How does security of payment work in Victoria?

The purpose of the security of payment legislation is to promote cash flow down the contracting chain.  It does this in two ways.  First, it contains a number of general protections for contractors.  Second, it contains a mechanism for the (relatively) speedy recovery of progress payments.

Who is covered by the legislation?

The Building and Construction Industry Security of Payment Act 2002 (VIC) (the Act) applies to building work carried out in Victoria. Certain types of contract are excluded, the most notable being construction contracts for carrying out domestic building work, as defined in the Domestic Building Contracts Act 1995 (VIC).

The comments below only apply to construction contracts covered by the Act.

General protections for contractors

Some of the general protections for contractors under the legislation (available here) are as follows:

• Minimum interest rates on late progress payments. A claimant may claim interest on late payments at the rate set out in the contract, or the rate prescribed by the Penalty Interest Rates Act 1983 (VIC), whichever is higher. The current penalty interest rate, as fixed by the Attorney-General, is 10% per annum (effective on and from 1 February 2017). Note that this rate changes over time.
• ‘Pay when paid’ provisions are deemed to have no effect (section 13 of the Act). If the contract contains a clause to the effect that a payment to a contractor or subcontractor is contingent upon the head contractor or contractor first receiving payment from someone else, that clause has no legal effect.
• Default payment terms. Where the contract is silent on payment terms for progress payments, the Act provides that a progress payment becomes due and payable 10 business days after a payment claim is made (see section 12 of the Act).
• A statutory right to suspend work following non-payment. Note that this right only exists where there is an amount that has become due and payable (for example, following the principal’s approval of a progress payment) and where the claimant has given prior written notice of its intention to suspend.

The Act gives contractors a statutory right to receive progress payments. This right operates in addition, and parallel, to any right it might have to receive progress payments under the contract.

Procedure for recovering progress payments

The process for recovering progress payments is the better-known part of the Act, and where the legislation derives its name from.

In short:

• A claimant has a statutory right to receive regular progress payments under the Act.
• A claimant can recover a progress payment by making a payment claim. Most importantly, in Victoria a claimant can only recover ‘claimable amounts’ in its payment claim. It cannot include any ‘excluded amounts’ and this prohibition severely restricts what can be claimed. You can read more about this here.
• A respondent has 10 business days to respond to a claimant’s payment claim, unless the contract requires a response to be given in a shorter period. This is done through a document called a ‘payment schedule’.
• If the respondent provides a payment schedule within the required timeframe but the claimant disagrees with their assessment, it has the right to apply for adjudication. We explain the adjudication process below.
• If the respondent fails to provide a payment schedule within the required timeframe, section 16(2)(a) entitles the claimant to recover the unpaid portion of its progress claim, save for any ‘excluded amounts' (which we explain in more detail here). To do this, the claimant will need to commence court proceedings. If it does so, the respondent’s defences will be limited. For example, the respondent will not be entitled to challenge the substance of the claim by reference to defences that might otherwise have been available under the contract. Alternatively, rather than commence court proceedings, the claimant apply for adjudication (subject to meeting the requirements in section 18(2). Whether a claimant should apply to the court or proceed to adjudication is a strategic decision that can only be made at the time, having regard to the specific circumstances of the claim.

What is adjudication under the Act?

Adjudication under the security of payment legislation involves the determination of a dispute over a payment claim by an independent adjudicator.

The adjudicator is not a judge (and is often not a lawyer), and is appointed by an independent ‘nominating authority’. A list of nominating authorities in Victoria can be found here. If a claimant applies for adjudication, it must make its application to one of those authorities, who then appoints the adjudicator on the claimant’s behalf.

An adjudication application is a written document that must be sent to the nominating authority within a fixed period – usually 10 business days from the date the claimant receives the respondent’s payment schedule. This timeframe is set by section 18 of the Act which you can find here. The claimant must also serve a copy of its application on the respondent. Most nominating authorities have their own application form.

By making an application, the claimant will assume responsibility for paying the adjudicator's fee. If its application is successful, the claimant would normally be able to recover this cost (or most of it) from the respondent. If it is unsuccessful, the claimant may be left to bear the adjudicator’s costs. However, unlike court proceedings, neither party can be ordered to pay the other side’s costs on completion of the adjudication.

The respondent will only have a short time to respond to the claimant’s application – either 5 business days from receiving the application, or 2 business days after receiving notice of an adjudicator’s acceptance of the application, whichever is longer.

Importantly, if the respondent includes reasons for withholding payment in its adjudication response but those reasons were not included in its payment schedule, the adjudicator must provide the claimant with 2 business days to respond to the new reasons.

Once the time for the respondent to provide a response has lapsed, the adjudicator is required to determine the application. The adjudicator’s decision is required to be issued within 10 business days after the date on which the adjudicator notified the claimant and the respondent of their acceptance of the application. The claimant may agree to extend this timeframe to a maximum of 15 business days.

What effect does an adjudication determination have?

Once the adjudication determination has been issued, the respondent must pay the adjudicated amount (if any amount is determined to be payable).

If the respondent does not pay, the claimant will have a right to suspend work (subject to giving the required notice, see here) and will also have the right to obtain an ‘adjudication certificate’ and proceed to file that in court to obtain judgement.

As we explain here, there are very few where an adjudication determination can be set aside. In most cases, the adjudicated amount must be paid.

Finally, it is important to recognise that a payment under the Act is an interim payment only, effectively made as a payment on account. If a claimant receives an amount under the Act to which it is not contractually entitled, the respondent will have the right to recover the difference from the claimant. This is where the legislation gets its name from – any payment recovered by a claimant under this legislation is effectively ‘security’ pending the determination of the final position under the contract.

For more information, check out our Guide to Security of Payment in Victoria.