ARTICLE
25 October 2024

Victorian Government endorses recommendations to amend Security of Payment Act

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Key recommendations to amend the Building and Construction Industry Security of Payment Act 2002 (SOP Act).
Australia Real Estate and Construction

The Victorian Government has endorsed an Inquiry's key recommendations to amend the Building and Construction Industry Security of Payment Act 2002 (SOP Act) to:

  • remove complexity and perceived unfairness in the existing regime;
  • make it easier for claimants to recover progress payments; and
  • align the Victorian regime with the rest of Australia.

By strengthening and simplifying the regime for recovering progress payments, the Victorian Government hopes to stem the tide of contractor insolvencies, ensure there are enough builders to meet the anticipated demand for housing supply and promote the overall health of the building and construction industry.

The SOP Act in Victoria

The SOP Act provides a legislative scheme for contractors, subcontractors and suppliers to secure interim progress payments and for the adjudication of disputed payment claims. It is intended to be quick and comparatively inexpensive.

Similar, but not uniform, statutory schemes operate across Australia, yet Victoria's SOP Act has not been significantly amended since 2006, with key local features seen as ineffective or out of date when compared to NSW and WA.

These unique aspects of the Victorian SOP Act are known to make it less attractive to claimants. This is borne out by the number of adjudications in Victoria compared to NSW. Data for the 2022-23 financial year shows that total adjudication applications were 2.4 times higher in NSW than Victoria and amounts awarded more than 13 times higher:1

  • 937 adjudication applications were lodged in NSW (claiming $889,544,144), compared with 384 in Victoria (claiming $74,331,230); and
  • 501 adjudication determinations were released in NSW (awarding $329,741,377 total), compared with 212 in Victoria (awarding $25,056,783 total).

What changes are proposed?

On 9 March 2023, the Legislative Assembly referred an Inquiry into employers and contractors who refuse to pay their subcontractors for completed works to the Environment and Planning Standing Committee for consideration and report. The Committee tabled its Report on 28 November 2023 and, on 17 October 2024, the Government's Response to the Report was tabled in Parliament.

Copies of the Report and Response are available here.

The Committee made nine findings and 28 recommendations. Thirteen of these recommendations are intended to strengthen the statutory right to claim payment, while twelve are intended to improve the adjudication of payment disputes. Many of the recommendations are modelled after the legislation in NSW and/or WA.

In its response to the report, the Victorian Government has broadly supported all 28 of the Committee's recommendations (16 in full and 12 in principle or in part).

Key recommendations supported in full except where noted include:

Excluded amounts and retention money (recommendations 2, 9 and 19): the SOP Act currently prohibits 'excluded amounts' from being the subject of a payment claim. This category of claims includes certain disputed variations and claims for time-related costs, those being claims for extensions of time or liquidated damages. The Committee recommended – and the Government supports – removing the concept of excluded amounts, to allow progress payments to be calculated in accordance with the contract, or otherwise on the basis of the value of construction work carried out. The adjudication review mechanism, which only allows for review of determinations involving excluded amounts, would also be removed. The Government also supports expressly allowing claimants to claim retention money under the SOP Act.

Reference dates (recommendations 3 and 7): removing the concept of 'reference dates', which can be difficult to navigate in the absence of legal advice and, if incorrectly identified, undermine otherwise valid payment claims. Instead, the Committee recommended – and the Government supports – enabling at least one payment claim to be submitted each month, and allowing payment claims to be made in respect of work performed in the last six months (rather than three).

Blackout period (recommendation 4): amending the definition of business day to exclude the end of year shutdown period from 22 December to 10 January inclusive. Victoria is currently the only Australian jurisdiction that does not include such a provision, allowing claimants to ambush respondents during the period where the building industry and legal practitioners are either closed or employ a skeleton staff.

Unfair time bars and other terms (recommendations 5 and 6): implementing similar provisions to sections 15 and 16 of the WA SOP Act, to allow certain contract provisions to be declared unfair and of no effect. This would include allowing nullification of notice-based time bar clauses in the context of the particular payment claim in dispute if an adjudicator, court or other similar body considers that compliance with the clause is not reasonably possible or would be unreasonably onerous, and also allow the Victorian Government to prohibit certain unfair contract clauses. This regime would operate in addition to the existing statutory prohibition on unfair contract terms in the Australian Consumer Law (with different consequences).

Payment times (recommendation 8): capping contract payment terms at 25 business days after the payment claim is made.

Extending regime to domestic context (recommendation 10): consider amending the SOP Act to encompass construction contracts with homeowners. Under the current regime, payment disputes between residential builders and homeowners are governed by the Domestic Building Contracts Act, while disputes between builders and their subcontractors are dealt with under the SOP Act.

In principle, the Government supports amendments that eliminate the DBC Act dispute resolution process but considers such issues should first be considered as part of the Minister for Consumer Affairs' review of the DBC Act (currently in submissions review phase) and the broader building reform program led by the Minister for Planning.

Limiting opportunities to provide new reasons for withholding payment (recommendations 15 and 16): prohibiting respondents from including reasons in their adjudication response that were not previously included in the payment schedule (and removing the requirement for adjudicators to identify those new reasons and give the claimant two days to respond to them during the period they are drafting their determination), and instead providing respondents with five business days to provide a payment schedule in response to an adjudication application (instead of two).

Standardising timeframes for determinations (recommendation 17): altering the time for an adjudicator to provide their determination to 10 business days after the adjudication response is received or due (currently time starts from when the adjudicator accepts the adjudication application, encouraging adjudicators to delay acceptance to maximise the period in which they have all of the relevant material), subject to the parties being entitled to agree to extend this time by an additional 20 business days (instead of five).

Electronic service (recommendation 20): expressly allowing notices to be issued or served via email or other electronic means.

Retention trust scheme (recommendations 27 and 28): that the Victorian Government implement a retention trust scheme or a cascading deemed statutory trust scheme, to better protect subcontractors in the event of head contractor insolvency.

The Government supports both recommendations in principle, noting that more examination of competing models is necessary before legislative amendments can endorse any particular approach or alternative.

When will the changes be introduced?

Where recommendations have been supported, the Government has committed to introducing enabling amendments to the SOP Act. The Response does not state when this will occur but given the Government's acute concerns regarding poor payment practices, we expect that a bill will be tabled in the near future.

Why do these changes matter?

Once enacted, the SOP Act changes will liberalise the Victorian payments regime. The mostly claimant-friendly changes will increase the opportunity for claims and limit technical grounds for rejection. This will likely lead to more payment claims and statutory adjudications in Victoria on a broader range of projects.

Principals and head contractors will need to be aware of increased time periods for claims to be made and the fewer technical grounds for rejection. On the flip side, the regime change presents important relief for owners in Victoria who have been unable to deduct or set-off liquidated damages against SOP payment claims (unlike the position in other jurisdictions).

The Victorian Government hopes that implementing these recommendations will improve the state of the construction industry, which has faced high levels of financial insecurity and insolvency among contractors, subcontractors and suppliers in recent years. We think this reform is timely and expect the Government to move quickly.

Footnote

1 Department of Customer Service (NSW), Building and Construction Industry Security of Payment Act 1999 Quarter 4 2023: Adjudication Activity Statistics; Victorian Building Authority, Building and Construction Industry Security of Payment Act 2002 Adjudication Activity Statistics 2022-2023 Financial Year.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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