• Aitchison Reid

Is your defects liability period void?


Let’s face it, the last payment of retentions is your gold at the end of the very long protracted project rainbow. It is your profit and the source of funding for your future projects.

The purpose of this article is to talk about:

  • The all-important definition of the expiry or end of Defects Liability Period, which determines when that final pot of retentions is released to you; and

  • The High Court of Australia decision that in one particular subcontract, the clause stating the end of the Defects Liability Period was void.[1] Could it apply to your subcontracts?

How could the end of defects liability period be void?

In Maxcon Constructions Pty Ltd v Vadasz (‘Maxcon’), the subcontract had a clause that made the release of retentions “contingent on obtaining a certificate of occupancy, and obtaining that certificate depended on works being done in accordance with the issued documents, including the head contract.”[2]

Section 12(1) of the South Australian Security of Payment legislation[3] (‘South Australian SOP Act’) states that:

“A pay when paid provision of a construction contract has no effect in relation to any payment for construction work carried out or undertaken to be carried out (or for related goods and services supplied or undertaken to be supplied) under the contract.”

The South Australian SOP Act defines a “pay when paid” clause as a provision of the contract:

“(a) that makes the liability of 1 party (the first party) to pay money owing to another party (the second party) contingent on payment to the first party by a further party (the third party) of the whole or a part of that money; or

(b)that makes the due date for payment of money owing by the first party to the second party dependent on the date on which payment of the whole or a part of that money is made to the first party by the third party; or

(c) that otherwise 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.”[4] [highlighting added]

The Court held that the head contractor’s liability to pay retentions to the subcontractor was contingent on the operation of the head contract and, on the basis of section 12, the clause was a “pay when paid” clause and void.

Is the Maxcon decision valid in Queensland?

The decision is very relevant in Queensland because section 74 of the Building Industry Fairness (Security of Payment) Act is virtually identical to section 12 of the South Australian SOP Act. Further, as the decision was made by the High Court of Australia, the Queensland Court is bound to follow the decision.

So how does the Maxcon decision affect your subcontract?

If your subcontract states that the release of retentions or the date for the end of the defects liability period is reliant on the end of the defects liability period in the head contract - it is more than likely to be void.

What if my “end of defects liability period” is void?

As you may recall, the retentions provisions in the Queensland Building and Construction Commission Act (‘QBCC Act’) were amended on 17 December 2018. As part of those amendments, a default defects liability period was included.

Section 67NA states that if retentions or a security is withheld and the contract does not provide for the release of the retentions or security at the end of an identifiable period, the retentions of security are to be released “at the end of 12 months starting on the day of practical completion” for your subcontract.

If you want to read more about the amendments to the QBCC Act retention provisions, see our article "No more retaining retentions? A 2.5% pay rise for subbies".

So why are subcontracts still referring to the end of the defects liability period under the head contract?

There are two reasons for this:

  • They are not aware of the Maxcon decision; or

  • They are relying on you not being aware of the Maxcon decision.

For example, in a recent Australian Standard subcontract that has come across our desk, the defects liability period is defined as:

“the period:

(i) commencing on the date of practical completion at 4.00pm; and

(ii) continuing until the later of the date which is:

(A) 15 business days after the Subcontractor submits the defects report; and

(B) the date of expiry of the last defects liability period under the Main Contract.”

If you didn’t know any better, you would wait until the end of the defects liability period under the Main Contract.

However, as detailed above, as Option B is contingent on the operation of the Main Contract, it is a “pay when paid clause” and is void.

Therefore the only option is Option A, which is reliant on you preparing and submitting a defects report.

Contact us

Need help with your retentions? Call our team on 07 3128 0120 or email us at subcontractors@arbuildinglaw.com.au today to discuss how we can help you recover your retentions, whether your entitlement occurred before the law changes made on 17 December 2018 or after.

Learn about BIF Act security of payment

Want to learn about how to use BIF Act security of payment in Queensland in your own time? Do our easy, video-based online course "A Subbies' and Tradies' Guide to Getting Paid Using BIF Security of Payment" at any time you choose, 24 hours a day 7 days a week.

End notes

[1] Maxcon Constructions Pty Ltd v Vadasz [2018] HCA 5

[2] Maxcon Constructions Pty Ltd v Vadasz [2018] HCA 5, para 28

[3] Building and Construction Industry Security of Payment Act 2009 (SA)

[4] Section 12(2) Building and Construction Industry Security of Payment Act 2009 (SA)

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