Does the Victorian SOP Act require amendment to better protect against non-payment?

Unlike most of its counterparts in other jurisdictions, many of which have undergone either frequent revisions or major legislative overhauls, the Building and Construction Industry Security of Payment Act 2002 (Vic) (SOP Act) has not been amended since 2006.

Earlier this year, the Victorian government announced a parliamentary inquiry looking at whether laws need to be changed to better protect subcontractors from non-payment. The inquiry was conducted by the Environment and Planning Standing Committee whose terms of reference required it to specifically look at the existing mechanisms in place in Victoria and to consider other opportunities for improvements in the law to ensure subcontractors are properly paid for the work they finish in a timely manner.

The Report of the Environment and Planning Committee of the Victorian Legislative Assembly was issued on 28 November 2023 (Report) and makes 28 recommendations. The key recommendations in the Report relate to:

Significant substantive amendments proposed to the SOP Act

Significant substantive amendments proposed to the SOP Act in relation to "excluded amounts", retention moneys, maximum durations for payment, giving powers to decisionmakers (including, but not limited to adjudicators) to declare notice-based time bar clauses and prohibiting the inclusion of "new reasons" for withholding payment in adjudication responses, which would bring Victoria's security of payment regime into closer alignment with security of payment laws in other jurisdictions, particularly NSW and WA;

Administrative amendments proposed to the SOP Act

Administrative amendments proposed to the SOP Act including with regards to the accrual of reference dates, business days, the time limit for claiming payment following the completion of works and other amendments relating to the adjudication process;

Encouraging the Victorian Government to investigate the views of the construction sector

The Victorian Government has been encouraged to investigate the views of the construction sector in relation to potential further significant changes, including some that have been recently introduced in other states, which largely remain untested, and consider whether they should be adopted in some form in Victoria, being:

• the extension of the application of the security of payment law to the residential building sector beyond where the respondent is in the business of building residences and the contract is entered into in the course of or in connection with that business (in which circumstances the SOP Act already applies), such that homeowners who have engaged a builder or tradesperson to work on their home might find themselves respondents under the SOP Act;
• the introduction of a cascading deemed statutory trust model as recommended in the Murray Report (Review of Security of Payment Laws: Building Trust and Harmony (2017)) or, alternatively, the introduction of a new retention trust scheme similar to the one that is in the process of being introduced in Western Australia;
• the implementation of an adjudication review scheme similar to that in Western Australia.

Giving the Victorian Building Authority powers and funding

The Victorian Building Authority has been given powers and funding to promote and educate the construction industry in relation to security of payment law, and requiring the Public Construction Procurement Committee to undertake a review of materials informing public construction procurement to inform any modernisation that may be required.

Overview of report recommendations

Essentially, the key recommendations encourage national consistency of approach where it was considered prudent to do so, an adoption of methods that have been tried and tested elsewhere, and a willingness to consider innovative ways to ensure payments flow.

A number of the recommendations made in the Report seek to change the unique and most problematic aspects of Victoria's security of payment law, and work to drive greater consistency with some of the other security of payment jurisdictions in Australia.

Some of the recommendations, such as the repeal of the "excluded amounts" regime and the prohibition on the introduction of "new reasons" for withholding payment in adjudication responses, are proposed to be modelled on tried-and-tested provisions in NSW. If adopted, these changes would align Victoria with the largest security of payment jurisdiction in Australia and would move the States closer to harmonisation of security of payment laws.

Other recommendations, such as empowering decisionmakers (which includes, but is not limited to, an adjudicator) to declare certain notice-based time-bar provisions of contracts unfair (and therefore of no effect) and the introduction of an expanded adjudication review regime reflect very recent changes to the Western Australian legislation and as yet are untested.

Recommendations such as the removal of the "excluded amounts" regime and the administrative amendments that bring closer alignment with other jurisdictions are considered by many to be long overdue and in that context will be a welcome change. In respect of other recommendations which propose to implement recent developments from other jurisdictions which are as yet untested (such as Western Australia's legislation dealing with notice-based time bar provisions), the opportunity to observe and reflect upon experiences in those jurisdictions would offer the Victorian Government the ability to ensure any equivalent amendments achieve the desired outcomes.

Recommended key substantive amendments to the Building and Construction Industry Security of Payment Act 2002 (Vic)

"Excluded amounts" and "claimable variations"

The Victorian SOP Act is well known for being unique in prohibiting the inclusion of certain categories of claims or entitlements, defined to be "excluded amounts", in payment claims or payment schedules. This results in certain contractual claims, such as:

• most entitlements relating to variations;
• latent conditions; and
• time related costs (i.e. delay costs as well as liquidated damages),

from being pursued and recovered under the SOP Act. Because of the "excluded amounts" regime in the SOP Act, the position as to interim entitlement to payment under the SOP Act often deviates from the position as to entitlement to progress payments under the Contract, and compels parties to pursue (often more costly) final dispute resolution avenues to determine their contractual entitlements.

The Report recommends the repeal of sections 10A and 10B of the SOP Act which would altogether remove the concepts of "excluded amounts" and, consequently, "claimable variations". Related to this, the Report also recommends the repeal of the provisions in the SOP Act which currently provide for adjudication review processes, as those current provisions are limited in scope to where a party alleges an adjudicator has misidentified something as an "excluded amount" or failed to identify something as an "excluded amount".

Retention monies

The Committee heard that there are barriers to contractors in claiming the return of retention money using the SOP Act, which does not include an express right to claim the return of retention money.

In this respect, the SOP Act is inconsistent with other jurisdictions, each of which make express legislative provision for return of retention money to be claimed using the applicable security of payment regime.

The Report recommends:

• including an express entitlement to claim retention money under the SOP Act, either as part of a broader payment claim or as a standalone claim; and
• empowering 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.

The Report also recommends that the Victorian Government consider, with the input of the construction sector, the introduction of either:

• a cascading deemed statutory trust model as recommended in the Murray Report (which is directed at protecting amounts paid by a principal to a head contractor which ought then be paid to a subcontractor from the insolvency of the head contractor); or
• a new retention trust scheme such as a scheme similar to the one that is in the process of being phased in in Western Australia.

Prohibition on "new reasons" in adjudication responses

Another unique feature of the Victorian SOP Act is that new reasons for withholding payment may be raised by a respondent in an adjudication response, without those reasons first having been included in a payment schedule. The SOP Act then provides a mechanism for the claimant to have an opportunity to respond to any new reasons raised during the adjudication process.

The Report recommends introducing a prohibition on respondents including new reasons in their adjudication response that were not previously included in the payment schedule, which would align Victoria's adjudication regime with the other jurisdictions.

Powers to declare notice-based time bar provisions "unfair" and of no effect

The Western Australian legislature, as part of its significant rewrite of its security of payment laws in 2021, has introduced a novel provision that empowers a decision maker (whether an adjudicator, a court, an arbitrator or expert determiner) to declare a notice-based time bar clause of a construction contract "unfair" in certain circumstances, which would result in that time-bar being of no effect in the particular instance that is the subject of the relevant proceeding in which it is declared "unfair". Specific classes of provisions considered to be unfair can also be ousted by their inclusion in the accompanying regulations. This provision applies beyond security of payment adjudications and can apply in all dispute resolution forums.

While this new clause has not yet been tested in Western Australia, the Report recommends that a similar amendment be made to the SOP Act.

Service of documents under the legislation

Service of documents in a manner that they are valid under the legislation can be a challenge, particularly given the strict timeframes within which those documents need to be served. Over time, there have been a number of challenges in judicial review proceedings to the validity of documents purportedly served or provided under the security of payment legislation in various states on the basis that they were allegedly served using the wrong method or technically not served at all.

Authorised nominating authorities in Victoria already provide digital "lockboxes" for parties to upload documents to, thereby providing them to the authorised nominating authority and (in some cases) to the adjudicator. This is particularly helpful where the adjudication application or adjudication response to be provided (as applicable) is voluminous and might not easily be sent by other means.

The Report recommends that express amendments be made to the legislation to modernise how notices can be served, and in particular suggests adoption of the recent amendments in Western Australia which expressly provide in the legislation for documents that are to be given to an authorised nominating authority under the legislation (such as adjudication applications and adjudication responses) to be given by uploading those documents electronically to a digital "lockbox" controlled by an authorised nominating authority.

Reference dates

The Committee found that the concept of reference dates causes confusion, and can unfairly prevent payment claims from being valid under the legislation. Further, depending on the terms of the relevant contract, the current manner in which an entitlement to make a payment claim arises under the SOP Act can result in entitlement to make a payment claim under the legislation being extinguished by termination of a construction contract.

The Report recommends introducing changes to the SOP Act modelled on the provisions in NSW to:

• enable at least one payment claim to be made per calendar month; and
• expressly provide for a payment claim to be made on or following the termination of a contract, for goods and services provided up to the date of termination.

The Report also recommends that the new provisions of the SOP Act should override any contracted dates for payments claims if they are longer than those provided by the SOP Act.

Time limit for claiming payment under the SOP Act

The Report recommends increasing the time period for claiming payment under the SOP Act, by allowing:

• a payment claim in respect of a progress payment to be served up to six months after the relevant construction work was completed, or later if provided for in the relevant construction contract; and
• a payment claim in respect of a progress payment that is a final payment to be served six months after the completion of works, or 28 days after the end of the last defects liability period for the construction contract (or another date provided for in the relevant construction contract),

as opposed to the 3 month periods currently permitted by the SOP Act.

Business days

The Report recommends amending the definition of business days in the SOP Act to exclude an end of year shutdown period, from 22 December to 10 January inclusive.

Payment terms

To protect contractors or subcontractors with limited negotiating power from being subjected to long payment terms, the Report recommends that:

• where the contract sets a date when payment becomes due and payable, that date cannot exceed 25 business days after the payment claim has been made; and
• where the contract is silent on the matter, payment is due and payable 10 business days after the payment claim is made.

New task for the regulator

The Report makes other recommendations to task the Victorian Building Authority with education of the construction sector in relation to the security of payment laws in Victoria and the promotion of the SOP Act, as well as that the Victorian Government fund the Victorian Building Authority to do so.

Adjudicators and authorised nominating authorities

The Report recommends changes that would:

• require adjudicators to complete continuing professional development to maintain their eligibility to perform the functions of an adjudicator, and require authorised nominating authorities to ensure that adjudicators complete the relevant continuing professional development;
• extend the protection from civil liability to authorised nominating authorities, as well as adjudicators; and
• require de-identified disclosure of the fee sharing arrangements that authorised nominating authorities have with their adjudicators.

Proposed review of the materials informing public construction procurement in Victoria

The Report also recommends that the Victorian Government require the Public Construction Procurement Committee to review the materials that inform public construction procurement.

Looking ahead

No doubt the construction industry will monitor further developments in relation to the Victoria SOP Act, whether they be opportunities for consultation on proposed changes or draft amendments to the SOP Act, with interest.

If you would like to know more about the proposed changes to the Victorian SOP Act, please reach out to our team.