Security of payment – Vic

Page contents:

• Security of payment
• Adjudication of disputes

Security of payment

Understanding the definition of construction work and related goods and services is the single most important element in determining whether the Act applies to the contract. Both these terms are broadly defined under the Act and apply to a number of categories.

Conversely, it is just as important that the architect recognises that there are a number of exclusions to the definition of construction work, namely:

• the drilling for, or extraction of, oil or natural gas
• the extraction (whether by underground or surface working) of minerals, including tunnelling or boring, or constructing underground works.

Main purpose of the Act

The Act establishes a procedure that enables:

• contractors to make monthly payment claims to owners
• owners to provide payment schedules to contractors
• referral of disputed or unpaid progress claims, including those for 'claimable variations' to an independent adjudicator
• payment of progress claims decided by the adjudicator.

Legal advice

This note provides an overview of the Act and is not a substitute for legal advice. If the owner receives a security of payment claim, it is recommended that you advise the owner to consult their legal adviser because:

• the time limits involved for compliance by the owner are tight
• the procedures are complex and certain formalities must be observed to protect the owner's rights
• developing case law will progressively clarify some uncertainties, including what items are or are not covered by the legislation, and uncover others.

To what does the Act not apply?

The Act does not apply to:

• a construction contract that forms part of a loan agreement, a guarantee or an insurance contract
• a construction contract for the carrying out of domestic building work on such part of a premises in which the owner resides or intends to reside (the Act does apply to a domestic building contract where the owner is in the business of building residences or the domestic building work is incidental to work to be carried out under another building contract)
• a construction contract where payment is to be calculated otherwise than by reference to the value of the work carried out or goods and services supplied.

How is the Act invoked?

The Act is invoked by the contractor making a 'payment claim' on the owner. The contractor can make a payment claim at the times set out in the contract or at any time within 3 months of the relevant 'reference date', whichever is the later The payment claim has to state the following things:

• what construction work the contractor has done or the goods and services supplied
• the amount of the payment sought
• the progress payment that the claim relates to
• that the claim is made under the Act.

Specific words must be stated on the claim for it to comply with the last requirement above:

    This claim is made under the Building and Construction Industry Security of Payment Act 2002.

Importantly, the claim must not include any 'excluded amounts' which are defined as follows:

• non-claimable variations as determined by the Act
• a claim related to latent conditions
• a claim for time-related costs
• a claim for changes in legislation
• damages for breach of contract
• a claim arising at law (that is, not under the contract).

Although many claims are excluded from the Act, you should be prepared to assist your client, the owner, under the building contract, with a possible claim under the Act before it arises. Your client also needs to understand what might be expected of them.

If the contractor makes a progress claim on the owner that becomes payable, the Act allows the contractor to register a lien for the unpaid amount over any unfixed plant or material supplied by the contractor for the building work. The Act prescribes a special form that the contractor must use to register a lien under Form 1, Regulation 6 of the Building and Construction Industry Security of Payment Regulations 2013 (VIC).

If the contractor makes a final claim (final certificate), it has to be served within the time period set out in the contract or three months after the issue of a final certificate by the architect, or if no final certificate was issued, the end of the defects liability period, or if neither of the previous two options apply, the last day of construction work on the site or when goods and services were last supplied to the site.

Claimable variations

As well as for ordinary claims under the contract, there are two types of claimable variations that may be taken into account under the Act in determining progress payments. The first type is those variations where the parties have agreed to all aspects of the variation. The second type is those variations where:

• the works have been carried out or goods and services have been supplied under the contract
• the owner requested or directed the variation; and
• the parties do not agree to all or one of the following:

• there is an entitlement under this Act to claim the variation (ie, whether it is in fact a 'claimable' variation, or a variation at all)
• the contractor is entitled to a progress claim for the claimed amount
• the value of or the method of valuing the claimable variation
• the time for payment of the claimable variation.

However, variations that would otherwise be claimable under the Act, will not be claimable if the initial contract sum is more than $5 million and there is a dispute resolution procedure in the contract (such as an ABIC contract).

Variations will also not be claimable variations if:

• the contract sum is greater than $150,000 but less than $5 million
• there is a dispute-resolution clause; and 
• there have been previous variations of the second type of claimable variations, (see above), that, with this new claim for the disputed variation, total more than 10% of the initial contract sum.

How must the owner respond to a payment claim?

After receiving a payment claim, the owner has the earlier of the time set out in the contract, or 10 business days, to give the contractor a 'payment schedule', which:

• identifies the relevant payment claim
• states the amount the owner will pay (if any)
• if the full amount is not being paid, states the amount that the owner will pay and the reason or reasons for not paying the remainder; and
• identifies any amount of the claim that the owner claims is an excluded amount.

So that the owner is able to take into account the architect's certification of the claim while issuing the payment schedule to the contractor within time, the architect, at the latest, should give the owner the progress certificate within eight business days after receipt of a claim. The owner is responsible under the Act to give the payment schedule to the contractor.

If the owner does not give the payment schedule to the contractor within time, the Act imposes significant penalties on the owner, discussed below under the heading 'Consequences of failure to follow the procedure'.

The owner cannot rely on a pay-when-paid provision (if any) in a contract.

Date for payment

Where the owner serves a payment schedule on the contractor within time for the full amount of the payment claim, the payment claim becomes due and payable:

• according to the time period set out in the contract, or
• if the contract does not make provision for it, (or only by a pay-when-paid provision, which will be void), within 10 business days after a payment claim is made.

If a progress claim becomes due and payable, interest is payable at the greater of the rate set out in the contract, or alternatively, if the amount is recovered by court proceedings, the rate specified by the court with jurisdiction. Also, as noted above, the contractor has a right to exercise a lien over any unfixed plant or materials supplied.

Consequences of failure to follow the procedure

The Act makes the owner liable to pay all, or the unpaid balance of a payment claim, if the owner:

• does not provide the payment schedule within the required time and does not pay the whole amount on or before the due date for the progress payment; or
• having given a payment schedule stating it intends to pay, then does not pay the amount on the payment schedule within the time set out under the contract or the Act, whichever is earlier.

The contractor can bring a court action, or apply for adjudication, for all of the unpaid amount of a payment claim.

If the contractor brings a court action to recover the unpaid amount because the owner has not followed procedure, the amount claimed is recoverable as a debt due to the contractor. The court can only consider whether the owner has failed to follow the procedure set out in the Act and, where the proceeding is brought on the basis of the owner failing to provide a payment schedule within the required time, whether any of the claimed amount includes any 'excluded amount'. However, while the owner may be obliged to pay the unpaid amount on an interim basis, the owner can bring a separate claim in the court or under the contract to review that claim.

Suspension of Works

The Act provides for the contractor to suspend works where the owner does not pay the claimant in accordance with the payment schedule or does not provide a payment schedule at all. The contractor will need to first serve the owner with three business days notice of their intention to suspend works. The contractor is entitled to claim costs for their suspension of works. If the work is suspended, the contractor might be entitled to an extension of time under the contract for the period of the suspension.

When a contractor is making a claim for suspension costs the architect should first check the contract to determine if they are appropriately dealt with by way of a set-off provision. If there is no reference to suspension costs, the contractor may include them when making an adjudication application. If successful, the contractor may then proceed to file the adjudication certificate into court to obtain a judgment for payment. Alternatively, the contractor, in the first instance, may claim the suspensions costs as a debt due in court.

Subcontractor claims

A subcontractor can make a claim under the Act to the contractor. If the contractor does not pay the subcontractor, and the subcontractor has obtained judgment for the adjudicated amount as a debt from a court, under exactly the same processes as described above, the subcontractor can claim directly against the owner out of the moneys that would otherwise be payable to the contractor.

Frequency of claims

The architect should follow the requirements of the Act and contract in assessing and responding to each and every progress claim, irrespective of when they are received by the architect. The architect should be mindful that if progress claims are submitted at the wrong time by the contractor, this could lead to that progress claim being invalid for the purposes of the contract, the Act, or both.

The architect should not agree to accept progress claims at longer or shorter intervals than stipulated in the contract, or agree to irregular dates in any one month for submission of progress claims.

Because the Act does not remove rights under the contract (unless they are inconsistent with the Act), the architect could be obliged to carry out duplicated or more frequent assessments and certificates. As some contractors consider that putting the architect under pressure is to their advantage, some contractors might seek to bring this situation about.

Conclusion

The provisions of the Act are complex and not dealt with in full detail by this note. Architects should remember that the obligations under the Act are on the owner and strongly encourage the owner to seek legal assistance immediately if a security of payment claim is received. The architect's role is to assist the owner in meeting those obligations, but not to advise about specific procedures where this could amount to providing legal advice.

Under Security of Payment legislation adjudication is the process for the resolution of a dispute relating to the payment of a claim. See information available on the Victorian Building Authority's website for an overview of the adjudication process.

Back to top

Adjudication of disputes

A contractor can apply to have a payment claim adjudicated where the owner:

1. does not provide the payment schedule within the required time (if no time is specified in the contract, 10 business days) and then does not pay all of the payment claim on or before the due date
2. provides a payment schedule but not for the full amount of the payment claim
3. having given a payment schedule stating it intends to pay, then does not pay the amount on the payment schedule within the time set out under the contract.

If the first of these above applies, before applying for adjudication and within 10 business days after the due date, the contractor must give a notice to the owner that it intends to apply for adjudication, and then before applying, allow the owner two business days after receipt of the notice to produce the payment schedule. If not produced, the contractor must then apply for adjudication no more than five business days after the two business-day period.

If the second applies, either initially or after the procedure above, the contractor can apply for adjudication but must do so within 10 business days after receiving the payment schedule.

If the third applies, either initially or after the procedure above, the contractor can apply for adjudication 10 business days after the due date for payment.

Adjudication appointment

The contractor applies to an adjudication authority to appoint the adjudicator and the contractor and owner have no say in who the adjudicator will be, although the contractor can select the adjudication authority. The contractor must copy the application to the owner.

The appointed adjudicator must serve notices on both contractor and owner and any person the adjudicator reasonably believes from the submission is financially or contractually interested in the matters to be adjudicated, for example a person for whom the owner is an agent.

Contractors may be tempted to use such provisions as a rationale for serving payment claims on the architect instead of the owner on the basis that the architect is an agent of the owner. This is quite wrong unless exceptional contractual circumstances apply. In virtually all standard-form building contracts, and at common law, the architect acts in certification (ie the payment-assessment role to which this legislation is relevant) independently, and not as the agent of the owner.

The adjudicator is deemed to have accepted the appointment when the last of the two notices is served.

Response to adjudication

Once an adjudicator has been appointed, the owner has to give the adjudicator and the contractor an adjudication response in writing to the contractor’s application (response) within the later of:

• five business days after receiving a copy of the application; or
• two business days after the adjudicator accepts the application.

However, the owner only has a right to make a response where the owner has submitted a payment schedule within time. If the owner did not submit a payment schedule within time, the contractor is entitled under the Act to payment of the payment claim in full.

The response has to refer to the application and include the reasons why all or part of the payment claim is not payable. It must also include the owner's name and address. If the owner is acting as an agent for the true owner, or knows of any other person with a financial or contractual interest in the matters to be adjudicated, the owner must include that person or persons' name and address.

If the owner's response contains reasons that were not stated in the payment statement for withholding all of part of a payment claim, the adjudicator must serve a notice on the contractor setting out those reasons and stating that the contractor has two business days after receipt to respond in writing to the adjudicator.

Adjudicator's decision

The adjudicator has to make a decision as soon as possible, but not until after the time the owner has to submit a response (see above).

Subject to that overriding condition, the decision is to be made within 10 business days or within such further time as the contractor agrees, not exceeding 15 business days after the date of the adjudicator's acceptance of the adjudication.

The adjudicator can ask the parties for further written submissions, call a conference of the parties and inspect the site before making the decision. The parties can only be legally represented at a conference with the permission of the adjudicator. Also, the adjudicator can consider, but only consider:

• the provisions of the Act
• the provisions of the construction contract, provided the provision is consistent with the Act
• the payment claim
• the payment schedule
• the response
• any further written submissions
• the results of any inspection of the site.

The adjudicator cannot take into account any part of a claimed amount that is an excluded amount or any other matter that the Act prohibits being taken into account.

The adjudicator must decide the sum of a progress claim, and the basis on which the amount or date for payment has been decided, as well as any interest that may be payable. The adjudicator's decision has to be in writing and include reasons.

It must be given to the Victorian Building Authority by the nominating adjudication authority within five business days of being made.

Consequences of the adjudicator's decision

Where an adjudicator has determined a value of construction work or related goods and services, where there is a further adjudication a subsequent adjudicator must arrive at the same valuation unless the contractor or the owner can establish that the value of the work has changed since the previous determination.

The adjudicator's decision determines the parties' interim payment entitlements and cannot be reviewed by a court unless the adjudicator has made certain reviewable errors of law.

The owner has to pay the adjudicated amount within five business days of receiving the decision or such later date determined by the adjudicator. If the owner is entitled to seek a review, the owner may be required to pay part of the adjudicated amount into a trust account, which might include paying part into a trust account if the owner is entitled to seek a review.

The owner can seek a review of the decision of the adjudicator if the adjudicated amount exceeds $100,000 and the owner had provided the contractor with a payment schedule within the timeframe allowed by the Act. However, the application can only be on the basis that the adjudicated amount included an excluded amount and then only if:

• the owner had identified that excluded amount in its payment schedule or adjudication response
• has paid the adjudicated amount other than the amount alleged to be an excluded amount
• has deposited the alleged excluded amount into a designated trust account.

The contractor can only apply for a review of a decision where the contractor believes that the adjudicator wrongly determined an excluded amount.

Any application for review must be made to the authorised nominating authority to which the adjudication application was made within five business days after receiving the adjudicator's determination.

After the adjudicator makes its determination on a review, the owner must pay the contractor the adjudicated amount within five business days or within such time that the adjudicator determines.

If the owner does not pay the adjudicated amount, the contractor can apply to the authorised nominating authority for an adjudication certificate. The contractor can then apply to enforce the adjudication certificate in a court as a judgment debt. The owner cannot in any such court action apply to set aside the judgment debt, except on the grounds that the adjudicator's determination included a variation that was not a claimable variation.

The contractor can additionally serve notice of the contractor's intention to suspend the works.

Adjudication and settling disputes under the contract

Leaving aside court action, of concern to architects administering the contract is how the adjudication affects the contract's dispute-resolution procedures. The Act does not remove the rights otherwise available to the parties under the contract. The architect may find that he or she has to deal with a payment claim from the contractor while at the same time being involved in a separate dispute resolution procedure or court action over the same dispute.

In order to finally determine the rights of the owner and contractor, it is possible for the owner to start the dispute-resolution procedures under the contract. This may lead to a court action. These processes are not affected by the Act. If the contractor has applied for an adjudication in the meantime, the contractor may arrive at court having already been paid (but perhaps being ordered to pay some of that money back).

A contractor is likely to favour using the adjudication process under the Act because the adjudication process is conducted relatively cheaply and quickly.

Because the adjudication only decides the parties’ interim payment entitlements, a different final result may be achieved through final dispute resolution. Your client should obtain legal advice in relation to both security of payment disputes and disputes under the contract.

However, amounts to be paid to the contractor according to adjudication are, when paid, advances toward the contract price (as adjusted). In other words, the adjudication process is not intended to undermine the bargain the parties have struck when entering into the contract. Even so, it is conceivable that the cost of variations and other adjustments may be determined by the adjudication process even though the determination differs from the architect's assessment (which must still occur under the contractual obligations between the parties).

Back to top

Related courses - Available via Online CPD

• Update: Security of Payment - VIC