Chapter 15 Security of Payment Legislation Victoria
The security of payment legislation in Victoria is:
- the Building and Construction Industry Security of Payment Act 2002 (Vic) (Victorian Act).
Building and Construction Industry Security of Payment Act 2002 (Vic) (Victorian Act)
When does the Victorian Act apply?
The Building and Construction Industry Security of Payment Act 2002 (Vic) 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.
South City Plaster Pty Ltd v Modscape Pty Ltd  VCC 1576
- Modscape was engaged by Fairbrother Pty Ltd to supply and install 64 fabricated modules for use in a hospital project in Tasmania.
- Modscape engaged South City Plaster Pty Ltd for the plastering work of the modules.
- The court held that the Victorian Act will apply to claims for prefabrication work carried out in Victoria for erection in other states.
The right to make a payment claim
When can a contractor make a claim?
A claim for a progress payment can only be made on or after 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.
A contractor in liquidation cannot make a payment claim under the Victorian Act, because it is no longer carrying out construction work or supplying related goods and services (see: Façade Treatment Engineering Pty Ltd (in liq) v Brookfield Multiplex Constructions Pty Ltd  VSCA 247).
A contractor cannot make a claim if the right to payment has been suspended under the construction contract (see: Westbourne Grammar School v Gemcan Constructions Pty Ltd  VSC 645).
Westbourne Grammar School v Gemcan Constructions Pty Ltd  VSC 645
- The construction contract entitled the respondent to give the claimant a show cause notice where the claimant had committed a substantial breach of the contract. It also entitled the respondent to take over the balance of the works and to suspend the claimant’s entitlement to payment where the claimant failed to show reasonable cause by the date and time stated in the show cause notice.
- The court looked to the High Court’s decision in Southern Han Breakfast Point Pty Ltd (in liquidation) v Lewence Constructions Pty Ltd  HCA 52, where Robson J held that the right to make a payment claim under the Victorian Act is based on a contractual right to make that claim. If the terms of the contract say that there is no right to make a payment claim because the right to payment or a reference date has been suspended, then there is no contractual right of payment which the claimant can enforce under the Victorian Act.
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).
A valid 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.
Gantley Pty Ltd v Phoenix International Group Pty Ltd  VSC 106
- 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.
- 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:
- costs concerning latent conditions;
- 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’.
- 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.
- 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.
- 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 is to be given full effect, excluded amounts must apply to amounts claimed by both parties.
- This case was upheld in Shape Australia v The Nuance Group  VSC 808. In that case the court held that the claim to recoup liquidated damages deducted in previous payment claims was a claim for an excluded amount under the Victorian Act.
Maxstra Constructions Pty Ltd v Joseph Gilbert & Ors  VSC 243
- Maxstra as head contractor subcontracted concreting work associated with the construction of a new service station to Gilbert.
- Gilbert issued a payment claim under the Victorian Act for completed work. 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 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.
- 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 compensation contemplated by section 11(1)(b)(iv) of the Victorian Act is purely a statutory concept and is 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 provide ‘a method of resolving disputes’ (discussed in further detail below).
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.
Does the contract provide ‘a method of resolving disputes’?
A claimant may claim second class variations under the Victorian Act where the contract price is greater than $5,000,000 and the contract does not provide ‘a method of resolving disputes’. The Victorian Supreme Court has ruled that ‘a method of resolving disputes’ requires reference of the dispute for a binding determination such as arbitration or litigation. It is not enough that the contract refers the dispute to mediation or another non-binding process.
Branlin Pty Ltd v Totaro  VSC 492
- The contract did not provide a ‘method of resolving disputes’ within the meaning of the Victorian Act.
- The court held that for a method of resolving disputes, what was required was at least a process which:
- could be described as a ‘method’ of dispute resolution;
- is capable of resulting in a binding resolution of the dispute; and
- the contract makes a binding obligation for the parties to enter upon and participate in.
SSC Plenty Road Pty Ltd v Construction Engineering (Aust) Pty Ltd  VSCA 119
- The dispute resolution provisions of the contract included a compulsory meeting following notification of a dispute, and failing resolution at that meeting, mandatory mediation.
- The Victorian Court of Appeal upheld the first instance decision that a ‘method of resolving disputes’ must otherwise prescribe an alternative means of securing the certainty and finality of a binding amount.’
- A ‘method for resolving disputes’ requires a method that will result in an actual resolution of the dispute between the parties rather than just offering a forum for the discussion of the controversies between them, which may or may not lead to their resolution
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.
MKA Bowen v Carelli Constructions  VSC 436
- MKA Bowen Investments Pty Ltd (MKA Bowen) engaged Carelli Constructions Pty Ltd (Carelli) to design and construct an apartment complex in Victoria.
- MKA Bowen sought a review of an adjudication determination on the basis that the relevant payment claim was not validly served under the Victorian Act as it was not served ‘on and from’ the relevant ‘reference date’.
- The payment claim was not a valid payment claim under the Victorian Act as it was served before the relevant reference date. Accordingly, the adjudication determination was quashed.
- The Victorian Act does not permit the service of a payment claim prior to the relevant reference date.
- The Victorian Act establishes a time-critical regime for the submission of payment schedules and referral to adjudication.
- Since the decision in Metacorp Australia Pty Ltd v Andeco Construction Group Pty Ltd & Ors (2010) 30 VR 141 (see below), it has been accepted that a genuine payment claim served prematurely could be valid. However, this is no longer the case, even where the relevant construction contract contains a clause deeming an early payment claim as effective only from the next reference date.
Metacorp Pty Ltd v Andeco Construction Group Pty Ltd VSC 199
- Metacorp engaged a builder, 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.
- The court held that 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.
- 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.
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).
- The respondent informally responded to one of the claimant’s payment claims by email, asserting that the claim was invalid.
- The claimant commenced proceedings and sought payment of unpaid amounts on the basis that the respondent had failed to issue a payment schedule.
- The Victorian Court of Appeal held that the email was not a valid payment schedule because it did not provide an adequate indication of the respondent’s objections to the claims made in the payment claim
- A payment schedule must have sufficient information to enable the claimant to understand why the claim has been rejected, so as to allow them to determine whether or not to pursue the claim.
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:
- the rate specified in the construction contract; or
- the rate fixed under the Penalty Interest Rates Act 1983 (Vic) from time to time.
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.
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 bullet points 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.
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. This period can be extended by a further 5 business days with the claimant’s consent (which must not be unreasonably withheld).
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 in cleared funds:
- 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.
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.