Faster payments for contractors and sub-contractors under the Security of Payments Act: Developers and builders beware.

Are you a solicitor acting for a contractor or sub-contractor owed outstanding progress payments for works pursuant to a construction contract within the meaning of the Domestic Building Contracts Act?

If so, a Payment Claim under the Building and Construction Industry Security of Payments Act (“Act”) may be a relatively speedy way to recover this sum for your client.

The Act provides a "pay now, argue later" regime offering a relatively fast, cost effective and certain process to recover overdue progress payments in an attempt to protect the cashflow and solvency of contractors. It is designed to avoid the cost and delay common to standard court proceedings.

If you’re acting for an owner or developer engaging builders or contractors to perform works under a construction contract: beware of the dangers of this Act.

How to prepare a ‘Payment Claim’ under the Act

Issuing a Payment Claim under the Act is simple. A solicitor is not required for this part of the process.

The progress claim for construction work or related goods and services must be due. But is cannot be more than 3 months overdue (sections 9(2) & 14(4) and 14(5) of the Act).
Issue an invoice for the claimed amount.
It must contains the words “This is a payment claim under the Building and Construction Industry Security of Payment Act 2002” legible on the invoice.
It does not need to contain the words “Payment Claim” anywhere on the invoice.
For each item on the invoice, include a description of the construction work or the goods or services supplied. It should be at least a few words so that the recipient can understand the item being charged for (see 'sufficiently identified construction work' section below).
Serve it on the recipient. Email is sufficient so long as the date of service can be objectively proven.
The recipient has 10 business days from service to respond with a "Payment Schedule' disputing the Payment Claim. If this is served on you within the 10 business day period, the matter may be resolved between the parties, or referred to adjudication (Division 2 of the Act).
If a Payment Schedule is not served within 10 business days, file an application pursuant section 16(2)(a)(i) "to recover the unpaid portion of the claimed amount from the respondent as a debt due to the claimant, in any court of competent jurisdiction."
The optimal method for bringing applications under the Act is in the County Court by summons on originating motion supported by affidavit, not by an application for summary judgment: 3D Flow Solutions Pty Ltd v Armstrong Creek Pty Ltd [2018] VCC 674 at [41]-[46].
Applications made under the Act for judgment are made returnable to the County Court Commercial Division Duty Judge in the first instance. Depending on the work load of the Court, such applications may be referred to a Judicial Registrar or a Judge of the Division.
Most applications in the County Court are disposed of within weeks of their initiation. With disputed application for judgment, written reasons are usually provided.

Received a Payment Claim? Act immediately

If you are served with a Payment Claim (eg as owner or developer), beware of the following:

You may be served with an ordinary looking invoice. It does not need to state that it is a “Payment Claim” or contain those words to satisfy the criteria in the Act: (section 14).
Look for the words: “This is a payment claim under the Building and Construction Industry Security of Payment Act 2002” anywhere on the invoice or statement or document. This is one of the few prescribed requirements under the Act (section 14(2)(e)) and the only way to tell it is a Payment Claim.
If the words “This is a payment claim under the Building and Construction Industry Security of Payment Act 2002” appear on the document, however small, you should get legal advice immediately and respond within 10 business days of service to the Payment Claim.
The Act does not require the Payment Claim to give notice of the 10 business day time limit. This can and does have disastrous effect if ignored.
Respond to the Payment Claim by filing a ‘Payment Schedule’ (section 15). This is your one opportunity to dispute the items in the payment claim. The matter may go to an adjudication (see s 18) where you can dispute the claimed payment.
If you don’t file a Payment Schedule within 10 business days, you lose your right under the Act to dispute the content of the Payment Claim (more about that below).
Missing the 10 business day deadline is legally and commercially fatal for the recipient of the Payment Claim. It is possible that the Payment Claim contains items which have already been paid for, or works which were not even performed. Even if they were commenced, they may only be incomplete, or finished defectively. If so, there is no opportunity to dispute them after the 10-day period has expired.

Because there is no present requirement under the Act to warn of the 10-day time limit, many recipients fail to respond within time, or at all, treating the Payment Claim as an ordinary invoice payable within 30 days or more.

What if I miss the 10 business day period to file a Payment Schedule?

If you miss the opportunity to file a Payment Schedule, the applicant may proceed to file a summons on originating motion effectively for a ‘judgment debt’ type hearing (s 16). At that hearing, you can’t dispute the items on the Payment Claim. That opportunity was only open for 10 business days after the Payment Claim was served.

'Sufficiently identified' construction work

At that hearing, you may question whether the construction work or goods/services supplied is sufficiently identified (s 14(c)). But beware: the threshold for identifying items on a Payment Claim is low. The authorities do not require the Court to take an ‘overly technical approach’.

Even if the works on the Payment Claim have the most basic, even scant, description such as “labour” or “machinery hire” or “excavation” they are very likely to satisfy section 14(c) and the authorities on point when considered in the context of a construction contract and the knowledge of the parties.

What will fail the requirements of section 14(c)? A Payment Claim which seeks a sum of money with absolutely no breakdown or explanation of the work to which it relates.

In Protectavale Pty Ltd v K2K Pty Ltd [2008] FCA 1248, Finkelstein J held that an entry for $215,850 without annotation made it impossible to determine the basis of the claim for that sum:

[15] To satisfy s 14, however, it was incumbent upon [the claimant contractor] to either identify the particular construction work the subject of the claim… or to state that the claim did not relate to construction work but was simply a contractual entitlement akin to a milestone payment. The omitted information was critical. Without it, Protectavale could not value the work (if any) to which the amount relates, make its own assessment of the amount payable and provide a payment schedule which, if the matter were to be disputed, would enable the dispute to be properly resolved by an adjudicator. In my view, the invoice does not meet the requirement in s 14(3).

So although a basic dollar figure is unlikely to pass the test, the threshold for ‘identification of the construction work’ is still extremely low for the issuing contractor.

As long as there is a basic description which “allows the principal to understand the basis of the claim” that is sufficient: Protectavale at [12].

Excluded Amounts

The only main hope at this stage is challenging individual items on the Payment Claim as ‘excluded amounts’ under section 14(3)(b) or 16(4)(a)(ii).

'Excluded Amounts' include non ‘claimable variations’ (section 10B). This means any variation which is not a Class 1 variation (a variation agreed between the parties) or a Class 2 variation (a variation which is agreed has having been performed, but there is disagreement over the amount, and the contract is valued under $5m or less). The Act stops disputes over variations from being part of a Payment Claim as they only want items which will not cause a ‘log-jam’ to be claimed this way.

Another option is to challenge individual items on the Payment Claim as damages, or liquidated amounts for delays, latent conditions, time-related costs etc . Review and analyse each item on the Payment Claim carefully, and section 10B.

If you are an owner or developer who is new to the building business, be wary of attempting a jurisdictional challenge under section 7(2) on the basis that you are not “in the business of building residences". The authorities are now casting a wider net and capturing single project developers. See my post on the Supreme Court's decision in Ian Street here.

What happens at a Payment Claim hearing?

If no Payment Schedule has been filed within the 10 business day limit, the application will be determined on the affidavit material and submissions only. There is no cross-examination of witnesses.

The Court won’t entertain any argument which should have been the subject of a Payment Schedule. This means any issues with the substance of the claim will not be heard.

Interest on the claim is calculated from the date 10 days after the Payment Claim is served (section 12(2)).

Conclusion

This Act shifts a lot of power in the hands of contractors and sub-contractors, especially if no Payment Schedule is filed in response to a Payment Claim. It is a tool worth considering as part of any debt-recovery procedure.

Final note

Given the consequences of failing to respond within 10 days, in fairness to all parties the Act and regulations should require an explicit notice of the 10 day period as one of the prescribed requirements for a valid Payment Claim. A similar requirement exists for statutory demands insofar as a demand must state the 21-day window within an application to set aside must be served.

However unless and until this suggestion is adopted by Parliament, contractors have an extremely useful and potent weapon at their disposal. Owners and developers be warned.