Maxcon Constructions Pty Ltd v Michael Christopher Vadasz (trading as Australasian Piling Company) & Ors  HCA 5
The High Court of Australia has cast doubt over the efficacy of cash retention as a construction subcontract security device. An appeal concerning a security of payment adjudication required the Court to consider whether the subcontract’s retention provisions were a “pay when paid” provision that was ineffective by s.12(2)(c) of the South Australian security of payment legislation.
Mr Vadasz subcontracted to Maxcon on a South Australian building project. The subcontract provided for retention money valued at 5% of the subcontract price, which was to be released progressively by reference to “CFO”. Mr Vadasz referred his claim for release of retention to security of payment adjudication. The adjudicator, a Mr Campbell, determined the subcontract’s retention provisions to be ineffective as pay when paid provision within the meaning of s.12.
In the High Court Maxcon contended that the Supreme Court had jurisdiction to quash the determination. Mr Vadasz contended that the adjudicator had made no error of law. Mr Vadasz’s contention, if upheld, would mean that s 12(2)(c) rendered the subcontract’s retention provisions ineffective as a pay when paid clause. The issue was whether the subcontract retention provision made the liability of Maxcon to pay money owing to Mr Vadasz, or the due date for payment of that money, contingent or dependent on the operation of another contract.
The subcontract provided that 50% of retention was to be released “90 days after CFO is achieved”, with the remaining 50% to be released “365 days after date of CFO”. “CFO” was, according to the subcontract, the Certificate of Occupancy and any other Approval(s) required under Building Legislation which are required to enable the Works lawfully to be used for their respective purposes in accordance with [Maxcon’s] Project Requirements.
The South Australian Full Court had opined that issue of a certificate of occupancy was an “independent event” that was derived externally to the subcontract and the head contract because it depended “not upon any contract that may have been entered into between the owner and builder” but upon completion of the building in accordance with the plans and specifications in the relevant development approval.
The High Court rejected that conclusion. The majority, (with whom Gageler and Edelman JJ relevantly agreed) held that the adjudicator was not in error. “Section 12(2)(c) of the security of payment legislation focusses on a provision of a contract and asks whether, in its proper construction, the provision ‘makes the liability to pay money owing, or the due date for payment of money owing, contingent or dependent on the operation of another contract’.”
Issue of Certificate of Occupancy under section 67 of the South Australian Development Act 1993 (specifically, Schedule 19A to the Development Regulations 2008) required a statement of compliance with, amongst other things, the contract. “CFO was dependent upon certification by Maxcon that the work had been performed in accordance with the issued documents, including the head contract between Maxcon and the owner of the land. It necessarily follows that the issue of the certificate depended on completion of the whole project in accordance with the provisions of the head contract.”
As there was no error of law Maxcon’s grounds of appeal did not arise. Even so, the full bench left no room for doubt as to the Court’s opinion on the nature of an error that would warrant quashing of an adjudication. Each judgment either affirmed or adopted the reasoning in Probuild Constructions (Aust) Pty Ltd v Shade Systems Pty Ltd  HCA 4, given that the New South Wales security of payment legislation (considered in Probuild) was materially indistinguishable from equivalent legislation in South Australia.
Practical lessons from Maxcon
South Australian and New South Welsh security of payment law are materially the same but there are differences between those states’ occupation certification regimes. Those differences do not mean that Maxcon should be treated lightly in New South Wales though, particularly by debtors.
- One might ask whether elements of New South Wales’ cascading occupation certification regime might fall within Maxcon’s operation.
- Maxcon highlights the commercial reach of adjudication. Mere error of law will not be sufficient warrant for intervention by the Courts in South Australia or in New South Wales.
- Perhaps a separate subcontract, a consultancy agreement or even an unrelated contract might now trigger the expansive catch of s.12(2)(c). Having been introduced with the 2003 amendments to the New South Wales legislation, that constriction on pay when paid devices, has frequently been overlooked or ignored in contract drafting. The High Court has now given it full effect.
- Skilled drafting will be necessary to ensure that the payment liability and the due date for payment are not contingent or dependent in substance on operation of another contract. This is so in relation to any payment of money under a construction contract, not just retentions.
- Gageler J regarded the question relating to retention as being of no public importance, perhaps (the author suggests), reflecting the fact that retention’s use has waned. It is worth noting though, that the New South Wales government has breathed new life into the concept of retention by the mandatory retention trust provisions made under s.12A.
Probuild has the lawyers atwitter but Maxcon may have more pragmatic effect at the commercial level, illustrating the value that an experienced and specialised lawyer can bring to a project, whether at the front end, during delivery or at the back end.
20 February 2018
 At 
 At 
 At 
 at