The judgment in Foursquare Construction Management Pty Ltd v Chevron Corporation Pty Ltd [2020] VCC 1928 is the most recent in a series of decisions in the last year which have considered the question of whether a payment claim made under the Building and Construction Industry Security of Payment Act 2002 (Vic) (SOP Act) can include a claim for retentions due under a construction contract.

The authorities considered below highlight the importance of understanding your construction contract.  If contract provides a mechanism for the release of security, a Payment Claim seeking payment for the return of retention money without any claim for the construction work performed under the contract is not valid for the purpose of the SOP Act. Rather than claiming retention amounts in progress payment, any contractual entitlement to security should be enforced as a contractual provision.

What is retention?

Retention is security held by a Principal to guarantee the performance of a Contractor’s works.  The form and amount of retention to be held by the Principal is a matter for the parties to negotiate and is typically 5% to 15% of the contract sum.

Generally speaking, the Principal is required to release to the Contractor half of any retention withheld under the contract at the issuing of a Certificate of Practical Completion confirming the Contractor has in fact completed its works.  The balance is usually released to the Contractor at the expiration of the defects liability period. 

Claims for retention in payment claims under the SOP Act

The SOP Act allows those who carry out construction work or supply related goods or services under a construction contract to efficiently recover progress payments for works performed under that contract.[1]  The definition of ‘construction work’ is broad and includes a wide range of construction works such as construction, repair, restoration, maintenance, extension, demolition or dismantling of buildings forming or to form part of land, installation of heating, lighting, air-conditioning, power, drainage, sanitation and the like, and it also includes external and internal cleaning of buildings so far as that cleaning is carried out in the course of construction work.  The list goes on.  What the definition does not say is whether ‘construction work’ extends to retentions withheld under a construction contract. 

This article considers three recent Victorian cases which considered whether retention monies are captured in the definition of ‘construction work’ and therefore can be claimed under the SOP Act regime.

Recent cases

Punton’s Shoes v Citi-Con [2020] VSC 514

The Supreme Court decision in Punton’s Shoes Pty Ltd v Citi-Con [2020] VSC 514 (Punton’s) was handed down 24 August 2020.

The case related to a design and construction contract (Contract) between a developer, Punton’s Shoes Pty Ltd, and the head Contractor and builder, Citi Con Pty Ltd. The plaintiff, Punton’s Shoes sought an order to quash the Adjudicator’s Determination.

Adjudication application

The first defendant, Citi Con, issued a payment claim in the amount of $222,750 (incl GST) in respect of the return of 50% of the retention money but without any claim in respect of the balance of the works.

Clause 5.2 and item 13 of Annexure Part A of the Contract relevantly required Citi Con to provide security in the amount of 5% of the Contract sum, being $405,000, in the form of cash retention, with such retention moneys to be reduced to 50% pursuant to clause 5.8 and Item 17 of Annexure part A of the Contract, upon the issue of the Certificate of Practical Completion.  Punton’s Shoes issued a payment schedule proposing to pay $0 and scheduling an amount of -$419,339.50.

The Adjudicator determined that Citi Con was entitled to the release of 50% of the retention due to the issue of the Certificate of Practical Completion (as required by the Contract) and the Adjudicated Amount was the claimed amount of $222,750 (including GST).

Supreme Court Proceeding

The plaintiff, Punton’s Shoes, sought an order that the Adjudicator’s Determination be set aside on the basis that clause 5.8 of the Contract did not provide a standalone entitlement for a claim under the SOP Act.  The plaintiff submitted that the Adjudicator was required to value all of the works performed under the Contract and that by (a) failing to determine the payment claim in accordance with the SOP Act, and (b) failing to consider defective works, the Adjudicator fell into jurisdictional error.

The first defendant, Citi Con, argued that the Adjudicator was entitled to find that the payment of retention money is in the nature of payment for construction works and is claimable under the SOP Act.[2] However, Justice Digby did not agree with this submission, finding in favour of the plaintiff.

His Honour found that under the Contract, specifically clauses 5.1, 5.2, 5.5, 5.6 and 42.8 the retention moneys formed a separate and distinct security fund. He found that the Contract made no provision for a claim in respect of the security fund.  Accordingly, any implied right or entitlement there may be in the return of a portion of retention moneys is different in character and distinct from either a claim under the Contract for the value of work carried out or an entitlement under the SOP Act for the value of construction work carried out.[3]

In circumstances where the Contract already provided a mechanism for the release of retentions captured by the Final certification process (clause 42.6 of the Contract) and it did not contemplate payment claims for retention deduction, reduction, recourse and security, goods and services supplied, his Honour held there was no basis to serve a progress payment seeking payment of retention monies.[4]  Accordingly, the adjudication determination was quashed.  

Key takeaways

Where a construction contract includes a mechanism for the release of security, specifically in this case the return of retention money, a Payment Claim seeking payment for the return of retention money without any claim for the construction works performed under the Contract is not valid for the purpose of the SOP Act.  The full judgment can be found here

Watpac Construction v CGM [2020] VSC 637

The case of Watpac Construction v CGM [2020] VSC 637 (Watpac), also considered the validity of a claim for retention amounts in a payment claim made under the SOP Act. The judgment, handed down on 30 September 2020, related to construction contracts entered into by the parties to the proceeding. Relevantly, the judgment considered whether payment claims for the reduction of security were claims for construction work or related goods and services, and thus covered by the SOP Act.

Consistent with the judgment in Punton’s, Justice Digby held that the payment claims in question were claims that did not come within the scope of the SOP Act because the payment claim did not capture construction work or the supply of goods and services performed under the contracts, but rather claims for reduction of security.[5]  The full judgment can be found here.

Foursquare Construction Management Pty Ltd v Chevron Corporation Pty Ltd [2020] VCC 1928

The above decisions in Punton’s and Watpac were more recently applied by Judicial Registrar Burchell in Foursquare Construction Management Pty Ltd v Chevron Corporation Pty Ltd [2020] VCC 1928 (Foursquare). This decision was handed down on 4 December 2020, and related to payment claims made by the plaintiff, Foursquare Pty Ltd, under a construction contract entered into with the defendant, Chevron Corporation Pty Ltd.

In this case, the Court considered whether the defendant could validly resist the judgment claimed by the plaintiff on the basis that the payment claim it sought to enforce included retention monies, which the defendant claimed were not a claim for construction work or related goods or services as required under the SOP Act.

In applying the above authorities, Judicial Registrar Burchell dismissed the plaintiff’s claims, finding that:

“the purpose of retention moneys is to provide security for defective work; it is not to compensate a person for construction work. Therefore, a claim for retention moneys does not facilitate the purpose of the SOP regime, namely to compensate persons who have undertaken to carry out construction work under the contract or to supply related goods and services under the contract (s9(1)).”[6]

The payment claim for the return of retention moneys by the plaintiff was therefore found not to be a claim for construction work as defined by section 5 of the SOP Act, and instead was an attempt by the plaintiff to enforce a contractual provision that was separate to the mechanisms under the security of payment regime.[7] 

The full judgment can be found here.

Key Takeaways

These cases confirm the position in Victoria that retention moneys do not fall within the definition of construction work under a construction contract, and therefore are not covered by the provisions of the SOP Act. Rather than claiming these amounts in progress payments under the security of payments regime, any contractual entitlement to retention amounts should be enforced as a contractual provision.

More broadly, these authorities also highlight the importance of understanding the agreement signed.

[1] Building and Construction Industry Security of Payment Act 2002 (Vic), ss 1, 3.
[2] Punton’s Shoes v Citi-Con [2020] VSC 514, [16] (‘Punton’s’).
[3] Southern Han Breakfast Point Pty Ltd (in liq) v Lewence Construction Pty Ltd [2016] HCA 52, [59]-[60].
[4] Punton’s, [110]-[114].
[5] Watpac Construction v CGM [2020] VSC 637, [180].
[6] Foursquare Construction Management Pty Ltd v Chevron Corporation Pty Ltd [2020] VCC 1928, [54].
[7] Ibid, [57], [65].
The contents of this article are intended to provide general information and commentary only. It is not intended to constitute legal advice, and has been prepared based on applicable law at the date of publication (13/05/2021).