Should residential builders be entitled to make claims under the security of payment act against homeowners?

Executive summary

Currently, the Victorian Building and Construction Industry Security of Payment Act 2002 (SOPA) does not apply to contracts between a residential builder and a homeowner.

The Victorian Government announced in October that it supports, in principle, a recommendation to extend Victorian SOPA to construction contracts between homeowners and builders.

While there may be some risks for homeowners as they become fully acquainted with the legislation, in our view, these risks are outweighed by the urgent need to address the unfairness of the current prohibition of claims by builders against homeowners under SOPA.

Current position

The exclusion of contracts between residential builder and homeowners under SOPA, has long been a source of discontent amongst residential builders who, by a quirk of this legislation, are required to pursue claims against homeowners through slower and more expensive processes in the Victorian Civil and Administrative Tribunal (VCAT) and the County Court while their subcontractors are free to ‘SOPA them’ in a fraction of the time and at a fraction of the cost.

Caught in the middle, residential builders are often in an untenable situation.

Unless certain exceptions apply, payment disputes between homeowners and residential builders are currently dealt with under the Domestic Building Contracts Act 1995 (DBCA), which requires a builder to:

1. first apply to Domestic Building Disputes Resolution Victoria (DBDRV) where a conciliation officer attempts to resolve the matter; and
2. where this fails, the builder may commence proceedings in VCAT.

The current time frames for a case to reach trial in VCAT is 53 weeks for complex multi-day hearings and 37 weeks for smaller claims. Trial dates in the County Court are being set for 12-14 months from commencement but often the period extends out due to complexities or third parties being added to the proceedings. Payment claims under SOPA can be resolved in 5-6 weeks.

The delay in having to use VCAT and the County Court causes significant financial strain on both parties. Insolvencies in the residential building sector are at record levels and there are concerns that there may be an insufficient number of solvent builders able to address the current housing shortage.

Proposed amendments

In a bid to address this, the Victorian Government announced in October that it supports, in principle, a recommendation to extend Victorian SOPA to construction contracts between homeowners and builders. It proposes to do so following engagement with the residential building sector. In addition, consultation is required to ensure that sufficient safeguards are in place to protect homeowners who will be unfamiliar with SOPA. In this regard, there is a risk that many homeowners will be caught out by the legislation’s unforgiving and short timeframes for responding to payment claims and adjudication applications.

Some of the risks include:

1. failing to issue a payment schedule within 10 business days, as a result of which they will be liable to pay the full claimed amount to the builder (s.16); and
2. failing to issue an adjudication response within 5 business of receipt of an application or may not issue one that meaningfully responds to any the issues as a result of which the adjudicator finds in favour of the builder.

An option is to adopt the following protective measures in other states:

1. amending domestic building contracts to include information that explains the operation of SOPA (NSW); and/or
2. requiring information to be included with payment claims served on homeowners on how to respond to a payment claims and adjudication applications, and where to seek assistance (WA).

Extending the timeframes for homeowners to respond to SOPA claims was not considered necessary provided that clear and practical guidance on how to respond was given to homeowners.

Conclusion

It will be interesting to see whether any of these measures will be sufficient to avoid the risks outlined above and there will undoubtably be a learning curve for both residential builders and homeowners.

Our Melbourne Construction and Infrastructure team are available to assist in navigating these upcoming changes. Please contact the authors if you have any questions or wish to discuss further.

This article was written by Brian Rom, Partner and Tara Nelson, Senior Associate.