Unique overhaul of security of payment in Victoria

By Steve O'Reilly and Lisa Stankiewicz.

Key Points:
All participants in the construction industry will have to review the way they deal with security of payment in Victoria and consider the implications on their administration of current contracts and the forms of contract they use in the future.

Amending legislation recently passed by the Victorian Legislative Council has overhauled the Building and Construction Industry Security of Payment Act 2002 (Vic) ("the Act").

The Building and Construction Industry Security of Payment (Amendment) Act 2006 ("the Bill") was intended to bring the Act into line with the security of payment legislation operating in NSW and Queensland. However, it introduces a number of entirely new provisions, in an attempt to address criticisms of the legislation in those states and the way the Act has operated in Victoria. These amendments have taken the Act much further than the 2003 overhaul of the NSW legislation on which the Act is currently modelled.

The Bill was not passed in the form initially proposed. The Bill now passed includes:

• amendments proposed in the original Bill, which was introduced into Parliament on 7 February 2006; and
• further amendments to the treatment of disputed variations, which were introduced during the course of debate last month by the Minister for Planning, Mr Rob Hulls.

The Bill adopts some of the recommendations of an industry working group which was established following responses from all sectors of the construction industry to the discussion paper released by the Building Commission in June 2004.

In addition to bringing about a wide range of changes to how security of payment presently operates in Victoria, these amendments will have a critical impact on contract drafting and administration.

The amendments will apply to all "construction contracts" (as defined by the Act) entered into from the date the amending legislation formally commences, which is currently stated to be no later than March 2007.

Changes towards uniformity

The changes which have brought the Act into line with NSW and Queensland include:

• permitting persons who are entitled, or who claim to be entitled, to a progress payment to make a claim under the Act;
• expanding the application of the Act to a wider range of payments, including final payments, single payments and milestone payments;
• extending the period within which an adjudication application can be lodged following the issue of a payment schedule from five to 10 business days;
• no longer permitting agreement on an adjudicator (all appointments must be through an authorised nominating authority);
• removing the option of respondents providing security in lieu of paying adjudicated amounts;
• facilitating the process for claiming a statutory debt under the Act through the courts - eg. where a scheduled amount is not paid - by denying respondents the ability to raise any cross-claim or any defence in relation to any matter arising under the contract;
• offering adjudication as an alternative to pursuing a statutory debt under the Act through the courts where no payment schedule has been provided;
• establishing prompt enforcement of payment of adjudication determinations by adopting a certification process to obtain a judgment debt; and
• expanding the anti-avoidance provisions.

However, the amended Victorian provisions do not mirror their NSW and Queensland counterparts in all instances, so a lack of consistency in operation is likely to remain.

Changes unique to Victoria

Even greater differences in the Victorian legislation have been introduced by the Bill. These changes seek to enhance the Act in response to some of the criticisms which have been levelled at the NSW and Queensland legislation. Some of these amendments are particularly significant and include:

creating two classes of variations that may be taken into account in claims submitted under the Act when calculating the amount of a progress payment as follows:

• agreed variations; and
• a select class of disputed variations.

The amendments impose a limitation on disputed variations that can be claimed such that a disputed variation will only be claimable under the Act where:

• the original contract price is less than $5m; or,
• alternatively, it is over $5m and the relevant contract does not contain a dispute resolution clause.

The amendments go further to impose a cap on the aggregate value of disputed variations that can be claimed under the Act at 10 percent of the original contract sum. If the aggregate value of disputed variations exceeds this cap, a disputed variation will only constitute a claimable variation if the original contract price is $150,000 or less or the original contract price exceeds $150,000 and the contract does not contain a dispute resolution clause. All disputed variations over and above this cap can only be claimed under the dispute resolution regime provided for in the relevant contract;

prohibiting "excluded amounts" from being taken into account in calculating the amount of a progress payment. Excluded amounts are variations which are not claimable variations, and also claims for any amount (other than a claimable variation) for compensation due to the happening of an event including latent conditions, time-related costs, changes in legislative/regulatory requirements, damages (breach of contract or otherwise), or other entitlement outside the construction contract;

creating a right in contractors/subcontractors to exercise a lien in respect of unpaid progress payments over any unfixed plant or materials supplied by the claimant for use in connection with the carrying out of construction work for the respondent (but not if third parties own that plant or materials);

limiting the time for the making of payment claims under the Act (other than one-off, single or final claims) so that they can only be made within the later of the period stated in the contract or three months after the specific item of construction work that is claimed is performed or related goods and service are supplied;

providing a mechanism that if an adjudication response includes any reasons for withholding payment that were not included in the payment schedule, the adjudicator must serve a notice on the claimant which identifies the additional reasons and gives the claimant two business days to lodge a response to those reasons (compare the situation in NSW and Queensland where the respondent is not entitled to include in its adjudication response any reason which is not expressed in its payment schedule);

providing that an adjudicator's determination, insofar as it takes into account matters that are not permitted to be claimed under the Act, is void and of no effect; and

introducing a limited right of review of adjudication determinations by another adjudicator where excluded amounts have been wrongly included or excluded in the determination as the case may be. The right is available only where the adjudicated amount is at least $100,000.

Following the 2003 amendments in NSW, there was a rapid expansion in the use of the legislation and the referral of payment disputes to adjudication. This was particularly as a consequence of the removal of the ability to provide security in lieu of paying adjudicated amounts.

To what extent one might see a similar expansion in the use of the recently amended Victorian Act remains uncertain. Its use may be tempered to a large extent by the exclusion of many types of claims which could be included before the amendments were passed and can still be claimed in NSW and other states. What is certain, however, is that all participants in the construction industry will have to review the way they deal with security of payment in Victoria and consider the implications on their administration of current contracts and the forms of contract they use in
the future.

How will Clayton Utz help you to comply with these new changes?

In recognition of the impact developments in security of payment legislation will have on the construction industry, Clayton Utz has established a National Working Group to advise clients on compliance with the regimes which are now in operation around the country. This National Working Group will offer regular updates and training to ensure our clients are kept abreast of future developments in this area of law.

For further information, please contact Steve O'Reilly.