Construction Industry Security for Payment

Commercial build principals and contractors will be familiar with specific terms under certain standard form contracts allowing for payment for certified sums by the proprietor direct to subcontractors, with commensurate deduction of those amounts from the sums due to the builder1.

The Building & Construction Industry Security of Payment Act 2002 (Vic.) (‘SOPA’) applies to most contracts for building work or the supply of related goods and services throughout Victoria, with relatively uniform set of similar laws applying all states and territories. The scheme, aimed at promptly securing valid progress payments to contractors, sub-contractors and suppliers in the building and construction industry, provides for independent recovery of interim payments due by way of summary judgement or adjudication, enforcement of an adjudicator’s determination and a right to suspend works or other supplies upon non-payment.

It provides payment standards for construction contracts (whether in writing or verbal, or a combination of those) between owners, builders, contractors and subcontractors, allowing for progress payments, relatively quick determination of disputes regarding them and provision for security of payments pending resolution of disputes. Important reforms include –

• a right to regular payment claims, with a maximum time for principals to respond – failing which the claim must be paid in full;

• the unpaid contractor or sub-contractor can suspend work pending a determination regarding a disputed payment;

• a minimum interest rate on late progress payments;

• a ban upon requirements that payment be made subject to payment being received by the principal; and

• a right of the contractor or sub-contractor, pending payment, to exercise a lien over unfixed plant or materials of the builder.

SOPA protections apply to any of the following contracts:

• residential and non-residential;

• professional services (architecture, design, engineering, surveying);

• supply of materials;

• plumbing;

• electrical services;

• demolition;

• plant & equipment hire;

• landscape;

• building or property maintenance;

• refrigeration & air conditioning

Making a Claim:

 A contractor or other person who has carried out work or supplied goods or services under a construction contract can claim progress payments by serving (in accordance with the “Notice”

1.     For example, JCC special condition c. 4.09.02; AS-2124 clauses 10.5 & 10.6

requirements of the contract, if any – otherwise perhaps by email or post) a ‘payment claim’ for the claimed amount to the relevant contractor, purchaser or client (the respondent). The payment claim specifies the work, goods or services supplied and the amount claimed and specifically states that it is made under the “Building and Construction Industry Security of Payment Act 2002 (Vic.)”. 

The respondent can pay in full or, if they dispute the amount due, give within a strict timeframe, the claimant a ‘payment schedule’ stating how much the respondent is willing to pay and why it is different from the amount claimed. A respondent who fails to provide a payment schedule within 10 business days (i.e., Monday to Friday excluding public holidays, unless otherwise provided under the contract – whichever is earlier)  is liable to pay the full amount claimed.

Timetable for Claims Procedure & Adjudication 

1.     Payment claim served upon head-contractor/builder (‘principal’);

2.     The principal must respond in writing with its  ‘payment schedule’ within 10 business days;

3.     If disputed by the contractor, an adjudication application must be made to the ‘authorised nominating authority’(‘ANA’)  within 10 business days of the payment schedule being received;

4.     The ANA nominates an adjudicator with the necessary skills and experience to adjudicate the dispute and refers the dispute to it;

5.     The principal’s reply to the application must be made within 5 business days of receiving the application, or 2 business days of notice of adjudicator’s acceptance of appointment;

6.     After accepting the nomination, the adjudicator has 10 business days (or up to 15 business days if the parties so agree) to determine what amount (if any) the respondent should pay, and when.

7.     In some cases, if the adjudicated amount exceeds $100,000 either party can apply for an adjudication review.

Effect of an Adjudication Determination

The principal must pay the ‘adjudicated amount’, otherwise - 

a)    It will be liable for interest accruing on the adjudicated sum;

b)    The contractor/sub-contractor may give notice of intention to suspend works and, after 3 business days, suspend works until the adjudicated sum is paid;

c)     The contractor/sub-contractor may obtain an adjudication certificate then register it (together with an affidavit deposing that the respondent has failed to pay, and the court can issue a warrant or other order requiring payment as a judgement, to be enforced against the principal – including by issuing of a statutory demand – with negative impact upon the respondent’s ability to tender or to obtain lines of credit.

What if the Respondent is Insolvent/ Wound Up?

Division 4 of the Act allows subcontractors to recover an adjudicated amount from monies payable by the principle to a head contractor, provided that the relevant construction works involved goods or services that the head contractor was to provide. 

Before that course can apply –

• a debt certificate must have been issued by a court;

• the subcontractor must serve notice of claim on the principal; and

• the effect of that is to assign to the subcontractor the principal’s obligation to otherwise pay to the head contractor.

Is an Adjudication Determination Final?

For the adjudication result to be set aside will require jurisdictional error on the adjudicator’s part, such as –

• the claim made by the contractor or subcontractor had no proper basis;

• the adjudicator substantially misinterpreted payment terms of the relevant contract;

• the adjudicator did not provide proper opportunity to one or other party to present its case, or failed to take proper account of, and give sufficient weight to, evidence before it.

Court Alternative/Enforcement:

A claimant may choose to go to court to resolve a payment dispute rather than apply for adjudication. This is done by lodging a complaint with the Magistrates' Court (for claims of up to $100,000.00) or a writ in the County Court or the Supreme Court, depending on the value of the claim.  However, that course is likely to be far more expensive and certainly more time consuming and delayed than the fast-track resolution of the claim under SOPA.

 Please note: This material is for general educational purposes and is not designed to be advice to any particular person in relation to their own affairs as it does not take into account the circumstances that you, as an individual, may confront. We do not represent, warrant, undertake or guarantee that the use of guidance in this paper will lead to any particular outcome or result. Please see us to obtain client-specific advice