Construction Guide 101 - Building and Construction Industry Security of Payment Act 2002 (Vic)
Summary
The SOP Act is designed to provide a fast and inexpensive process to recover payments due under a construction contract, without the need for lawyers to become involved.
The SOP Act applies to most contracts for building work or for the supply of related goods and services in Victoria. The contract may be oral, written or a combination of both.
The SOP Act does not apply to domestic building contracts between a builder or supplier and the home owner.
The timeframes prescribed by the SOP Act for adjudication are short and inflexible. So make sure you have all your paperwork in order before you start the process of adjudication.
What is it?
The Building and Construction Industry Security of Payment Act 2002 (VIC) – or commonly known as ‘SOP Act’, is Victorian-specific legislation that is intended to reduce the incidence of insolvency in the construction industry. It does this by:
providing specific rights and protections for contractors; and
prescribing a statutory mechanism for recovering progress payments.
All States and Territories in Australia have their own security of payment legislation. There are differences from State-to-State.
This Guide 101 relates to the Security of Payment Act in Victoria only.
Who is covered by the Act?
Section 7 of the Act explains who is covered. Broadly, most commercial construction contracts will be caught by the legislation.
The SOP Act applies to most contracts to carry out construction work or supply related goods and services. The contract may be written, oral or a combination of both.
It does not apply to contracts to carry out domestic building work with a building owner unless the building owner is in the business of building residences and the contract is entered into in the course of, or in connection with, that business.
When can you make a payment claim?
A payment claim must be served within three months after the reference date, or within the period specified in the contract – whichever is the later.
A reference date is the date on which a claim may be made. If the contract does not specify reference dates, the SOP Act provides for them as follows:
Progress payments – 20 business days after the work was first carried out or goods and services were first provided. Subsequent payment claims may then be made every 20 business days until the job is completed.
Single or one-off payments – The day after the work was last carried out or the goods or services were last supplied under the contract.
Final payments – The day after the end of any period under the contract for rectifying defects or omissions or the day after the final certificate is issued. If neither of these applies, the reference date is the day after the work was last carried out or the goods or services were last supplied under the contract.
What is the procedure for recovering progress claims?
The process starts with the contractor making a ‘payment claim’ in relation to the claimed amount. The payment claim must:
identify the construction work or related goods and services to which the payment relates
Indicate the amount of money that the claimant claims is due (the ‘claimed amount’)
Include the ‘Security of Payment Statement’.
The payment claim must notify the respondent that it is made under the SOP Act. It must say “This is a payment claim under the Building and Construction Industry Security of Payment Act 2002”.
A copy of the payment claim must be served on the client or the purchaser (the ‘respondent’) in one of the following ways:
delivered in person – it is served when the respondent receives it;
lodged during business hours at the respondent's ordinary place of business – it is served when it is received at that address;
sent by post to the respondent's ordinary place of business – it is served two business days after the day it is posted;
faxed to the respondent's ordinary place of business – it is served at the time it is received unless it is received after 4 pm; if it is received after 4 pm, it is taken to have been served on the next business day; or
provided in any other manner specified in the contract.
Can you claim for variations?
The SOP Act only allows for certain variations to form part of the claimed amount. These are called 'claimable variations'. There are two classes of claimable variations – agreed variations (class 1) and disputed variations (class 2).
Agreed variations (class 1)
A variation falls into class 1, and may be claimed in a payment claim in full, if the parties agree on all of the following:
the claimant has carried out the work or supplied the goods or services;
the scope of work that has been carried out or the goods and services that have been supplied;
the work or the supply of goods or services is a variation to the contract;
the claimant is entitled to be paid for the variation;
the value of the variation or the method of valuation; and
the time for payment.
Disputed variations (class 2)
A variation is classified as a class 2 variation if it is not a class 1 variation and where:
the claimant has carried out the work or supplied the goods and services under the contract; and
that work was requested or directed to be carried out by the respondent or a person authorised by the respondent in accordance with the contract.
Additionally, a disputed variation will only be claimable if it meets certain threshold criteria and if the contract does not contain a ‘method of resolving disputes’. You can read about those threshold criteria here.
Excluded Amounts
The SOP Act expressly excludes certain amounts from being claimed in a payment claim. These are called 'excluded amounts'. Excluded amounts will not be taken into account by an adjudicator.
An excluded amount is any amount that:
is not a 'claimable variation';
relates to latent conditions, time-related costs and changes in regulatory requirements;
is for damages for breach of contract; or
relates to a claim arising at law other than under the construction contract.
Reference Date
As noted earlier, a payment claim cannot be made under the SOP Act without an available 'reference date' – being a date fixed by the contract or the legislation as a date for making payment claims. It must be served within 3 months after the reference date or the period specified in the contract (whichever is later).
A sample payment claim form published by the Victorian Building Authority can be found here.
Payment Schedule
Once a payment claim has been made, the principal (or head contractor) only has 10 business days to respond, unless the contract prescribes a shorter period. This response must be in writing and is called a 'payment schedule'. A sample payment schedule published by the Victorian Building Authority can be found here.
If the principal or head contractor fails to provide a payment schedule within the required timeframe, it will be liable for the entire amount of the claim. The contractor can then recover this amount as a debt in court.
If the principal issues a payment schedule but the contractor disagrees with the assessment, the contractor can make an 'adjudication application'. We explain this further below.
What is adjudication?
Adjudication is a streamlined process that allows a contractor to recover a disputed or unpaid progress payment. The dispute is determined by an independent adjudicator.
The adjudicator is not a judge (and is often not a lawyer), and is appointed by an independent ‘nominating authority’. You can find a list of nominating authorities in Victoria here.
The adjudication application is a written document that must be sent to the nominating authority within a fixed period – usually 10 business days from the date the payment schedule is served on the principal or head contractor. The exact timeframe will depend on the circumstances. (You can find the relevant part of the legislation here).
Any response to an adjudication application must be made within 5 business days of receiving the application, or 2 business days after receiving notice of the adjudicator having accepted their appointment, whichever is longer. This is often an exceptionally short timeframe.
Once the time for a response has lapsed, the adjudicator is required to determine the application. Typically, this is done by reference to the application and the response, with neither party having any right to appear before the adjudicator. It is not uncommon for the adjudicator to seek further submissions from the parties.
Adjudication determinations are usually issued within 10 business days of the date the adjudication response was required (although extensions are often sought by the adjudicator and approved by the parties). You can read more about this here.
When can an adjudication determination be reviewed?
In limited circumstances, either party may apply for an adjudicator’s determination to be reviewed. A determination may be reviewed where:
the parties entered into the contract after 30 March 2007; and
the adjudicated amount is more than $100,000.
A respondent can seek a review of the determination if:
it has provided the claimant with a valid payment schedule on time;
the adjudicated amount included an ‘excluded amount’ and that amount was identified by the respondent as an excluded amount in the payment schedule or the adjudication response;
it has paid the claimant all the undisputed amounts determined by the adjudicator; and
it has paid any amounts they have identified as ‘excluded amounts’ into a designated trust account, and given the claimant details of the account.
A claimant can only seek a review of the determination where the adjudicator has failed to include an amount in its determination because it was wrongly identified as an ‘excluded amount’.
The other party to an adjudication review has three business days after the applicant sends them a copy of the application to make submissions to the authorised nominating authority in response.
The application for review must be made by the authorised nominating authority within five business days after receiving the adjudication determination. The authorised nominating authority will appoint a new adjudicator and notify the parties within five business days of receiving the application. The review adjudicator must complete the review within five business days of accepting appointment (or 10 business days if the claimant agrees).
What effect does an adjudication determination have?
Once an adjudication determination has been made, the respondent must pay the ‘adjudicated amount'. If it does not:
the respondent will be liable for interest;
the contractor can give notice of its intention to suspend work and, after three business days, suspend work if the amount remains unpaid; and
the contractor can apply for an ‘adjudication certificate’ and then seek to register that certificate in court, as a judgment. Usually this can be done within a matter of days.
If the judgment debt is not paid, the contractor can then commence debt recovery proceedings.
The entry and enforcement of an adjudication certificate can have negative implications for the respondent’s credit rating and, if it is a head contractor, its ability to secure future work. This is because some principals and government bodies will take this type of behaviour into account when awarding tenders.
What if the Principal is insolvent?
If the principal is insolvent, an adjudication determination may not be worth much unless it can be enforced against another party.
In Victoria, the Act allows subcontractors to recover the adjudicated amount out of money that is payable to a head contractor by its principal for construction work or goods and services that the principal engaged the head contractor to carry out. That is, it allows a subcontractor to redirect payments that would ordinarily be made by the principal to the head contractor so that the subcontractor receives the payment instead of the head contractor.
Before a subcontractor can obtain the money owed from the principal:
a debt certificate must have been issued by a court; and
the subcontractor must serve a notice of claim on the principal, as this operates to assign the subcontractor the obligation of the principal to pay the money owed under its contract with the head contractor.
Once a notice of claim is served, the principal must pay the subcontractor the money that it owes the head contractor. If the principal fails to pay, the subcontractor may sue the principal to recover the debt in court.
Who pays the costs of an adjudication?
The parties to an adjudication must each bear their own costs. That is, you will not be able to recover any costs you incur in preparing or responding to an adjudication application from the other side.
If you are the claimant, you will need to pay the adjudicator’s costs before he or she releases a determination. If you are successful, the adjudicator will normally allow you to recover most or all of those costs from the other side. Those costs form part of the adjudication certificate if they are not immediately paid by the respondent.
Can an adjudication determination be appealed?
Yes, however the circumstances in which they can be appealed are extremely limited.
The mere fact that an adjudicator makes a mistake is usually not a sufficient reason for a determination to be set aside.
To be able to set aside a determination, you would generally need to prove some form of ‘jurisdictional error’. A jurisdictional error is an error that involves the adjudicator having acted outside the scope of his or her authority, such as by:
making a determination where the claimant did not make an adjudication application, or had no right to make an adjudication application;
failing to consider the terms of the contract; or
failing to afford the parties procedural fairness.
Is it a final or interim decision?
Any payment made under the security of payment legislation is an interim payment only.
If the contractor recovers more under the security of payment legislation than it would be entitled to receive under the contract, the principal (or head contractor) will have a contractual right to recover the difference.
This interim nature of the payment is reflected in the name of the legislation. Also, when the legislation was originally passed, respondents had the option to pay the adjudicated amount into court pending the final determination of the dispute. Unless there are exceptional circumstances (potentially including the insolvency of the claimant), that is no longer the case.
If you would like any further information on debt for equity swaps, or other ways in which you can restructure your debt or equity, please contact:
Chris Burrell
Partner
chris@fuselaw.com.au
+61 417 832 153
Kate Cantrell
Partner
kate@fuselaw.com.au
+61 401 370 179