Security of Payment reforms in Victoria get green light from State Government

The Victorian Government has indicated support for major amendments to the Building and Construction Industry Security of Payment Act 2002 (Vic) (SOP Act) which will contribute to increased national consistency, though nationally uniform legislation remains a distant prospect.

The proposed amendments will remove aspects unique to Victoria, such as the “excluded amounts” regime which has traditionally reduced to rate of use of the SOP Act in Victoria. They will add some aspects already enacted in other states, such as a prohibition on “unfair” time bar contract clauses, removal of “reference dates” and a summer black-out period for serving and responding to payment claims.

The movement toward greater national consistency is a positive development, though uncertainty remains regarding the application of prohibition on contract clauses deemed “unfair” and the potential creation of project trust accounts which has mixed support within industry.

The move towards reform of security of payment in Victoria

Security of payment legislation regulates progress payments in the construction industry. It exists in different forms in each Australian State and Territory. While the purposes of each piece of legislation are similar across State and Territory borders, the legislative mechanisms differ, sometimes markedly so, with the Victorian legislation (with its “excluded amounts” regime) a major outlier.

There has been a consistent call for a more uniform approach and, potentially, a Commonwealth-based approach to legislation in this space. While the latter is not on the horizon, there has recently been movement at the state and territory level toward greater levels of alignment. In Western Australia, the “west coast model” was recently replaced with the Building and Construction Industry (Security of Payment) Act 2021 (WA) which more closely aligns with the approach taken in NSW (with the notable exception of provisions regulating “unfair” time-bar contract clauses). There is now a similar movement in Victoria toward greater alignment with the NSW approach, though with some elements borrowed by Western Australia and NSW.

On 17 October 2024, the Victorian Government tabled its Response to the Legislative Assembly’s Environment and Planning Committee inquiry into employers and contractors who refuse to pay their subcontractors for completed works. It details key areas for reform of the SOP Act, including:

• the removal of the excluded amounts regime;
• the removal of reference dates; and
• a new regime in relation to some “time bar” provisions.

The recommended changes, if legislated, will make the Victorian regime more consistent with other Australian jurisdictions, including New South Wales and Western Australia. The Victorian inquiry comes after a period of national consideration of security of payment regimes, including:

• A review of security of payment regimes by John Murray AM, completed in 2017. Following the Murray Report, other jurisdictions, including New South Wales and Western Australia, reviewed and reformed equivalent security of payment legislation.

• The Victorian Legislative Assembly Environment and Planning Committee inquiry into the current security of payment regime in Victoria, which reported its findings on 28 November 2023. The issues highlighted in the Report include:
  • poor payment practices due to an imbalance of power between principals and head contractors, on one hand, and subcontractors on the other;
  • thin profit margins or construction businesses operating in a negative cash flow; and
  • difficult economic conditions that contribute to high rates of insolvency.

These issues have confronted the construction sector across Australia. However, Victoria’s SOP Act has not had significant updates since 2006. The Report made 28 recommendations, with the Government supporting 16 recommendations in full. The Government has not yet indicated when legislative amendments will be progressed.

Below, we discuss some of the key recommendations.

Recommendations fully supported by Government

Recommendation 2 – Removal of the “excluded amounts” regime

The Government has supported in full a recommendation to remove the excluded amounts regime from the SOP Act.

Currently, the excluded amounts regime prohibits certain types of claimed costs from being taken into account by an adjudicator when adjudicating a progress payment. Excluded amounts include costs related to:

• certain types of variations;
• latent conditions;
• time-related costs;
• changes in regulatory requirements;
• claims for breach of contract or any type of damages; and
• claims arising at law other than under the constructions contract.

The excluded amounts regime is unique to Victoria. The Response notes that the current regime, and its complexity, has impacted the number of payment claims submitted for adjudication under the SOP Act. Removing this regime is likely to increase the number of progress claims pursued to the adjudication process and the amounts recoverable through the SOP Act adjudication process. It will also ensure greater consistency with other security of payment regimes around Australia.

Recommendation 3 – Removal of “reference dates”

The Government has supported in full a recommendation to remove the concept of ‘reference dates’ from the SOP Act. Currently, reference dates determine when a:

• person undertaking construction work or supplying related goods and services becomes entitled to a progress payment; and
• payment claim may be served.

The Response supports amending the SOP Act to:

• enable at least one payment claim to be made per calendar month;
• expressly provide for a payment claim to be made on or following termination of a contract; and
• override any contractual periods regulating the submission of payment claims if those periods are longer than the timeframes provided for in the SOP Act.

Recommendation 4 – Summer blackout period

The Government has supported in full a recommendation to amend the definition of “business day” under the SOP Act to expressly exclude the period between 22 December and 10 January each year.

The definition of “business day” is very relevant to the timeframe for responding to a payment claim with a payment schedule. Once a payment claim has been received, the recipient typically has 10 business days to respond with a payment schedule. Failure to comply can have significant adverse consequences for the recipient, as the claimant can seek summary judgment. It can be onerous for principals to comply with some SOP Act timeframes, especially during the summer break shutdown period.

This change aligns with the traditional construction industry shutdown period and will bring the SOP Act into alignment other Australian jurisdictions, which expressly exclude some or all of the period between 22 December and 10 January. This proposed amendment will reduce, but not remove, the prospect of a surprise payment claim over the summer break resulting in summary judgment.

Recommendations 5 and 6 – Unfair time bars and prohibition on unfair contract terms

The Government has supported in full recommendations that will significantly alter contractual risk allocation profiles in respect of making claims for compensation under construction contracts.

Under the proposed amendments:

• a notice-based time bar clause can be declared “unfair” by an adjudicator, court or arbitrator where compliance is not reasonably possible and would be unreasonably onerous; and
• the Building and Construction Industry Security of Payment Regulations 2023 (Vic) may prohibit specific contractual clauses.

A similar provision exist in the WA security of payment legislation, in section 16 of the Building and Construction Industry (Security of Payment) Act 2021 (WA), and industry awaits judicial guidance on the operation of that regime.

The proposed amendments to the SOP Act, if legislated, will need to be considered when drafting and preparing new contracts for construction works or related goods and services.

Recommendation 8 – Time limits on payments

The Government has supported in full a recommendation to limit contractual payment terms to a maximum of 25 business days. This will bring the Victorian regime into closer alignment with other Australian jurisdictions.

Recommendation 20 – Electronic service

The SOP Act does not currently expressly contemplate electronic service of documents related to payment claims or a dispute. The Government has supported in full a recommendation to amend the SOP Act to allow for electronic service. This is a commonsense amendment to reflect modern communication methods.

Recommendations supported in-principle by Government

The Response also indicates in principle support for other recommendations. These include extending the application of the SOP Act to domestic building payments, which are currently regulated by the Domestic Building Contracts Act 1995 (Vic). Enactment of this reform requires further consideration in the broader policy context.

Other recommendations with in-principle support include the introduction a trust scheme to preserve funds for payment of contractors, subcontractors and suppliers. Other jurisdictions have enacted trust schemes of various kinds and complexity. The Report and the Response considered comparator models, including:

• a cascading deemed statutory trust model (recommended in the Murray Report) – where monies paid by a principal to a head contractor are treated as trust funds, and in turn the part of those funds that is paid to subcontractors is also treated as trust funds;
• project trust accounts model (used in Queensland) – where a head contractor is required to establish a project bank account for the benefit of the head contractor and each subcontractor; or
• retention trust accounts model (used in Queensland, NSW and WA) – where retention funds held as performance security are deemed to be held in a trust.

These models each are intended to protect contractors and subcontractors by ensuring funds are preserved so that they can flow downstream.

The Government has not identified a particular any model and the Response observed the complexities of project trust schemes and the potential to increase project costs, which has generated mixed industry views. The Response concluded that further consultation and research should be undertaken.