The construction industry has been consistently identified to experience payment problems such as long payment terms, late payments, incomplete payments and non-payments. As such, in November 2023, the Legislative Assembly Environment and Planning Committee (the Committee) published its inquiry dealing with the security of payment (SOP) laws in Victoria.
This inquiry has been published in recognition of the proliferation of poor payment practices frequently experienced by businesses in the construction industry, and considering its findings, the Committee has made a number of recommendations to the Victorian Government including a call for legislative reform to the Building and Construction Industry Security of Payment Act 2002 (Vic) (the Act).
Summary of Findings
As a result of its consultative process, the Committee made a number of findings about the Victorian construction industry, including the following.
- The hierarchical and competitive nature of construction contracts exposes contractors and subcontractors to poor payment practices and can limit contractors and subcontractors’ ability to negotiate fair payment terms.
- Businesses tend to be undercapitalised which may lead to poor payment practices and the use of funds earmarked for subcontractors to finance other projects.
- Businesses are currently operating in a difficult economic climate characterised by persistent supply chain issues, increased building material costs and skills shortages, however, poor payment practices predate these challenges.
- Poor payment practices may lead to the closure of businesses, noting that the construction industry experiences higher levels of business insolvency than other sector.
Summary of Recommendations
The Committee made 28 recommendations to the Victorian Government to address the problems it has found. The most significant recommendations the Committee has made are for several amendments to be made to Victoria’s SOP legislation to reflect the other states’ corresponding legislation, to protect contractors and subcontractors from the problems of the construction industry that it found. These recommendations are as follows.
- Abolishing excluded amounts and non-claimable variations (a concept unique to Victoria), and instead, inserting a new provision that enables contractors to claim a progress payment in accordance with a contract or, if the contract does not provide for the matter, based on the value of construction work carried out. This would be a significant change expanding the scope of security of payment laws bringing Victoria into line with other Australian jurisdictions.
- Abolishing the concept of ‘reference dates’, and instead, allowing at least one payment claim can be made per calendar month, a payment claim is able to be made following the termination of a contract, and for goods and services a payment claim can be made up to the date of termination. This change reflects a recent change in NSW.
- Including within the definition of ‘business days’ the exclusion of the period between 22 December and 10 January inclusive (in addition to the exclusion of Saturdays and Sundays and Victorian public holidays), which will extend periods for serving documents, reflecting the other Australian jurisdictions.
- Including a new section which “should provide that notice-based time bar clauses be declared ‘unfair’ by an adjudicator, a court, an arbitrator (or expert appointed by the contracting parties to determine a matter under the contract) if compliance with the clause is not reasonably possible and would be unreasonably onerous.” This reflects a recent change made to WA’s corresponding legislation.
- Including a new provision that may prohibit unfair construction contractual clauses and, in doing so, nullify their effect, again reflecting the other Australian jurisdictions.
- Extending the time limit on claiming payment to six months after the relevant construction work was completed, modelled on WA’s corresponding legislation.
- Introducing minimum payment terms of payment claims, that is a payment under a construction contract becomes due and payable on the date set by the terms of the contract, subject to the payment term not exceeding 25 business days after the payment claim has been made.
- Allowing claimants to claim retention money in payment claims, either as part of a broader payment claim or as a standalone claim, and allowing an adjudicator to decide whether retention money is to be returned, the proportion which is owed, and the date on which it is to be returned.
- Allowing contracts with domestic homeowners, which would otherwise be excluded from the Victorian SOP regime, to be included under the Act.
- Prohibiting respondents from including reasons in their response to an adjudicator that was not previously included in the payment schedule. This is a significant change that respondents should be aware of, as it means that the issuance of payment schedules to claimants should be as detailed as possible to protect their position in any subsequent adjudication.
- Amending the response time for respondents to provide a payment schedule from 2 business days to 5 business days in response to a notice of intention to adjudicate.
- Providing 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. This amendment is modelled on WA’s corresponding legislation.
- Abolishing the adjudication review mechanism, which currently only allows for the review of determinations involving excluded amounts.
- Including a new section that all registered authorised nominating authorities should be required to clearly disclose their fee sharing arrangements with adjudicators in a de‑identified manner on their website, including a general description of the services they provide to adjudicators for these fees.
- Amending the Act to provide that an adjudication certificate may be filed as a judgement for a debt in any court of competent jurisdiction and is enforceable accordingly. This amendment is modelled on NSW’s corresponding legislation.
Will these changes take effect?
The Committee, with its comprehensive and long list of recommendations, has taken a radical approach in the formulation of its recommendations, which to many, are considered overdue given other Australian jurisdictions have periodically updated their respective SOP regimes, whilst Victoria’s existing SOP legislation is over twenty years old.
Therefore, many of these changes may take effect upon consideration from the Victorian Government. The Committee has been successful in producing similar reports containing recommendations which have been heeded by the Victorian Government, such as its 2020 Inquiry into Tackling Climate Change in Victorian Communities, implementing and supporting most recommendations.
It follows, that all stakeholders in the construction industry who could be affected by these changes, should be aware of the recommendations by the Committee, particularly as the recommendations drive for the protection of contractors and subcontractors in the construction industry.
This article was written by Leighton Moon, Partner, Fin Neaves, Associate and Ariadne Paras, Solicitor.