SECURITY OF PAYMENT LEGISLATION

VICTORIA



The security of payment legislation in Victoria is:

Building and Construction Industry Security of Payment Act 2002

(Vic) (Victorian Act)



When does the Victorian Act apply | The right to make a payment claim | How to respond to a payment claim | When is payment due | Contractor's rights if not paid - how to enforce its rights | Adjudication | Enforcing an adjudication determination


When does the Victorian Act apply?



The Building and Construction Industry Security of Payment Act 2002 (Vic) (Victorian Act) applies to construction work (and related goods and services) carried out inside Victoria. This is true even if the contract specifies that it is governed by the law of another jurisdiction.

The Victorian Act does not apply to domestic building work if the principal is a party to the contract and will live in the building.

A construction contract is defined broadly under the Victorian Act. It includes 'arrangements' which may be less than a legally enforceable contract.

It is not possible to contract out of the Victorian Act.

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The right to make a payment claim



When can a contractor make a claim?



A claim for a progress payment can be made on the dates specified in the contract.

If the contract does not specify when a payment claim can be made, one can be made every 20 business days after the first day works are carried out.

The right to make each payment claim lapses if it is not made within the later of 3 months or the period specified in the contract.


How does a contractor make a payment claim?



To be entitled to a progress payment the contractor (claimant) must serve a payment claim on the person who is liable to make the payment under the construction contract (respondent).

To be valid under the Victorian Act, a payment claim must:

  • identify the relevant construction work or related goods and services;
  • indicate the amount claimed to be due (claimed amount); and
  • state that it is made under the Victorian Act.

CASE STUDY



Gantley Pty Ltd v Phoenix International Group Pty Ltd

[2010] VSC 106



Facts


  • Phoenix International Group Pty Ltd (Phoenix) served payment claims on the plaintiff in respect of three projects.
  • In response Gantley Pty Ltd (Gantley) served payment schedules of 'nil', on the basis that the claims did not properly identify the work to which they related.
  • The adjudicator determined that the sums claimed by Phoenix were valid and were due to it.
  • Gantley issued proceedings in the Supreme Court for review of the decision.

Result


  • The court decided that a payment claim that does not reasonably specify the work done which is the subject of the payment will be invalid.
  • In determining the degree of specificity, what is necessary is an identification of the work which is sufficient to enable a respondent to a payment claim to understand the basis of the claim and provide a considered response to it. The standard is that of a reasonable person who is in the position (and has the knowledge) of the recipient.
  • The court held that it is possible to sever part of a payment claim which is non-compliant with the Victorian Act.


What type of payments are excluded from the Victorian Act?



A contractor cannot include the following in a payment claim:

  • time-related costs;
  • costs arising from changes in regulatory requirements;
  • damages arising under or in connection with the contract; or
  • any claim arising at law other than under the construction contract.

These are called 'excluded amounts'.

CASE STUDY



Seabay Properties Pty Ltd v Galvin Construction Pty Ltd & Anor

[2011] VSC 183



Facts


  • Seabay Properties Pty Ltd (Seabay) as principal contracted with Galvin Construction Pty Ltd (Galvin) for the construction of an apartment block.
  • In accordance with both the contract and the Victorian Act Galvin submitted a payment claim for approximately $2 million.
  • Seabay responded by providing a payment schedule that deducted approximately $770,000 for liquidated damages.

Result


  • The court held that the list of 'excluded amounts' in the Victorian Act was not exhaustive and liquidated damages were also an excluded amount.
  • The court rejected an argument by Seabay that the prohibition on excluded amounts only applied to amounts claimed by a claimant.
  • The court observed that excluded amounts dealt with contentious issues that often give rise to complex and costly disputes. If the concept of pay now argue later that underpins the Victorian Act was to be given full effect, excluded amounts must apply to amounts claimed by both parties.


CASE STUDY



Maxstra Constructions Pty Ltd v Joseph Gilbert & Ors

[2013] VSC 243



Facts


  • Maxstra Construction Pty Ltd (Maxstra) as head contractor subcontracted concreting work associated with the construction of a new service station to Joseph Gilbert.
  • Mr Gilbert issued a payment claim under the Victorian Act for completed work. In response Maxstra submitted a payment schedule disputing the payment claim and claiming the right to set-offs for defects and delay costs.
  • The adjudicator found for Mr Gilbert on the basis that Maxstra's claim for rectification of defects was a claim for damages for breach of the construction contract and was caught by the Victorian Act's excluded amount provisions.
  • Maxstra appealed the decision to the Supreme Court arguing that it was able to claim the estimated cost of rectification of defects under section 11(1)(b)(iv) of the Victorian Act and that such amounts were not caught by the Victorian Act's excluded amount provisions.

Result


  • The court held that the estimated cost of rectifying defects can be taken into account by an adjudicator when determining the correct value of a payment claim under the Victorian Act.
  • The court observed that the compensation contemplated by section 11(1)(b)(iv) of the Victorian Act was purely a statutory concept and was of a different character to a 'claim for damages' which is caught by the Victorian Act's excluded amounts provisions.


What variations can be claimed?



There are two classes of variations that can be included in a payment claim (claimable variations).

The first class of claimable variations are variations that are wholly agreed by both contracting parties. That is, both parties have agreed that the work was done, that it constitutes a variation and the amount that it is worth.

The second class of claimable variations occurs when parties agree that an item of work has been performed by the claimant, however, they disagree on the amount it is worth or that it constitutes a variation.

In order to be able to claim the second class of claimable variations, the contract price must be:

  • $5,000,000 or less; or
  • greater than $5,000,000 but the contract does not include a dispute resolution clause.

Importantly, whenever the total amount of second class claimable variations exceeds 10% of the contract price, then this $5,000,000 threshold is reduced to $150,000.

A variation that is not a claimable variation is also an excluded amount.


What methods of service are valid?



Notices or documents required to be served under the Victorian Act may be served:

  • by delivering it to the person personally;
  • by lodging during normal office hours at the person's ordinary place of business;
  • by sending it by post or facsimile addressed to the person's ordinary place of business;
  • in such manner as may be prescribed for the purposes of this section;
  • in any other manner specified in the relevant construction contract.

CASE STUDY



Metacorp Pty Ltd v Andeco Construction Group Pty Ltd

[2010] VSC 199



Facts


  • Metacorp Australia Pty Ltd (Metacorp) engaged a builder, Andeco Construction Group Pty Ltd (Andeco) to construct a mixed use development.
  • Metacorp sought a review of an adjudication determination which held that a payment claim was valid. It argued that essential formalities of the payment claim, relating to service, necessary to bestow jurisdiction on the adjudicator had not been satisfied.

Result


  • The court held that premature service of a payment claim will not necessarily render the claim invalid. The court noted that, where service is premature, the 10-day time limit for issuing a payment schedule under the Victorian Act still runs from the prescribed date.
  • Furthermore, service on the superintendent, rather that the party 'liable to make payment' under the Victorian Act, was valid as the superintendent had actual and ostensible authority to receive the payment claim as all previous payment claims had been submitted to the superintendent.
  • The court also held that service via email did not invalidate the payment claim because:
  • section 50 of the Victorian Act (which concerns the mode of service) is facultative, not mandatory, and is silent on service my email; and
  • the contract states that notice 'may be served' via post, indicating discretion.



CASE STUDY



470 St Kilda Road Pty Ltd v Reed Constructions Australia Pty Ltd

[2012] VSC 235



Result


  • The court held that contractors are not under a duty of good faith, and need not have a bona fide belief as to the entitlements claimed, when submitting payment claims pursuant to section 14 of the Victorian Act.

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How to respond to a payment claim



Respondent to serve a payment schedule



If a respondent is served with a valid payment claim then it must respond by serving the claimant with a payment schedule. A payment schedule sets out what the respondent assesses is due.


When to serve a payment schedule



The respondent must serve a payment schedule within 10 business days of receiving the payment claim or by the date specified in the contract (whichever is earlier).

The consequence of not serving a payment schedule on time is that the amount claimed in the payment claim is automatically deemed to be due and payable. This is true even if the claimant has no right to receive payment under the contract.


What must be included in a payment schedule?



To be valid under the Victorian Act, a payment schedule must:

  • identify the relevant payment claim;
  • indicate the amount (if any) that the respondent proposes to pay (scheduled amount);
  • indicate why the scheduled amount is less than the claimed amount (if applicable); and
  • provide reasons for withholding payment (if applicable).

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When is payment due?



What amount must be paid?



If the respondent does not serve a payment schedule within time it must pay the full amount of the payment claim.

If the respondent has correctly served a payment schedule, it must pay the scheduled amount.


When is payment due?



If the contract does not specify a particular date, payments become due 10 business days after the payment claim is served. That is, on the same day as the payment schedule.


Right to interest on unpaid amounts



Interest is payable on unpaid amounts at the greater of:

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Contractor's rights if not paid - how to enforce its rights



Right to court order



If a respondent does not pay the scheduled amount or does not provide a payment schedule within time, then the claimant is entitled to a court order.

A court order can be obtained by applying for summary judgment. There are sometimes legal difficulties in obtaining a summary judgment. Therefore, the claimant may choose to have the dispute adjudicated instead, as discussed in adjudication.


Right to exercise lien



If a respondent does not pay the amount due, then the claimant can exercise a lien over any unfixed plant or material at the construction project.

Before exercising a lien, the claimant must give the respondent notice in the prescribed form.


Right to suspend work



If a respondent does not pay the amount due, then the claimant can also suspend work. The claimant must first give notice of its intention to suspend.

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Adjudication



Adjudication of disputes



Claimants can apply for adjudication to enforce an entitlement to progress payments.

An application can be made if:

  • the scheduled amount is less than the claimed amount;
  • the respondent has not paid the scheduled amount by the due date; or
  • the respondent has not provided a payment schedule and has not paid the claimed amount by the due date.


When to apply for adjudication



In the case of the first two bullets above, an adjudication application must be made within 10 business days after the claimant receives the payment schedule.

Where there is no payment schedule or payment, the claimant must first:

  • notify the respondent of its intention to apply for adjudication within 10 business days after the due date for payment; and
  • allow the respondent at least 2 business days to supply a payment schedule after the notice is received.

An adjudication application must then be made within 5 business days after this 2 business day allowance.


How to apply for adjudication



An adjudication application must:

  • be in writing;
  • be made to an authorised nominating authority (ANA);
  • identify the relevant payment claim and payment schedule (if any);
  • be accompanied by any requisite application fees; and
  • be copied to the respondent.

Note that a construction contract can specify three or more ANAs.

A list of all ANAs can be found on the Victorian Building Authority website.

The ANA will then appoint an adjudicator to determine the amount payable.


How to respond to an adjudication application



The respondent may file a response to the adjudication application (adjudication response).

This must be done within the later of:

  • 5 business days after receiving the adjudication application; or
  • 2 business days after receiving notice that the adjudicator has accepted his or her appointment.

An adjudication response:

  • must identify any amounts in the payment claim that are alleged to be excluded amounts;
  • must include the names and addresses of:
  • any relevant principal of the respondent; and
  • any other person who the respondent knows has a financial or contractual interest in the matters under adjudication; and
  • may include other submissions regarding the amount alleged to be payable.

If the adjudication response includes any reasons for withholding payment that were not included in the payment schedule, then the adjudicator must inform the claimant. The claimant then has 2 business days to make submissions.


When will the adjudicator make his or her determination?



The adjudicator will determine the amount he or she believes is payable under the payment claim (adjudicated amount).

The adjudicator must make his or her determination within 10 business days of accepting his or her appointment. The parties can extend this date by up to 15 business days by consent.

The determination must be in writing and must give reasons.


When is payment due?



The respondent must pay the adjudicated amount within 5 business days of the respondent receiving the adjudication determination.


The respondent can apply to have the determination reviewed



If a respondent disagrees with the adjudicated amount, it can apply to the ANA to have it reviewed by another adjudicator.

The review is limited to where the respondent claims that the determination wrongly considered 'excluded amounts'. What constitutes an excluded amount is discussed in The right to make a payment claim above in this section of this chapter.

An application for review must be made within 5 business days of the respondent receiving the original determination.

However, before a respondent can apply for a review, it must first pay:

  • any undisputed amount to the claimant; and
  • the disputed amount into a designated trust account.

The claimant may make submissions within 3 days of receiving an application for review.

The review adjudicator must make his or her determination within 5 business days of accepting his or her appointment. The parties can extend this date by up to 10 business days by consent.

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Enforcing an adjudication determination



Obtain a court order



If a respondent does not pay the adjudicated amount, the claimant can automatically obtain a court order. This can be done simply by requesting the ANA to provide a certificate stating the adjudicated amount. This certificate can then be registered as a judgment with a court.

It is not necessary for the claimant to apply to the court for summary judgment. This avoids a number potential of legal difficulties.


Right to suspend work



If a respondent does not pay the adjudicated amount then the claimant can also suspend works. The claimant must first give 3 days notice of its intention to suspend.


Obtain payment directly from the principal



If the respondent is a subcontractor and has obtained a court order against a head contractor by registering a certificate from the ANA, then it can also recover directly from the principal.

To recover directly from the principal, the subcontractor must:

  • apply for and obtain a 'debt certificate' from the court; and
  • serve the principal with the debt certificate together with a prescribed form.

The amount that can be recovered from the principal is limited to the amount that the principal owes to the respondent under the head contract. This is achieved by assigning any debt due to the respondent under the head contract to the claimant. This is to avoid the principal having to pay twice.

The claimant must notify the principal if it receives payment from the respondent.

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Updated November 2013