ensure that the payment mechanisms are consistent with the objects of the Act and not at risk of contravening section 34.
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