Proposed changes to the security of payment regime in Victoria: watch this space

By Julian Berenholtz, Didi Levin, Jade Hazan
Construction & major projects Property & Development

Positive steps towards better meeting the needs of the Victorian construction sector 15 min read

Significant reforms are being considered to the Building and Construction Industry Security of Payment Act 2002 (Vic) (SOPA) reflecting the practice in other Australian jurisdictions.

In this Insight, we consider 10 of the 28 recommendations that are likely to be most significant to participants in the construction industry.

Background and context

In March 2023, the Victorian Legislative Assembly launched an inquiry into the state of payments in the Victorian construction industry, culminating in a report documenting relevant findings and recommendations that was tabled in the Victorian Parliament on 28 November 2023 (Report).

A core focus of the inquiry was the operation of the SOPA. The SOPA provides contractors and subcontractors in the construction industry with a statutory cause of action by which they can seek to claim payment in a timely and efficient manner under a 'pay now, argue later' system.

The inquiry evaluates the SOPA provisions introduced over 20 years ago, with the Report noting (among other things) that the value of construction work completed in Victoria during 2022 totalled $66.89 billion (12.1% of Gross State Product) and that '…updates are needed to give subcontractors a fair go'.

Proposed reforms

Of the 28 recommendations in the Report, 10 warrant particular attention given their potential impact on participants in the construction industry.  

Abolish the excluded amounts regime

The concept of 'excluded amounts' is unique to the Victorian SOPA. 'Excluded amounts' are prohibited from being taken into account in calculating progress payment entitlements, including damages relating to latent conditions, damages for breach of contract, time-related costs, changes in regulatory requirements and disputed variations and amounts (sections 10B(1) and (2), 14(3)(b), 16(4)(a) and 23(2A)(a)). These types of claims commonly arise on construction projects.

The Report recommends a new provision to enable contractors to claim payment calculated in accordance with the contract, or if the contract does not provide for the matter, payment is to be calculated on the basis of the value of the construction work performed. These calculations may take into account matters that would be excluded amounts under the current SOPA provisions.

Abolish reference dates

The current SOPA provisions allow for only one payment claim per reference date. A reference date is usually a monthly date determined by the construction contract (if the contract does not expressly provide a reference date, it is to be 20 business days since the start of construction and/or the previous reference date). The Report proposes that reference dates be replaced by a provision that payment claims for each month's work are to be made on and from the last day of each month, unless an earlier date is agreed by the contract.

Time to stop running over certain dates

The SOPA includes strict timeframes, eg the time in which payment claims and schedules are to be served, or the timeframe to apply for or respond to an adjudication process. The Report recommends new provisions to stop time from running over weekends, Victorian public holidays and between 22 December and 10 January.

Time-bar clauses may be declared 'unfair' by an adjudicator

Construction contracts often include time-bar provisions that operate to bar a contractor from receiving a payment entitlement on the basis that a notice claiming the payment was not submitted within the timeframe or in the form specified by the contract. The Report proposes for a new provision (modelled on s16 of the Western Australian security of payment legislation), to allow for an adjudicator or other decision-maker to declare that a time-bar provision is unfair if compliance with the provision is onerous or not reasonably possible. In such a case, the time-bar provision declared to be unfair will not affect the particular payment claim (but may still apply to other claims, depending on their context).

The committee also recommends that the Victorian Government should be able to restrict (by enacting regulations) other types of contractual provisions it considers to be unfair. This is so the legislative regime can 'keep pace' with evolving contractual practices. A provision to this effect exists under s15 of the Western Australian security of payment legislation. We consider that the scope of any such broad power ought to be carefully defined.

Time limit for making payment claims extended to six months

Currently, payment claims must be served within three months from completion of the relevant construction work. This date can be extended by the terms of the construction contract. The Report proposes to extend the time limit to six months (or later if provided for by the contract).

Retention money can be claimed and adjudicated

There has been some uncertainty in Victoria as to whether retention moneys may be claimed as part of a payment claim under the SOPA (the Victorian Supreme Court recently clarified that retention moneys may be claimed under the SOPA, in Hunters Green Retirement Living Pty Ltd v JG King Project Management Pty Ltd [2023] VSC 536). The Report recommends that the SOPA expressly provide that retention moneys may be claimed and adjudicated.

Reasons not in a payment schedule cannot be included in an adjudication response

The recipient of a payment claim will typically respond by way of a payment schedule identifying any areas of dispute and advancing an alternative amount for payment. The claimant may then refer the matter to adjudication. The Report proposes that a respondent's submissions for an adjudication process may only include reasons that have been specified in their payment schedule. Reasons may not be raised for the first time during adjudication.

Modernising how notices may be served

The current SOPA provisions for service of notices are limited and importantly make no express provision to allow for service of payment-related notices by email (which is a current common practice). The Report recommends for the SOPA provisions to be modernised as needed, including for documents served as part of an adjudication to be uploaded to a digital 'lockbox'.

Adjudication certificates may be filed as judgment for debt

If an adjudicated amount is not paid and an adjudication certificate has been issued, the current enforcement process under the SOPA requires a claimant to commence court proceedings to obtain a judgment debt. The Report recommends streamlining this process so that an adjudication certificate may be enforceable as a judgment debt, without the need for further court proceedings.

Retention trust scheme

The Report recommends for SOPA to legislate for the establishment of retention money trust accounts. These accounts are to hold or quarantine subcontractor retention monies until they are returned to the subcontractor or validly used by the head contractor to rectify defects. The retention trust schemes already operate in some other states such as NSW, Western Australia and Queensland. Holding retention funds in a standalone trust account protects the funds if the head contractor becomes insolvent.

We do not address all of the proposed reforms in this Insight. The balance of the recommendations deal with a broad a range of topics, including (among other things) to extend the SOPA to domestic building contracts with homeowners, promotion and education of the construction sector, funding, improving the adjudication process, professional development for adjudicators and adjudication fee arrangements.

Analysis: key recommendations and objectives

The inquiry and Report are positive steps towards improving SOPA processes to better meet the needs of the Victorian construction sector. Many of the recommendations made by the Report (such as the abolishment of excluded amounts and reference dates, extended time limits for claims, and trust schemes) are consistent with payment provisions already legislated in NSW and (more recently) Western Australia. The recommendations in the Report seek to bring Victoria into line with the payment practices in these other states, which we consider a useful objective having regard to the fact that national contractors operate in most states and territories; harmonisation of laws is desirable.

The 10 recommendations summarised above can be divided into the following three broad objectives (considered in turn below), to:

  • simplify the claims process
  • adjust timeframes
  • provide better access to, and protection for, retention monies.

Simplifying the claims process

The excluded amount regime and reference dates have undoubtedly complicated the payment claim process in Victoria.

Excluded amounts

Abolishing the excluded amounts regime will enable the swift interim resolution (via SOPA mechanisms) of many valid contractor claims that are currently excluded from the SOPA process. It will also simplify the making of SOPA claims.

The complexity of the excluded amounts regime was highlighted in the decision of the Victorian Court of Appeal in Yuanda Vic Pty Ltd v Façade Designs International Pty Ltd [2021] VSCA 44. In that case, the court held it could not award judgment to enforce any part of a payment claim that contained excluded amounts. The entire payment claim before the court in that case was rejected.

The abolition of the excluded amounts regime will simplify the claims process insofar as anything contained in a payment claim will be a valid part of the claim. Considering that another recommendation in the Report is to limit adjudication responses to the reasons set out in a payment schedule, respondents to a payment claim will need to look ahead to prepare as much as possible in advance, before receiving a claim.

Reference dates

Reference dates can be difficult to calculate—especially where a contract does not expressly specify a date (in which case, it is calculated by counting 20 business days). An incorrectly determined reference date can undermine the validity of a payment claim. With this in mind, it is sensible to establish routine fixed dates for payment claims to be made.

Any new legislation will need to safeguard against the potential for multiple claims for the same work, to avoid the potential for a contractor 'double dipping' on payment.

Other proposals in the Report—to modify notice provisions and for adjudication certificates to be filed as judgment for debt—are practical recommendations to simplify the claim and enforcement processes, as well as reduce the need for court intervention, which can be time consuming and expensive.

Adjusting timeframes

Extending the time limit so that claims can be made for up to six months from completion of the relevant construction work (instead of three months) provides a claiming party with more control over when to make its claims. The extension may be useful in circumstances where there are matters to be resolved between the parties or to give the claimant time to prepare materials to support any damages or extension of time entitlements associated with the payment claim (assuming the excluded amounts provisions are abolished).

It is commonplace for payment claims to be served just before Christmas and the New Year, with the intention to ambush receiving parties at a time when staff and advisers are generally on leave. The recommendation to stop time from running over weekends, Victorian public holidays and the Christmas and New Year period is a practical change. The SOPA has strict deadlines. Missing a deadline could invalidate a claim or a response. Stopping time over periods when workplaces are often closed or short staffed reduces the chance for a hard statutory deadline to be missed (which attracts significant consequences) and alleviates the difficulties of addressing claims over holiday periods.

Finally, the recommendation that time-bar provisions may be declared 'unfair' by an adjudicator, means that contractual timeframes cannot be strictly imposed where it would be unfair to do so.

Retention monies

Easier access by subcontractors to the return of retention monies and protection of retention monies are important areas for reform.

We have seen insolvency scenarios where head contractors have absorbed retention monies into operations accounts and expended the money before becoming insolvent. In these situations, there is very little prospect for subcontractors to recover the retention amounts they are due.

The trust scheme recommended by the Report will provide a layer of protection to retention monies so that those funds are quarantined in the event of a head contractor insolvency.

Final thought

It will be interesting to see what the Victorian Parliament does with these recommendations, and the extent to which the proposed reforms might be implemented.