KEYWORDS: SET OFF; ABIC SW 2008

KEY TAKEAWAY

The standard form ABIC SW-2008 "Simple Works Contract" does not give the owner an express right of set off. This case confirms that there is no common law or equitable right for the owner to set off against progress claims unless there are express words or a clear implication to the contrary. Under the Simple Works Contract, if the owner believes there is unremedied defective work, the owner must not withhold payments certified by the architect and instead must promptly raise a dispute.

This case also highlights the importance of strict compliance with contractual processes. Here, a claim for the release of security was invalid as it was not issued separately with its own tax invoice, as the contract required.

The facts

In 2012, Clarke engaged a builder, Cirocco Constructions Pty Ltd (Cirocco), to build a new residence and renovate an old church hall for $2.117 million. Clarke and Cirocco executed a contract (Contract) based on the ABIC SW-2008 developed jointly by the Australian Institute of Architects and Master Builders Australia.

Under the Simple Works Contract, an "architect" administers the contract, inspects the works, issues progress payment certificates and issues a certificate of practical completion. The architect must act independently when exercising its function as an assessor or certifier. Under the Contract, the architect issued:

  • on 3 September 2014, progress certificate 11 for $58,875 ($52,925 was for the return of security);
  • on 3 November 2014, progress certificate 12 for $99,484.79; and
  • on 1 December 2014, the certificate of practical completion, which occurred on 31 July 2014.

Clarke had previously paid all progress certificates in full, but rejected these two certificates because the work was not undertaken in a proper and workmanlike manner and defects remained unremedied. Clarke did not dispute the certificate within 20 working days, as the Contract required.

Cirocco then sought summary judgment. Clarke resisted on the basis that the work was not of an acceptable standard and that she did not want to pay for unsubstantiated prime costs, provisional sums, unapproved variations, or longunremedied defective work.

The decision

Judge Tilmouth first determined whether section 37 of the Building Work Contractors Act 1995 (SA) (BWC Act), which contains wide remedial powers for the correction and enforcement of deficient building work, displaced the common law remedies available under the Contract. His Honour found that section 37 did not displace the common law remedies as the BWC Act did not include the strong words needed to displace established common law rights.

His Honour confirmed the longestablished principle that one must examine the terms of the contract to determine whether the building contractor is entitled to the progress payments without deduction if a dispute about defective work arises.

His Honour began by citing Lord Reid in Gilbert-Ash (Northern) Ltd v Modern Engineering (Bristol) Ltd, 128 who allowed a right of set-off as "no provision ousted the right of set-off in respect of unliquidated cross-claims". Lord Reid held that there was no presumption that an architect's certificate must be paid at once without waiting for set-off claims to be determined.

His Honour considered Algons Engineering Pty Ltd v Abigroup Contractors Pty Ltd, 129 in which Rolfe J stated that where a right to set off is established, it will constitute a defence, but dismissed the defendant's claim of an equitable right of set off because:

  • there would be no injustice by requiring the parties to abide by the terms of their contract, which excluded the right to set off until a later time; and
  • the defendant could later rely on that equitable right of set off in adjusting the parties' financial rights and obligations.

Judge Tilmouth found that the current situation was no different from that in Algons Engineering. Therefore, Clarke's equitable right of set off would fall for later determination. Cirocco was entitled to the certified payments, which would not be subject to any set off, regardless of whether Clarke had issued a notice of dispute.

This decision confirms the statement by Ian Bailey and Matthew Bell in their textbook Construction Law in Australia that "under the ABIC contracts, the principal is probably not entitled to set off against the certificate", 130 citing John Holland Construction and Engineering Pty Ltd v Majorca Projects Pty Ltd. 131

It is critical, of course, to pay proper attention to the contractual terms. Under the related but differently drafted ABIC MW-2008 (Major Works Contract), clauses M12–M13 allow the owner to set off for liquidated damages only.

Judge Tilmouth also had to consider whether the architect's progress certificates complied with the contract. The important question is whether the valuation complies with the terms of the contract, not whether there was an error in discretionary judgment. In relation to progress certificate 11, his Honour found that there was a reasonable basis for defending the application for summary judgment as the certificate was invalid because the Contract required a separate certificate or tax invoice to be issued for the release of security.

Clarke argued that progress certificate 12 was invalid because the architect made an error in calculation. Judge Tilmouth found this does not make the certificate invalid, and is instead to be dealt with under the contract's dispute mechanism.

http://www.austlii.edu.au/au/cases/sa/ SADC/2015/107.html

Footnotes

128 [1974] AC 689
129 (1997) 14 BCL 215
130 (Lawbook Co,3rd ed, 2011) at 241
131 (1996) 13 BCL 235. This case concerned a JCC contract with similar payment terms

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