Liquidated Damages and the Building and Construction Industry Security of Payment Act 2002 (Vic)

The Building and Construction Industry Security of Payment Act 2002 (Vic) (SOP Act) entitles those that carry out construction work or supply goods and services under construction contracts to progress payments and sets out a framework to recover them should they remain unpaid.

Payment claims and excluded amounts

A payment claim must not include an excluded amount.  Section 10B of the SOP Act states that:

Excluded amounts

(1)  This section sets out the classes of amounts (excluded amounts) that must not be taken into account in calculating the amount of a progress payment to which a person is entitled under a construction contract.

(2)  The excluded amounts are—

(a) any amount that relates to a variation of the construction contract that is not a claimable variation;

(b) any amount (other than a claimable variation) claimed under the construction contract for compensation due to the happening of an event including any amount relating to –

(i) latent conditions; and

(ii) time-related costs; and

(iii) changes in regulatory requirements;

(c) any amount claimed for damages for breach of the construction contract or for any other claim for damages arising under or in connection with the contract;

(d) any amount in relation to a claim arising at law other than under the construction contract;

(e) any amount of a class prescribed by the regulations as an excluded amount.

The Courts have determined that liquidated damages are “time-related costs” within the ambit of Section 10B of the SOP.  This position was confirmed by the Victorian Supreme Court in the case of VCON v Oliver Hume & Anor [2020] VSC 767, which went further to hold that any attempt to recover liquidated damages levied in a previous accounting period was also a claim for an excluded amount.

The Victorian Supreme Court further clarified the position in relation to liquidated damages in the case of Goldwind Australia Pty Ltd v ALE Heavylift (Australia) Pty Ltd [2021] VSC 625.  In this case, the Court held that:

(a) a claimant is not precluded from recovering payment for work the subject of an earlier, unadjudicated payment claim; and

(b) liquidated damages claimed as part of a subsequent payment claim for work performed is not a claim for an excluded amount.

It is worth setting out the facts of the case to illustrate how the decision came about.

In this case, Goldwind Australia Pty Ltd (Goldwind) engaged ALE Heavylift (Australia) Pty Ltd (ALE) to erect wind turbines at a wind farm located in Victoria.

In September 2020, Goldwind issued a payment schedule deducting liquidated damages from the amount it paid ALE.

In February 2021, ALE issued a payment claim for the works it performed in September that was not paid as a result of Goldwind deducting liquidated damages. In response, Goldwind issued a payment schedule again deducting liquidated damages.

In March 2021, ALE applied for an adjudication under the SOP Act claiming it should be paid for the work the subject of its February 2021 payment claim.  The adjudicator determined that ALE’s payment claim was for works done and was not a claim to recover liquidated damages.

Goldwind subsequently issued proceedings in the Supreme Court of Victoria seeking an order that the adjudication be set aside because the adjudicator had taken into account the liquidated damages, being an excluded amount under the SOP Act.

The Court upheld the adjudicator’s decision.  It rejected Goldwind’s argument that because ALE failed to immediately dispute the liquidated damages in the September 2020 payment schedule, the nature of the claim to a claim changed to a to claw back of the liquidated damages.

Impact of the decision

In circumstances where liquidated damages are deducted against work claimed in a payment schedule, claimants can decide when to dispute the deduction via adjudication.  It would appear that they will not be penalised by the Court if a review of the deduction is not done immediately.  Further, they can issue a later progress payment claim for works performed but not paid to claw back the deduction of liquidated damages.

If we can assist you with a SOPA Payment claim, or responding to one, please contact Kaye Griffiths, Senior Associate at Kaye.Griffiths@lewisholdway.com.au or 0412 083 513