Can Security and Retention Funds be Claimed under the SOP Act?

Under the Building and Construction Industry Security of Payment Act 2002 (Vic) (SOP Act) claimants have a statutory right to make a claim for payment for the value of construction work and related goods and services. The question considered in this case is whether a payment claim under the SOP Act can validly claim for retention funds by another party. The answer to this question turned on whether the payment claim for retention funds was a claim for the value of ‘construction work’ or for related goods and services for the purposes of the SOP Act.

In this case of J.G. King Project Management Pty Ltd v Hunters Green Retirement Living Pty Ltd & Anor [2024] VSCA 310, the Court of Appeal of the Victorian Supreme Court held that a Builder’s final progress claim for the return of retention moneys held by the Principal as security was a valid payment claim within the scope of the SOP Act.^[1] This case is significant because it opens the door for parties to make a payment claim under the SOP Act to recover retention funds held by another party. Significantly, the Court confirmed that a claim for the return or release of a bank guarantee could not be a claim made under the SOP Act.

Background

1. In August 2018, J.G. King Project Management Pty Ltd (Builder) and Hunters Green Retirement Living Pty Ltd (Principal) entered into two contracts for the construction of a retirement village in Cranbourne East (Contracts) based upon the general terms and conditions of AS4902 – 2000 (as amended).

2. Clause 37.1 of the Contracts concerned progress claims and provided that the Builder shall give the Superintendent claims for payment (‘progress claims’) on the 25^th day of each month for ‘WUC’ (works under contract) done to the last day of that month during ‘WUC’; on the date of  practical completion and at the time for making the final payment claim.

3. Clause 37.2 of the Contracts concerned payment certificates which provided that the Superintendent shall, within 10 business days after receiving a progress claim, issue to the Principal and Builder a payment schedule.

4. Clause 37.4 of the Contracts concerned the Contractor’s final payment claim. This clause provided that within 28 days after the expiry of the last defects liability period and satisfaction of all of the Contractor’s obligations under the Contract the Contractor shall give the Superintendent a final payment claim to be assessed by the Superintendent.

5. Under the Contracts the form of security was retention moneys.

6. On 19 August 2022, the Builder sent to the Principal:

1. 1. a document titled ‘Final Payment Claim’ for Stage 12 that stated that the ‘Current Contract Claim’ was $115,948.66 (inclusive of GST) and was a claim under the Act and a deed of release that stated the ‘Amount Claimed’ was $115,948.66 (‘Stage 12 Final Payment Claim’); and
   2. a document titled ‘Final Payment Claim’ for Stage 13 that stated that the ‘Current Contract Claim’ was $176,055.64 (inclusive of GST) and was a claim under the Act and a deed of release that stated the ‘Amount Claimed’ was $176,055.64 (‘Stage 13 Final Payment Claim’),
      (together the Final Claims).

7. The Final Claims included a schedule (headed ‘Final Payment Claim’) and a table which provided that each item of work was 100 per cent complete. The schedule also outlined the ‘current contract claim’, being the difference between the total amount of the value of completed works less the total amount previously paid by the Principal. In effect the Final Claims included a claim for the retention moneys held by the Principal.

8. The Principal submitted that the Final Claims were not for ‘construction work’ or for ‘related goods and services’, but rather, were solely in respect of the release of retention moneys in the Principal’s possession.

9. The Builder took the Final Claims to adjudication and succeeded against the Principal. The Principal sought judicial review of the adjudicator in the Supreme Court. The Supreme Court overturned the adjudicator’s decision on the basis that, amongst others things, the final certificates had not been issued and that the claims were not in respect of construction work because they were claims for the return of security. The Builder appealed that decision to the Court of Appeal.

Decision

10. As observed by Niall JA, as a Builder’s entitlement to submit a payment claim under the SOP Act is a statutory entitlement, the cause of action is not in contract. Accordingly, when a Builder makes a claim under the SOP Act, the question of the Builder’s entitlement is determined by the provisions of the SOP Act. However, the SOP Act can and does use the terms of a construction contract as a point of reference for the purpose of determining the timing and calculation of this statutory entitlement.

11. In allowing the appeal, Niall JA decided that clauses 5.4 and 37.4 of the Contract did not permit the Principal to withhold the balance of retention moneys until the issue by the superintendent of a final certificate under clause 37.4.

12. Niall JA considered that funds that were retained as security by the Principal came from moneys that were otherwise payable to the Builder in respect of work carried out by it under the construction contracts. Further, that security is an amount retained from a progress payment that is withheld after the amount owing to the Builder has been calculated under the Contract.

13. As such, Niall JA stated that:
    ‘In my opinion, the final payment claims were for construction work. The amounts were for construction work that had been undertaken by the builder and in respect of which amounts were said to be owing and unpaid. The fact that the amounts remained unpaid and had been held by the principal as security does not preclude the claims from being claims for construction work.’^[2]

14. Niall JA distinguished a claim for payment of retention moneys, which could be a claim for construction work under the SOP Act from claims for the release or return of a bank guarantee as follows:
    ‘In my opinion, it does not matter that the money the subject of the claims could also be characterised as money held by the principal as security. Even if it was held for that purpose, it did not lose its character as money owing for construction work done. It may be accepted that a claim for the release of other forms of security may not involve a claim for payment for construction work. So, for example, if the builder had provided a bank guarantee in the sum of 10 per cent of the contract price to be held as security, a claim for its release would not be a claim to be paid for construction work. That is a very different situation to a claim based on money withheld by the principal that was otherwise payable for work done.’^[3]

Take Aways

15. Under a construction contract, security in the form of retention funds held by a principal can be claimed by a contractor under the SOP Act as payment for construction work.

16. This case is significant as it has commercial implications for principals and contractors alike, particularly in circumstances where the contractor is approaching the time by which its final payment claim is made. At that point in time contractor typically claim for all amounts to be paid for unpaid construction works and this may well include retention amounts held by the principal.

Queries

For further information regarding this article, please contact the authors or any member of our Building & Construction team.

Disclaimer

This information and the contents of this publication, current as at the date of publication, is general in nature to offer assistance to Cornwalls’ clients, prospective clients and stakeholders, and is for reference purposes only. It does not constitute legal or financial advice. If you are concerned about any topic covered, we recommend that you seek your own specific legal and financial advice before taking any action.

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[1] The ‘SOP Act’ being the Building and Construction Industry Security of Payment Act 2002 (Vic).

[2] J.G. King Project Management Pty Ltd v Hunters Green Retirement Living Pty Ltd & Anor [2024] VSCA 310 at paragraph 41.

[3] J.G. King Project Management Pty Ltd v Hunters Green Retirement Living Pty Ltd & Anor [2024] VSCA 310 at paragraph 44.