In a judgment handed down on 6 May 2011 in the case of Seabay Properties Pty Ltd v Galvin Construction Pty Ltd & Anor [2011] VSC 183 the Supreme Court of Victoria confirmed that liquidated damages are an 'excluded amount' under section 10B of the Building and Construction Industry Security of Payment Act 2002 (Vic) ("the SOP Act").
Section 10B(1) of the SOP Act relevantly provides that excluded amounts must not be taken into account in calculating the amount of a progress payment. An 'excluded amount' is defined in section 10B(2) as, among other things:
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..."
The principal in this case, Seabay Properties Pty Ltd, contended that it was entitled to deduct liquidated damages from the payment claimed submitted by the contractor under the SOP Act because the 'excluded amounts' prohibition only applied to amounts claimed by the claimant, and not amounts deducted by the person on whom a payment claim was served. However, the Court disagreed with Seabay Properties' contention. After noting that the SOP Act is not designed to accommodate claims for damages arising under the construction contract, whether made by the claimant or the party on whom the claim was served, the Court held that the amount of liquidated damages deducted by Seabay Properties fell within the definition of 'excluded amount'. Accordingly, Seabay Properties was precluded from deducting liquidated damages from the payment claimed by the contractor in its payment claim.
What does this mean for you
The Court's decision confirms that, where payment is claimed under the SOP Act, the party on whom the claim is served will not be entitled to deduct or set off any damages, including liquidated damages and other delay damages, before making that payment despite any contractual entitlement to do so. Instead, such claims will need to be resolved in court or, where applicable, arbitral proceedings after the payment is made.
Claimants under the SOP Act should carefully review payment schedules issued by the person on whom the claim was served to ensure that deductions or set offs for liquidated damages have not been made and, where such deductions or set offs have been made, claimants should object.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
