Corrs High Vis: Episode 61 - Payment secured: unpacking Victoria's recent SOPA Reforms

Joe Barbaro, partner, Corrs Chambers Westgarth

Jey Nandacumaran, partner, Corrs Chambers Westgarth

Caitlin Smith, Special Counsel, Corrs Chambers Westgarth

Amy Catanzariti, Associate, Corrs Chambers Westgarth

Joe: Welcome to today’s edition of Corrs High Vis. We're focusing on reforms to the Building and Construction Security and Payment Act, known to those who work in the area as SOPA. My name is Joe Barbaro, partner in the Corrs Projects team, and I'm joined by three of my colleagues today, Jey Nandacumaran, Caitlin Smith and Amy Catanzariti. Hi guys.

Jey: Hi Joe.

Caitlin: Hi Joe.

Joe: We've been working with many of our clients these past months, getting ready for what is, in our opinion, the most significant SOPA reform in the state for almost 15 years. 

Today with my colleagues, we're going to explore the key changes and impacts for those involved in the construction sector, ranging from owners and developers, head contractors, through to subbies and others in the supply chain, and many of the changes will also resonate and impact third parties like financiers and other funders.

Now to help frame this discussion, I'm going to remind people of what SOPA is designed to do and highlight some of the key reforms to give context.

SOPA is the statutory scheme introduced in 2001 to provide contractors and suppliers of construction,  goods and services a statutory right to progress payment, with the right to fast-track challenge disputes through adjudication and to get an interim payment in their favour. While the Victorian regime started aligned with New South Wales, it wasn't long before the regime was rewritten and curtailed, meaning it was applied to far fewer claims and this is actually borne out in the data, which as recently as 2023 showed that Victoria was running at about a quarter of the adjudication claims of New South Wales and the total value of those claims proportionally lower.

Fast track to today and the Victorian Government has heard the concerns about cash flow in the sector and impacts of insolvency, which are highest in construction over any other sector and the regime now will not only more closely resemble New South Wales once again, but bring in many of the bells and whistles introduced in states like WA.

So I think, guys, what we all agree is you now have sort of lower barriers to entry with greater simplicity to make claims and more protections for contractors to fast track their disputes. The claims process is more straightforward with probably less room for technical disputes. That'll no doubt emerge. No more reference dates, monthly claims, the long list of previous exclusions is being cut back, which means you can now get more into your claims on a fast track basis and, as a big development, the regime is now introducing arrangements and a scheme to get your security returned through bonds and bank guarantees.

So, certainly my prediction, I think our prediction, is you can expect the Act is going to be used more, but only time will tell.

Caitlin, in that context, let's talk a little bit about how the claims process changes.

Caitlin: So, in terms of making payment claims, the key change is that reference dates have been abolished. The statutory right to progress payments is no longer tied to a specific reference date under the contract or by default under the Act, rather, the contractor is entitled to claim monthly progress payments.

Payment claims under the new Act can now be served from the last day of each month in which work has been performed. The new Act also implements a blackout period over Christmas for payment claims. Claimants can still only serve one payment claim per month – unless the contract permits more frequent claims.

Contractors and suppliers can still include previously unpaid amounts in subsequent payment claims, serve a single claim covering multiple progress payments, or claim in one month work done in previous months.

Contracts can specify an earlier claim date, but they cannot delay a payment claim beyond the last day of that month.

Any contract provisions requiring progress payments less frequently will be void.

So what does this all mean? Let's start with what stayed the same.

For contracts that already provide for monthly progress payments, it's business as usual - except for that Christmas blackout period that I mentioned.

The contract can provide an earlier date than the end of the month to make a payment claim, and that earlier date will be valid. So if your contract provides for monthly payment claims, business as usual.

Now what's different?

So the most significant change is reference dates have been abolished. This used to be a great source of technical non-compliance.  Is there a valid reference date? Has more than one claim been served on the reference date? So by abolishing this regime, the new Act lowers the bar to entry for contractors to make claims.

The second significant change is under the new Act, any contract which provides for payment claims less frequently than monthly will be void. So milestone contracts, which provide for periodic payments upon completion of milestones, where they are spaced more than one month apart, will be invalid and contractors can claim progress payments monthly under such milestone contracts now.

Joe: So Caitlin, overall, it's just a simplified regime, isn't it?

Caitlin: Yes, very much.

Joe: And we still need to endorse our claims each month in the same way that we always have?

Caitlin: Yes, contractors/suppliers, you still need to put those magic words on your payment claims.

Joe: The payment timing has changed, hasn't it?

Caitlin: So you used to have three months to put in your final payment claim. Now you have six months from the last date of practical completion to make a payment claim.

Jey: So it seems pretty sensible to remove this concept of reference dates because in my own practice I've seen so many disputes arising as to what is or isn't a reference date and there seems to also be some decided cases on the topic.

Caitlin: So yes, the old reference date conundrum was a great source of judicial review, but the only people that do well out of that are the lawyers, so I think this regime will be a welcome change for contractors.

Jey: Well, to Joe's point before, I mean, the legislators have obviously tried to remove some of the kinks in the existing Act to remove some of these technical type arguments, but like any new piece of legislation, it's no doubt [going] to generate its own case law in respect of aspects of it which are ambiguous or capable of more than one meaning.

Joe: I think so and I mean, the other opportunity it presents now is getting rid of a lot of the convoluted drafting that people have put in contracts to try and deal with reference dates so hopefully simplicity, but like all new legislation, opportunities for disputes.

Might be worth then moving to the payment schedules and in this respect, I think there's a pretty significant few changes for those who are having to prepare payment schedules, which will be anyone who has a payment claimed from them, starting from principals and owners all the way through to head contractors and those in the supply chain.

[The] big change is that Victoria, which was an outlier and gave everyone a second chance in an adjudication to raise new reasons for withholding payment or for there being a difference between the scheduled amount and the claimed amount, no longer get that second chance. You need to indicate all of the reasons that you're withholding in your payment schedule when you put it in. 

That's a pretty big change, and I think from an administration point of view, means for those who have to prepare schedules, you need to make sure your administration teams are aware of that, and they're armed with checklists and other information, I think, to really help them make sure they're dealing with things properly the first time and don't inadvertently find themselves locked out in an adjudication process.

That reasoning is going to be, or the dealing with that reasoning is going to be, exacerbated by the fact now that Victoria aligns with everywhere else by abolishing the excluded amounts and claimable variations regime. In a nutshell, that was a basis that allowed those providing payment schedules to say, you're claiming these types of amounts and the Act doesn't allow you to claim them, so it was an easy response.  [The] adjudicator has no jurisdiction, and that was variation claims, especially where the existence of the variation was disputed or the quantification was disputed. It's great to get rid of it because it was a complex regime in terms of percentages and amounts and thresholds that just, and arguments, which I recall taking to the Court of Appeal, about whether you had a dispute resolution process in your contract or not.

So all of that is gone and you're going to now see the ability to put in latent conditions claims that might be disputed, the delay cost claims that follow from EOTs, changes in law, and in the current environment with the fuel prices and war in the Middle East, changes in law claims are on the table as well and other types of claims in that context as well will readily fall within the regime for the Security Payment Act and the exclusion, which is an interesting one, that was in the previous Act, that you couldn't bring a claim for damages for breach of contract or damages generally, has been removed.

Is it an open question, do you think, as to whether that means you can now just put in damages claims into security of payment?

Jey: It surely must mean that claimants and their lawyers, having seen the abolishment of the excluded amounts regime, will now seek to advance those sorts of claims in their payment claims and adjudication applications.

There is some case law from other jurisdictions, particularly New South Wales, in the EnerMech v Acciona case from 2024 (see EnerMech Pty Ltd v Acciona Infrastructure Projects Australia Pty Ltd (2024) 115 NSWLR 56), and even going back to the Southern Han decision from the High Court in 2016 (see Southern Han Breakfast Point Pty Ltd (in liq) v Lewence Construction Pty Ltd (2016) 260 CLR 340), which we think supports the notion that claims for breaches, so claims for damages for breaches of contracts, it won't be possible to advance those claims through the adjudication process, but I'm sure that people will try and there will no doubt be cases about it in due course.

Joe: Yes. So I think we'd say it's probably intended to be claims under your contract, an opportunity to try and I mean, the thing to keep in mind here, I guess, is you are going to adjudication. Adjudication is a pretty free-flowing process. If the adjudicator goes down a particular pathway, you don't really have an easy remedy other than to get into a jurisdictional fight by elevating it to the Supreme Court, so I suppose interesting times ahead there.

Probably one last topic to mention and this is really for those responding to claims, the ability to set-off or deduct liquidated damages, will now be back on the table. For those who recall the history of it, in a nutshell, the Supreme Court decided some years ago that if a contractor is not entitled to bring a claim in respect of delay under security payment, then a principal equally is not entitled to bring a claim in respect of delay, which is what liquidated damages is all about and so the court held that a deduction for liquidated damages in a payment schedule was out of bounds and that's really created some interesting things over the years in terms of the contracting dynamics with principals who might have had, or head contractors, who might have had large amounts of LDs payable, unable to use it as a basis to set-off under security of payment. I even saw some clients introducing additional security under their contracts to try and manage the shortfall. Again, that regime will play out differently now. 

Amy, one of the biggest changes, completely new things, is the ability for contractors to now get their security back and use security of payment to do so?

Amy: That's right. Previously, the Act was only concerned with payment claims and being paid on time and promptly, and now the Act is traversing into the realm of performance security by regulating both recourse to security and also performance security release claims. 

So the first big change is there is a new mandatory requirement for a party holding performance security under a construction contract to provide prior written notice of its intention to call on the security. Now, that change aligns the Victorian legislation with the position in Western Australia and also a similar notice requirement in Queensland, and we're anticipating that the effect of that change is really going to be more attempts to pursue urgent injunction applications seeking to restrain calls on security. It's still a high bar to succeed on that claim, but claimants who think that they have a meritorious claim will now have more time to prepare and lodge a claim where they do think that they have a meritorious claim.

Jey: And so, Amy, does this apply to a particular class or types of security, or all the sorts of things that we encounter in construction contracts.

Amy: Yes Jey, the definition of performance security in the Act is quite broad. It means guarantees, performance bonds, retention monies, that are given to secure performance by a party of obligations under the contract. So we think that that not only captures security held by a principal up to practical completion or until the end of the defects liability period, but other types of security like for unfixed plant and materials - so these changes really do have quite broad-ranging application to security held under contracts.

The second big change is that claimants will now have a right to seek release of performance security held by a principal by making performance security claims, and then they have a right to have those claims adjudicated. So as a first step, a claimant submits a performance security claim in a particular format and specifying particular information, like the type and amount of security that it wishes to have released, and that claim can importantly be made either on its own or it can be made in conjunction with a payment claim. So owners are going to need to be vigilant of hidden claims that they might not previously have been expecting to see as part of payment claims because the consequences of failing to respond to a performance security claim can be severe.

The claimant can apply then to a court to seek an order for release of the whole amount of the security claimed, or it can proceed to adjudication.

Joe: Amy, as you know, in finance projects, the bank or funder often holds security for the contractor and, in this case, you're going to have an order, presumably from an adjudicator or a court, that says return the security that isn't actually been held by the principal under the contract but a bank.

What sort of issues does that throw up from your perspective?

Amy: From my perspective, I think the borrower is in a tricky situation where it potentially runs the risk of having an order made against it for security to be released, but it's not actually functionally holding the security. So I think the key thing for borrowers is really to ensure that they are drafting into the facility agreements or the tripartite deeds an obligation on the bank, if such an order is made, to facilitate the release of the security in order that the borrower can comply with the relevant order.

Joe: There will have to at least be something that banks and funders are aware of that ultimately they might be compelled to return security, and that might result in different security arrangements between lenders and their borrowers to deal with the fact that the sort of security package that the bank's expecting to be able to hold, is moving.

Amy: Yes, and we'll come to another issue in terms of how long you can hold security, because certainly the Act, there are some elements of it which could be read as overriding rights of the principal to continue holding security beyond the end of the defects liability period that might also be relevant to financier concerns around security held for a particular facility.

I've just mentioned the claim timeframes, then the next step in the process is similarly to the payment claim process, that the principal is obliged to respond to the claim within 10 business days or any earlier date in the contract by issuing a performance security schedule, and then security is due for release on the day for release under the contract, or if the contract is silent, 10 business days from the earliest permissible service date. Importantly, a contractual provision will have no effect if it provides for release later than 20 business days after service of a performance security claim. 

Now just some observations about the Act with respect to the earliest and latest date provided for in which a claimant may make performance security claim and also the due date for release.

Firstly, the Act stipulates an earliest and a latest date in which a claimant may put in their performance security claim.

A contract can expand the duration of that period, but it cannot contract that period. Both of those dates are tied to a definition in the Act of defects liability period, which is drafted somewhat unclearly and without any apparent reference to the contractual defects liability period, with the effect that the defects liability period under the Act could expire either earlier than or later than the contracted defects liability period date. That then has bearing on when security is due for release because the earliest you can make a claim is on the expiry of the defects liability period in the Act. 

So there's an open question then, if security is required to be released within 20 business days of a claim being served, as to whether that is intending to override provisions in contracts that stipulate that a principal may continue holding security beyond the end of the contractual defects liability period - for example, where there are outstanding claims or debts against the contractor or whether, alternatively, the Act preserves a principal's rights to continue holding security where there's a contractual right to do so and only requires the principal to respond to a performance security claim and assess whether the security is properly due for release under the contract.

Joe: It sounds, Amy, like that area is definitely ripe for dispute and it's one of our top candidates for disputation and uncertainty in terms of the new drafting of the legislation and I think because the legislation is retrospective, those who are already embroiled in or concerned about return of security can immediately start using the legislation now to bring it to a head, to make adjudication applications, and maybe very soon we'll find out what it all means. 

Jey, there's a bunch of things that sit over the top of this in terms of further exclusions and protections under the Act. Do you want to comment on those?

Jey: Yeah, so thematically brought about by the amendments to the security of payment legislation is to make it easier for claimants to get an entitlement to payment claims or performance security, notwithstanding what might be in the construction contracts and a key example of that concerns notice-based time bars.

Many people listening to this podcast will be familiar with what is a notice-based time bar. In a nutshell, it's a contractual provision that says that you're only entitled to relief, say time or cost, if you've given notice within a specified time and with specified content, as set out in your contracts.

Now the position at common law is that those sorts of time bars are generally enforceable, even if they produce harsh outcomes. That is, you might have a meritorious claim for time or for cost, but if you haven't given notice in accordance with your contract, then you will be shut out of that entitlement.

There is a new power in the new legislation where an adjudicator, a judge, an arbitrator, an expert can declare a notice-based time bar to be unfair, if he or she determines that compliance with the time bar is not reasonably possible or would be unreasonably onerous on the party seeking the relief.

Joe: And Jey, is that ... do you get knocked out for all purposes then, with that contract when the time bar is determined that way by an adjudicator?

Jey: It is only in respect of the particular entitlement, the subject of the adjudication or the court case, etc. So you could have a situation where an adjudicator says for entitlement A, say for an extension of time and delay costs, the particular time bar does not apply, but under the same contract for a different claim, the adjudicator finds that it does apply, and the fact that the adjudicator has made that finding doesn't mean that you're home and hosed and that you have the entitlement. It just means that one of the barriers, the time bar, no longer applies.

So practically, what does this mean? It does create a little bit of an uncertainty. For claimants, this isn't a get out of jail free card, you should still seek to comply with the time bars that are in your contract wherever possible and from a respondent's point of view, if you're responding to a claim, you should not include in your payment schedule or in your adjudication response that the claimant is shut out merely because they haven't complied with the time bar. You should set out other reasons which go to the claimant's underlying entitlement.

As Joe alluded to earlier, this particular change is in keeping with a number of the changes in the new Security Payment Act, whereby some of the things, and the carefully calibrated risk allocation that you have in your contract, won't necessarily apply to the extent that it's inconsistent with, or seeks to limit or modify the operation of the Act.

Joe: An example of that, Jey, might be the common practice of trying to link contracts by providing that a payment only occurs when, for example, a particular milestone has happened under a separate contract.

You need to be careful to be drafting things in a way that your agreement is somewhat standalone and has its own obligations that can be assessed.

Jey: Yeah, quite right, Joe. There has existed in the old Act a prohibition on pay-when-paid provisions, but those provisions have now been expanded and applied to a broader range of circumstances.

Joe: So Jey, for all those listening, what do you do from here?

Jey: New legislation, risks and opportunities. It has always been a piece of legislation that has been claimant friendly, in the sense that one of the objects of the Act is to promote cash flow and make sure those persons who carry out construction work, supply related goods and services, get paid for the work that they do.

Hate to generalise, but our take on the amended Act, is that it is even more claimant friendly. And for either side, for either claimants or respondents, there are things that can be done now to prepare for what this new Act means for parties.

In particular, we would recommend that people think about and refresh contract administration practices, making sure, as Joe said before, that you have checklists available. Maybe you've got a system of alerts, you're carefully attuned and aware of service requirements, such that you can continue to meet the existing timeframes in the SOPA Act, in circumstances where the volume of claims we expect will increase, the complexity and the volume. 

Now, there might be a number of reasons explaining that difference, but our view is that it's because of the excluded amounts regime which previously existed in the Victorian Act, which has now been abolished.

Joe: In wrapping up, we've heard today that there is a whole lot of new opportunity for claims. There's a range of uncertainties. The best thing you can do is inform yourself, regardless of what role you play in all of this. We've got a number of publications that will be put up on the web. Have a read and don't hesitate to get in touch with us with any questions.

Thank you.