Pay when entitled not when paid

3 mins 15.02.2018 Peter Wood, Andrew Orford, Richard Crawford, Tom French, Andrew Hales, Nikki Miller, Amy Dunphy, Alexandria Hammerton

Head contract cannot influence when retention amounts are released to subcontractors

The High Court has held that provisions relating to the release of retention under a subcontract contingent on an event under a head contract are void under the 'pay when paid' prohibition contained in the Building and Construction Industry Security of Payment Act 2009 (SA) (SOP Act).

The broad view taken by the High Court in Maxcon Constructions Pty Ltd v Vadasz [2018] HCA 5 of 'pay when paid' provisions is important because:

many head contractors rely on retention amounts from subcontractors for security;
often, the release of retention (and even payment generally) is tied to certain events occurring under a head contract, such as practical completion; and
the Security of Payment legislation in all Australian jurisdictions contains 'pay when paid' prohibitions (although the particular wording may affect the application of the decision in some jurisdictions).

Industry participants should carefully review the retention provisions in their subcontracts to ensure that they do not unintentionally fall foul of the 'pay when paid' prohibition in the Security of Payment legislation.

Facts

In summary:

Maxcon Constructions Pty Ltd (head contractor) and Mr Vadasz (subcontractor) entered into a subcontract under which the subcontractor was to design and construct the piling for an apartment development.
The subcontractor was required to provide security in the form of cash retention of 5% of the contract sum.
The security was to be released when the Certificate of Occupancy (CFO) under the Development Act 1993 (SA) being issued.
The head contractor deducted retention amounts from the payment schedule, which the subcontractor disputed in an adjudication.
The adjudicator accepted that the head contractor was not entitled to deduct the retention sum, finding that the retention provisions amounted to 'pay when paid provisions' under the SOP Act.
The head contractor commenced proceedings to have the determination set aside. The head contractor alleged that the adjudicator made an error of law in deciding that the relevant clauses were 'pay when paid' provisions.

Decision

The High Court unanimously dismissed the appeal finding that the adjudicator had not erred in law in determining that the retention provisions were 'pay when paid provisions' under the SOP Act.

The High Court reasoned that the due dates for payment of the retention sum were dependent on something unrelated to the subcontractor's performance. That is, payment of the retention sum was dependent on the completion of the head contract, which in turn would have enabled a CFO to be issued. It followed that, under the SOP Act, the head contractor had no right to deduct the retention sum from the scheduled amount.

Relevantly the High Court found that, even if the adjudicator had fallen into error, it would have been non-jurisdictional error. This meant that the court did not have jurisdiction to set aside the adjudicator's determination.