How to prepare for the upcoming security of payment season in Victoria

As the year 2020 (thankfully) comes to a close, the construction industry is entering its annual security of payment season.

November and December are traditionally times when there is an increase in payment claims and adjudications as Claimants seek to improve cash-flow before end of year. It is anticipated that 2020 will be particularly busy in those sectors that have been impacted by COVID and other pressures.

We have set out below some commentary on issues that industry participants should keep front of mind in this time of year.

Delay costs and liquidated damages cannot be included under the SOP Act

It is likely that liquidated damages and delay costs will become an increasing cause of disputes over the coming period as projects that have been impacted by COVID are delivered late.

Victoria has a unique position in its Building and Construction Industry Security of Payment Act (Vic) 2002 (SOP Act) compared to other States in that it does not permit claims for “excluded amounts”. Claimants cannot include these “excluded amounts” in payment claims, and Respondents are not liable to pay them.

The concept of “excluded amounts” is relevant for both contractor’s delay costs claims and principal’s liquidated damages claims for delayed projects:

• Claimants (i.e. a head contractor) are prevented from claiming their delay and disruption costs, or other time-related costs as these are “excluded amounts”; and
• Respondents (i.e. a principal) are prevented from levying liquidated damages as they must pay the full value of work performed (on an interim basis).

If a Respondent applies liquidated damages in a payment schedule, then the Claimant can recover them in an adjudication based on the relevant payment claim.

Importantly, if a Respondent levies liquidated damages in one payment claim and the Claimant does not seek to recover them, then the Claimant may not be able to claim those liquidated damages back in subsequent payment claims. That is, the Claimant may lose its ability under the SOP Act to prevent the Respondent levying those liquidated damages. Although the law is not yet certain, it is likely that the Claimant’s attempt to recoup liquidated damages levied from previous months will be deemed to be an “excluded amount”.

For these reasons it is important that Claimants consider applying for adjudication in each month that liquidated damages are levied. Similarly, Respondents should consider levying liquidated damages in each month as they become due, rather than waiting until the end of the project. If Respondents wait until the end of the project, the SOP Act will prevent them from levying liquidated damages in their final payment schedule.

Claims for government’s COVID restrictions cannot be included under the SOP Act

It is unlikely that Claimants will be able to include claims for increased costs due to the government’s COVID related directions (e.g. to reduce labour on sites, implement COVID Safety Plans and similar).

Subject to the terms of the particular contract, these costs are likely to be classified as being claims for changes in legislation, and so are “excluded amounts” and cannot be included in a payment claim.

Business days over the holiday period

The timelines in the security of payment legislation are based on “business days” as defined in the SOP Act. These are set out in the calendar below.

Key:

Warnings:  

• Be careful that the deadline for submitting payment schedules in the contract is not earlier than you think. The SOP Act requires a payment schedule within the earlier of 10 business days of the payment claim or as set out in the Contract. If the Contract requires a response based on calendar days or has a different definition of “business day”, the deadline may be earlier than you think; and
• A payment claim can only be served on or after the “reference date”. This is the date for submitting payment claims under the contract (or monthly if it is silent). If a Claimant serves a payment claim before the reference date, then it will be invalid and cannot be relied upon.

For example, a payment claim submitted on Christmas Eve before the Claimant’s office closes will be invalid if the contract requires payment claims to be submitted after the 25th day of each month.

Note that many contracts state that a deadline that falls on a non-business day may be extended until the following business day. This may mean that payment claims that would otherwise be due on 25 December may not have a “reference date” until 29 December. If it is served prior to that date, then it would be invalid.

Our Melbourne security of payment team

If you have any questions about this update, or if you require assistance in relation to a security of payment issue, then our primary contacts are our Melbourne-based Partners Leighton Moon and Paul Graham.

Otherwise, we hope you enjoy the upcoming Season, and look forward to working with you in 2021.

This article was written by Leighton Moon, Partner and Paul Graham, Partner.