Victoria's Security of Payment regime set for extensive reform

Introduction

In November 2023, Victoria's Legislative Assembly’s Environment and Planning Committee released its report following an inquiry into Employers and Contractors who refuse to pay their subcontractors for completed works (Report)¹. The Report made sweeping recommendations to reform Victoria's security of payment regime, as is currently set out in the Building and Construction Industry Security of Payment Act 2002 (Vic) (SOP Act).

In October 2024, the Victorian Government responded to the Report², formally indicating its broad support for all 28 of the Report's recommendations (16 recommendations in full and 12 recommendations in principle or in part). The Government's response foreshadows fundamental changes to the operation of the SOP Act in Victoria. Proposed changes include what amounts can be claimed in a progress claim, the date for making payment claims as well as limits on the timeframe for payment of those claims, amongst other things.

 

Background

Each of Australia's states and territories has enacted security of payment regimes seeking to address poor payment practices. These regimes work to:

1. ensure any contractor who carries out construction work (or supplies related goods and services) under a construction contract is entitled to be paid progress payments for carrying out work and supplying goods and services; and
2. provide access to a rapid, low-cost adjudication scheme to determine payment disputes.

Although there have been ongoing recommendations to establish a uniform security of payment regime across Australia, each State and Territory deployed different regimes. The Victorian regime has remained a peculiarity and includes several concepts not found elsewhere in Australia. The Victorian SOP Act has not been amended since 2006, despite amendments in other jurisdictions. The sweeping reforms now endorsed by the Victorian Government will address several of the inconsistencies, supporting a move towards more uniformity across the Australian security of payment regimes.

 

Summary of the key recommendations

Recommendation No. 2 – removing the "Excluded Amount" and "non-claimable variations" regime

This change would remove Victoria's unique "Excluded Amount" regime which excluded certain amounts from being included in a contractor's progress claim – including amounts related to latent conditions, time-related costs, changes in regulatory requirements and certain non-claimable variations. The Government supports inserting sections modelled on the Western Australian and New South Wales Acts enabling contractors to claim a progress payment calculated in accordance with a contract or, if the contract does not provide for the matter, calculated on the basis of the value of construction work carried out.

Recommendation No. 3 – removal of "reference dates" concept

This change would remove Victoria's unique "reference date" concept – which currently sets the date on which a person is entitled to a progress payment and when a payment claim can be made. Instead, the Government supports a regime modelled on the NSW legislation which would:

• enable at least one payment claim to be made per calendar month;
• expressly provide for a payment claim to be made on or following the termination of a contract, for goods and services provided up to the date of termination; and
• override any contracted dates for payment claims if they are longer than those provided for by the SOP Act.

Recommendation No. 4 – amend business day concept to introduce end-of-year shutdown period

This change would amend the definition of business days to exclude:

• Saturdays and Sundays;
• Victorian public holidays; and
• the period between 22 December and 10 January inclusive.

This means key timeframes under the SOP Act, including the time to respond to a payment claim, would exclude the dates above.

Recommendation No. 5 – protection from unfair notice-based time bar clauses

This change would introduce a new provision based on the Western Australian legislation that empowers an adjudicator, a court, an arbitrator (or other expert appointed by the contracting parties to determine a matter under the contract) to declare a notice-based time bar clause "unfair" if compliance with the clause:

• Is not reasonably possible
• Would be unreasonably onerous

A provision declared unfair would have no effect in relation to the payment claim that is the subject of the proceedings. It would however continue to have effect in other circumstances arising under the same or a related contract.

Recommendation No. 6 – protection from unfair contract clauses generally

This change would see the insertion of recognition into the SOP Act that the Government may, by amending the Building and Construction Industry Security of Payment Regulations 2023 (Vic), nominate and prohibit specific types of unfair construction contractual clauses and, in doing so, nullify their effect.

Recommendation No. 7 – extend the time limit on claiming payment

Currently the SOP Act provides that progress payment claims (other than a final, single or one-off payment) made under the Act must be submitted within three months of the relevant reference date, or later if allowed in the contract. The proposed change would increase the timeframe to six months after the relevant construction work was completed, or later if provided for in the contract. The proposed change would also extend the time for final payment claims.

Recommendation No. 8 – imposing payment time limits under construction contracts

This change would set an upper limit for when payment under a construction contract will become due and payable being 25 Business Days after the payment claim has been made.

Recommendation 9 – introducing an express entitlement to claim payment of retention moneys

This change would remove current uncertainty to provide an entitlement to claim retention money under the Act, either as part of a broader payment claim or as a standalone claim.

Other recommendations – adjudication process

The Victorian Government has further supported a number of recommendations aimed at addressing several perceived deficiencies in the adjudication process under the current SOP Act. This includes recommendations to:

• prohibit respondents from including new reasons for withholding payment in their response to an adjudicator that was not previously included in the payment schedule (Recommendation 15);
• remove the requirement for adjudicators to identify these reasons and provide claimants with two days to respond to them (Recommendation 15);
• provide respondents with five business days to provide a payment schedule in response to an adjudication notice (Recommendation 16);
• provide that an adjudication determination must be made within 10 business days of:
  • a respondent providing a valid adjudication response;
  • the date an adjudication response became due; or
  • if the respondent is not entitled to provide an adjudication response, the date the adjudicator accepted the adjudication application, subject to the claimant and the respondent agreeing to extend the time by which an adjudicator must make a determination by up to an additional 20 business days (Recommendation 17).

• remove the current adjudication review mechanism, which only allows for the review of determinations involving excluded amounts – thereby limiting review of adjudicator determinations to judicial review (Recommendation 19); and
• provide that an adjudication certificate may be filed as a judgement for a debt in any court of competent jurisdiction and is enforceable accordingly (Recommendation 26).

 

Commentary

If implemented, these proposed changes to the progress claim process make significant steps to aligning Victoria's security of payment approach with the rest of Australia. Despite the popularity of concepts like "excluded amounts" and "non-claimable variations" with principals in Victoria – who can rely on these categories to argue for the exclusion of certain disputed payment amounts from SOP Act claims (and adjudication processes) – their removal will benefit contractors and provide much-desired consistency for those operating in multiple Australian States and Territories. Similarly, the recommended reforms in relation to unfair clauses and time-bars will further protect contractors – and may warrant the revisiting of their standard form contracts by principals in Victoria.

In relation to the adjudication reforms, the Victorian Government noted in its response to the Report that the "provisions of the SOP Act governing when adjudication applications must be made are complex and do not lend themselves to easy interpretation and application by laypersons in the construction industry". It is not a surprise then that in FY2024, New South Wales led Victoria in the following statistics:³

• 1057 adjudication applications lodged in NSW compared to Victoria's 332 lodged applications;
• AUD745,154,036 claimed in NSW compared to AUD119,816,186 in Victoria;
• 538 adjudication determinations released in NSW, compared to 189 in Victoria; and
• AUD113,831,040 awarded in NSW compared to AUD42,188,314 in Victoria.

The proposed changes to the Victorian adjudication process will align it with other jurisdictions, will help to achieve consistency across Australia, and will likely lead to more adjudication applications being made. For example, the proposed prohibition on respondents from including new reasons for withholding payment in their adjudication responses will assist in reducing the likelihood of adjudication applications being rejected on technical legal grounds and achieve alignment with most other Australian jurisdictions which already prohibit respondents from including new reasons in their adjudication responses.

 

What happens next?

In addition to the recommendations that were "supported in full", the Victorian Government supported "in-principle" or "in-part" a number of other reforms which will be subject to further consultation. These may result in additional amendments being proposed to the SOP Act. 

Although no timeline for enacting the recommendations has been given, the proposed changes to the SOP Act will have far-reaching consequences for those procuring and undertaking construction work (and related goods and services) in Victoria. It will require participants in the Victorian construction industry to review and revise their future contracts, as well as understand their new rights and liabilities relating to payment and the adjudication of payment claims.

 

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¹ Nonpayment of subcontractors
² Government Response Subcontractors Inquiry
³ Victorian Building Authority, Building and Construction Industry Security of Payment Act 2002, Adjudication Activity Statistics: 2023-2024 Financial Year; Building Commission NSW, Building and Construction Industry Security of Payment Act 1999 Quarter 4 2024.