Due to the high levels of insolvency in construction, security of payment legislation was introduced to ensure cash flow throughout the project. In Victoria this is the Building and Construction Industry Security of Payment Act 2002 (SOP Act). Based on the philosophy of “pay now, argue later” this act aims to provide quick, inexpensive and easy means of obtaining payment due. Therefore it is important to understand how this act may apply to you, how it operates and how to make the most of it for your business.
Can I make a security of payment claim?
The SOP Act was specifically designed to ensure payment for sub-contractors therefore banning “pay-when-paid” and “pay-if-paid” clauses which denied subcontractors the right to payment until and if the head contractor was paid. The act therefore covers contractors, sub-contractors, consultants and suppliers who perform work under contracts for the supply of goods and services including:
- Residential and non-residential building
- Hire of plant and equipment
- Mechanical work
- Design, architectural and surveying services
Important exclusions to the act include contracts between builder and home owner and contracts for mining, oil and gas exploration.
What can I claim?
The Victorian Act is quite narrow in its scope exactly because the process aims to be quick and efficient. Hence only money owing under a progress payment or milestone payment is claimable. Therefore money relating to the following cannot be claimed:
- Costs relating to latent conditions
- Costs from changes in regulatory requirements
- Damages arising from breach of contract
- Costs for delay caused by the owner
Notably due to the frequency and potential size of claims arising from variations, these payments can be claimed. The nature of variations claimable is divided into two categories;
- Agreed variation
Parties agree that the work constitutes a variation and its value. All appropriate contract types can claim this category.
- Disputed variations
Parties disagree that the work constitutes a variation or the value of the variation. Only contracts less than $5 million or over $5 million but without a dispute resolution clause can claim this type of variation.
How to make a payment claim?
In order to be entitled to a payment by law, a payment claim must be served on the person liable to make the payment (the respondent). The payment claim must include:
- The relevant construction work or related goods and services
- Indicate the amount claimed to be due
- State that it is made under the Victorian Act by writing:
- This payment claim is made under the Building and Construction Industry Security of Payment Act 2002
The payment claim can be served on the relevant party by delivering it to them, lodging it during office hours or sending it by post. This claim must be made within the dates specified in the contract or 20 business days if the contract does not specify such dates. Importantly, the right to claim lapses within 3 months of the period specified in the contract.
What to expect once claim made?
The respondent must respond to your claim by providing a payment schedule within 10 business days of receiving your claim. The payment schedule identifies the relevant payment claim, the amount intended to be paid and the reasons for refusing part or all of the amount claimed. Failure to provide this payment schedule results in automatic approval of your claim. Where payment schedule is approved either directly or by default, payment will be due according to the contract date or within 10 business days from date of claim.
What if my claim is refused?
If your claim is refused in whole or in part you may apply to the authorised nominating authority (ANA) for an adjudicator to determine the amount, if any, owing. The ANA is a statutorily authorised body who nominates an adjudicator to determine this amount. The Application may be to an ANA of your choice and must be made within 10 business days from:
- Date payment due under payment schedule where all amount claimed is approved
- Receiving payment schedule if amount approved is less than amount claimed
- Date payment is due under your claim where no payment schedule is provided and the progress payment is not paid.
There are strict guidelines for the conduct of adjudicators and their payment is split equally by the parties. The adjudication process is inquisitorial rather than adversarial. This means the adjudicator may only;
- request further submission from either party to clarify their claims
- Set deadlines for further submissions
- Call an informal conference where legal representation is usually not allowed
- Carry out an inspection of any matter relevant to the claim.
Their decision is based on the Act, the contract between the parties, the payment claim and payment schedule. The decision is provided within 10-15 days and is binding but does not affect the parties’ rights and obligations under the contract. This means you are still able to exercise any rights under the contract to other dispute resolution mechanisms such as mediation or litigation.
How to enforcing Adjudicator’s decision?
If the adjudicator affirms your payment claim you have the right to suspend work or the supply of goods and to exercise a lien over unfixed plant and materials. A lien is a security over that un-fixed property which prevents the respondent from fixing, removing, selling or otherwise dealing with the property. This restriction on the use of the un-fixed property will remain until the claimant receives the progress payment.
It is also possible to enforce payment by court order by filing an adjudicator’s certificate and an affidavit. The affidavit is evidence to the fact that the respondent has not paid. This latter option may be more suitable if the claimed amount is quite large as failure to pay pursuant to a court order would allow for proceedings to wind up the respondent’s company.
Is this process suitable for me?
Like all dispute resolution procedures, SOP claims come at a cost if challenged. The rough cost depends on the adjudicator selected. Generally adjudicators charge by the hour with daily cost ranging between $1,500 and $10,000 a day. While this may sound expensive, the swift nature of adjudication reduces cost and makes it much more affordable that litigation or arbitration.
Lastly, security of payments claim is a legal process that if not understood and implemented properly can impact the working relationship between the parties. This might occur in payment claims that go outside the limits of the act (such as costs arising from latent conditions) or responses to a rejected claim that are not authorised by the Act. For this reason, it is best to consult the Victorian Building Authority who govern the application of the Act or seek legal advice, if you have any uncertainties about a security of payment claim.
For more information on this, call Boutique Lawyers for a FREE telephone or in office consultation on 1300 556 140 or alternatively send us an email.