Important High Court ruling on retention money

In a recent High Court decision, a term in a contract whereby retention money was retained by a head contractor until after a ‘certificate of occupancy’ was issued under a head contract came under scrutiny and the Court had to consider whether such a provision was as a “pay when paid” provision. 

The relevant provision in the Security of Payment Act of South Australia states that a “pay when paid” provision includes one that “makes the liability to pay money owing…contingent or dependent upon the operation of another contract”.

The High Court ruled that the release of the retention money was contingent upon or dependent on the operation of the head contract and as such a “pay when paid” provision and therefore unenforceable. 

Note that this case did not deal with the provisions of the WA Construction Contracts Act (the Act).

Under the WA Construction Contracts Act, a provision that makes the liability of a party A to pay party B contingent, whether directly or indirectly, on party A being paid by another person is a “pay when paid” provision and unenforceable (section 9).

If your contract provides for the release of retention money that is a “pay when paid” provision then, such a provision will be of no effect, and there is no entitlement to withhold payment of the retention money.

NECA Legal recommends that you engage us to review your contract to determine if any provision could be a “pay when paid” provision and potentially unenforceable.

(Maxcon Constructions Pty Ltd v Vadasz (2018) HCA5)

For further information about prohibited provisions under the Act, come along to NECA's free Security of Payment seminars.

Disclaimer: the short guidelines above are not legal advice and for more information on retention money call NECA Legal (WA) Pty Ltd on (08) 6241 6129 or email  necalegalwa@ecawa.org.au.