Security of Payments in Victoria: An introductory guide

In 2023, a parliamentary inquiry commissioned by the Victoria Parliament determined that the value of construction undertaken in Victoria during the 2022 calendar year amounted to $66.89 billion dollars and accounted for approximately 12.1% of the State of Victoria’s GDP.

Many small businesses are therefore reliant upon the hierarchical structure which consists of a principal (such as a government body or a developer), who engage a head contractor, and then that head contract will likely engage other contractors that have employees.

Accordingly, each State and Territory in Australia has recognised the importance of these small businesses to be able to obtain payment for goods and services they have provided and that if a dispute arises, the need for such disputes to be resolved, cheaply, efficiently and cost effectively. For this reason, legislation called the Building and Construction Industry Security of Payments Act 2002 (Vic) (the SOP Act)was introduced.

What is the SOP Act?

The SOP Act is a statutory regime that grants a statutory entitlement to payments to any person who carries out construction work, or who provides or undertakes to provide, related goods or services under a construction contract.

It aims to achieve these purposes by establishing a procedure whereby a person who is entitled to payment (insofar as it relates to a construction contract) can request payment under the SOP Act, and if payment is not forthcoming, seek adjudication.

The security of payments act also removed the effect of, rendering void and unenforceable, certain contractual terms such as ‘paid when paid’ or ‘paid if paid’.

What is a construction contract?

A construction contract is any contract or other arrangement under which one party undertakes to carry out construction work or to supply related goods and services for another party.

What is construction work?

Section 5 of the SOP Act provides an extensive definition of the matters and things which constitute construction work. It is as follows:

5 Definition of construction work In this Act, construction work means any of the following work— 

(a) the construction, alteration, repair, restoration, maintenance, extension, demolition or dismantling of buildings or structures forming, or to form, part of land (whether permanent or not); 

(b) the construction, alteration, repair, restoration, maintenance, extension, demolition or dismantling of any works forming, or to form, part of land, including walls, roadworks, power-lines, telecommunication apparatus, aircraft runways, docks and harbours, railways, inland waterways, pipelines, reservoirs, water mains, wells, sewers, industrial plant and installations for the purposes of land drainage or coast protection; 

(c) the installation in any building, structure or works of fittings forming, or to form, part of land, including heating, lighting, air-conditioning, ventilation, power supply, drainage, sanitation, water supply, fire protection, security and communications systems;

(d) the external or internal cleaning of buildings, structures or works, so far as it is carried out in the course of their construction, alteration, repair, restoration, maintenance or extension; 

(e) any operation which forms an integral part of, or is preparatory to or is for rendering complete, work of the kind referred to in paragraph (a), (b) or (c), including— 

(i) site clearance, earth-moving, excavation, tunnelling and boring; and

(ii) the laying of foundations; and

(iii) the erection, maintenance or dismantling of scaffolding; and

(iv) the prefabrication of components to form part of any building, structure or works, whether carried out on-site or off-site; and

(v) site restoration, landscaping and the provision of roadways and other access works; 

(f) the painting or decorating of the internal or external surfaces of any building, structure or works; 

(g) any other work of a kind prescribed for the purposes of this subsection. 

(2) Despite subsection (1), construction work does not include any of the following work— 

(a) the drilling for, or extraction of, oil or natural gas; 

(b) the extraction (whether by underground or surface working) of minerals, including tunnelling or boring, or constructing underground works, for that purpose;

(c) any other work of a kind prescribed for the purposes of this subsection.

The application of the provision, because of what it classifies as construction work, is extremely wide. However, common classes of construction contracts which are covered by the SOP Act include, but are not limited to:

• • Residential and non residential building;

• • Civil engineering;

• • Demolition;

• • Electrical;

• • Professional services (such as architecture, design and surveying);

• • Plant or equipment hire

• • Landscaping;

• • Plumbing;

• • Building material supply contracts; and

• • Mechanical air conditioning.

Note: The SOPA Act does not usually apply to contracts between a home owner and a contractor themselves.

What are related goods or services?

In addition to covering work which meets the definition of construction work the SOP act also applies to those individuals or businesses that provide related good services, and this is defined in section 6 of the SOP Act as follows –

6 Definition of related goods and services

(1) In this Act, related goods and services, in relation to construction work, means any of the following goods and services—

(a) goods of the following kind—

(i) materials and components to form part of any building, structure or work arising from construction work;

(ii) plant or materials (whether supplied by sale, hire or otherwise) for use in connection with the carrying out of construction work;

(b) services of the following kind— 

(i) the provision of labour to carry out construction work; 

(ii) architectural, design, surveying or quantity surveying services in relation to construction work;

(iii) building, engineering, interior or exterior decoration or landscape advisory or technical services in relation to construction work;

(c) goods and services of a kind prescribed for the purposes of this subsection.

(2) Despite subsection (1), related goods and services does not include any goods or services of a kind prescribed for the purposes of this subsection.

(3) In this Act, a reference to related goods and services includes a reference to related goods or services.  

The SOP Act: Payment Process

The Payment Claim

If you have carried our construction work, or supplied goods or services under a construction contract in Victoria, you can claim a progress payment by giving a payment claim to the person who is obliged to pay you under that contract. A payment claim must be in accordance with, and contain, the information set out in section 14 of the SOP Act.

Notwithstanding subsection 14(2) of the SOP Act, there is no prescribed form or prescribed information, other than the statutory criteria contained in that section, but it must state that it is a payment claim made under the SOP Act.

Options after receipt of a payment claim

A person who receives a payment claim has two (2) options available to them, they are:

• • pay the full amount specified in the payment claim; alternatively

• • give the payee a ‘payment schedule’ within 10 business days of receipt of the payment claim. A ‘payment schedule’ sets out the amount the person is prepared to pay in respect of the payment claim, along with reasons as to why payment cannot be made in full (in specific circumstances).

If the person does not do either (a) or (b) above, they will be deemed liable to pay the whole amount by the due date under the SOP Act.

If there is a dispute

If there is a dispute about payment following the issuing of a payment claim, the person who gave the payment claim can apply for adjudication to an ‘authorised nominating authority’. An adjudicator is a third party (who is not related in any way, shape or form), to either of the parties the subject of a disputed payment claim, who will determine the facts and matters for determination in the adjudication application.

Alternatively, as the SOP Act does not restrict or place any other limit upon any person that they may have in accordance with the law or at common law, a party can apply to the Magistrates’ Court, County Court or the Supreme Court of Victoria (as applicable).

Conclusion

Due to the nature and complexity of many different forms of construction contracts in the construction industry, many different and complex disputes arise, including in relation to the identification of the correct parties to the construction contract, what variations are proper and fall within the ambit of the SOP Act and are recoverable, amongst other things.

It is for this reason that if you have a dispute involving a payment under a construction contract, whether that be a residential or none residential construction contract or any other form of building or construction arrangement or agreement, you should seek legal advice.

Allen Law have been experience advising and representing clients on small and medium building and construction disputes, including complex large building disputes. Contact us today to see how we can help resolve your building issue or dispute.

Phone:             (03) 7020 6563
Email:               enquiries@allenlawyers.com.au
Website:         www.allenlawyers.com.au

Disclaimer: This article is general in nature and does not constitute legal advice. Please contact Allen Law for advice tailored to your particular situation.