Building and Construction Industry Security of Payment Act what does it do and how does it work? John K. Arthur 1

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1 Building and Construction Industry Security of Payment Act 2002 what does it do and how does it work? John K. Arthur 1 1. The Building and Construction Industry Security of Payment Act 2002 ( the Act ) 2 was enacted to provide a relatively quick and inexpensive process 3 for the recovery of progress payments by persons who carry out work or supply good and services in the construction industry 4. It operates on an interim basis and may be adjusted or reversed in further or other proceedings in a court, tribunal or arbitral tribunal or other form of dispute resolution under the contract 5. Object of the Act: 2. The object of the Act is to ensure that a person 6 who carries out construction work 7 or supplies related goods and services 8 under a construction contract is entitled to receive, and able to recover, progress payments for such work, or supply of good or services 9. This object is achieved by the Act granting the contractor a statutory 1 John Arthur is a member of the Victorian Bar practising in Commercial Law with a particular interest in dispute resolution. He is a member of the Victorian Bar Professional Standards Scheme approved under Professional Standards Legislation. His liability is limited under that Scheme. Liability limited by a scheme approved under Professional Standards Legislation. His profile may be viewed at 2 The Security of Payment scheme, Fact Sheet No. 1 The Security of Payment Scheme ; available at the Victorian Building Authority s (formerly Building Commission) very informative SOP training page and website containing a training package and helpful fact sheets 3 which is free from excessive legal formality, and not bedevilled by unnecessary technicality: Hickory Developments Pty Ltd v Schiavello (Vic) Pty Ltd [2009] VSC 156 at [46], and Grocon Constructors v Planit Cocciardi Joint Venture (No 2) [2009] VSC 426, [112] cited with approved i n Pearl Hill Pty Ltd v Concorp Construction Group (Vic) Pty Ltd [2011] VSCA 99 at [11] 4 The view has been expressed by one commentator that while the underlying intent of the Act was to to provide a simple means of facilitating cashflow, it is by no means a straight-forward task to navigate the legislation and its judicial consideration, Security of Payment in Victoria A Update, Vicbar and Commercial Bar Assoc, Construction Law Section, 13 Sept., 2010, by Matthew Bell, p. 12. The problem is compounded for practitioners operating across states and territories in Australia, ibid. 5 See s. 47(2), (3) and Grocon Constructors v Planit Cocciardi Joint Venture (No 2) [2009] VSC 426 at [110]-[111] cited with approval in Pearl Hill at [16]-[17] 6 A person who has undertaken to (a) carry out construction work under the contract, or (b) supply related goods and services under a construction contract is referred to hereafter as a contractor 7 construction work is defined in detailed terms in s. 5(1) 8 related goods and services is defined in s. 6(1) 9 Section 3(1)

2 2 entitlement to that payment 10, and establishing an expedited and cost effective process for recovering the payment 11, in accordance with the Act. 3. As stated by Finkelstein J in Protectavale Pty Ltd v K2K Pty Ltd 12 the payment claim regime: places the claimant in a privileged position in the sense that he acquires rights that go beyond his contractual rights. The premise that underlies the legislation is that cash flow is the lifeblood of the construction industry and that the principal under a construction contract should pay now and argue later. 4. The Act does not limit any other entitlement that the contractor may have under the construction contract, or remedy for recovering such entitlement 13 but it is not possible to contract out of the Act 14. The philosophy of the Act is pay now, argue later. The Act came into operation on 31 January, 2003 and was amended in with the object of making it more effective 16. The amended legislation applies to contracts entered into on and from 30 March, The Act applies to construction projects whether public or private Similar legislation is now in effect in all other Australian states and territories 18, New Zealand 19, Singapore 20, Malaysia 21 and the United Kingdom from where the 10 Section 3(2) 11 Section 3(3) 12 [2008] FCA 1248 quoted with approval in Pearl Hill at [27] 13 Section 3(4) and see s Section 48: a provision of any agreement, whether in writing or not: (a) under which the operation of this Act is, or is purported to be, excluded, modified or restricted, or that has the effect of excluding, modifying or restricting the operation of this (s. 48(2)) Act; or (b) that may reasonably be construed as an attempt to deter a person from taking action under the Act Act is void. 15 Act no 42 of ibid, Fact Sheet No The Act binds the Crown: s With NSW being the first State to enact security of payment legislation in 1999: Building and Construction Industry Security of Payment Act 1999 (NSW). The other Acts are: Building and Construction Industry Payments Act 2004 (Qld); Construction Contracts (Security of Payments) Act 2004 (NT); Construction Contracts Act 2004 (WA); Building and Construction Industry Security of Payment Act 2009 (Tas); Building and Construction Industry Security of Payment Act 2009 (ACT); Building and Construction Industry Security of Payment Act 2009 (SA). See Security of Payment Legislation in Australia, Differences between the States Vive la Différence? Hon. Justice Peter Vickery, Building Dispute Practitioners Society 12 October Construction Contracts Act 2002 (NZ) 20 Building and Construction Industry Security of Payment Act 2004 (Singapore) 21 Construction Industry Payment and Adjudication Act 2012 (Malaysia) recently gazetted.

3 3 legislation derived 22. It is asserted that the various Acts around Australia are in many respects incompatible and have a tendency to collide with one another 23. There is a recognition of a common objective but a manifest divergence in approach to achieving it 24. There have been calls for national uniform Security of payment legislation 25. Application: 7. The Act applies to most contracts, whether written or oral, for building work or the supply of related goods and services in Victoria 26, including: (a) residential and non-residential building; (b) civil engineering; (c) demolition; (d) electrical; (e) professional services (eg. engineering, design, surveying, legal (?)); (f) hire of plant and equipment; (g) landscaping; maintenance; (h) mechanical/air conditioning; (i) plumbing; (j) supply of building materials Domestic building contracts within the meaning of the Domestic Building Contracts Act 1995 ( DBCA ) between a builder and building owner do not fall within the Act as they are governed by the DBCA unless the building owner is in the business of building homes and the contract is entered in the course of such business. However contracts between a home owner s building contractor and any sub-contractor or supplier are covered Pay when paid or paid if paid contractual clauses have no effect Part 2 of the Housing Grants, Construction and Regeneration Act 1996 (UK) 23 From Motley patchwork to security blanket: The Challenge of National Uniformity in Australian Security of Payment Legislation, Matthew Bell, Donna Vella, [2010] UMelbLRS 20; Towards Harmonisation of Construction Industry Payment Legislation: A Consideration of the Success Afforded by the East and West Coast Models in Australia plus Addendum, Australasian Journal of Construction Economics and Building Vol 10, Issue 3 (2010); Security of Payment Legislation in Australia, Differences between the States Vive la Différence? Hon. Justice Peter Vickery, Building Dispute Practitioners Society 12 October Vickery J gives several examples of how the different Acts and jurisdictions in Australia deal with various common issues under their respective Acts. 24 ibid, Hon. Justice Peter Vickery 25 Ibid, Bell and Vella; Matthew Bell, ibid at n Section 7 Application of the Act 27 ibid, Fact Sheet No ibid, Fact Sheet No. 1; and see Republic of Turkey v Mackie Pty Ltd [2012] VSC 309 and Director of Housing v Structx Pty Ltd [2011] VSC Section 13

4 4 Right to progress payments: 10. The central provision in the Act is a statutory entitlement which contractors are given to progress payments for work done or supplies of goods and services under a construction contract on the date set out in the contract, or if the contract does not set the date, on a date set by the Act called reference date For contracts entered into on or after 30 March, , progress payments include final, single or one-off payment and milestone payments (based on an event or date) 32. The amount of the progress payment to which the contractor is entitled is the amount calculated in accordance with the contract, or if there is no express provision, then on the basis of the value of the work, or related good and services 33, which may include claimable variations 34, but not excluded amounts Construction work and related goods and services are to be valued in accordance with the contract, or if no express provision is made by reference to certain specified matters, including the price for the work, and other rates or prices set out in the contract A progress payment becomes due and payable on the date provided for in the contract, or if no express provision is made 10 business days after a payment claim is made 37. Interest is payable on the unpaid amount at the penalty interest rate, or rate specified under the contract 38. The claimant is entitled to a lien in respect of the unpaid amount over any unfixed plant or materials supplied by the claimant for use in connection with the carrying out of construction work Section 9(1), (2) 31 ibid, Fact Sheet No s. 4 definition of progress payment 33 Section Section 10A 35 Section 10B 36 Section 11(1), (2) 37 Section 12(1) 38 Section 12(2) 39 Section 12A; see also Building and Construction Industry Security of Payment Regs 2013 ( BCISP Regs) which provides a prescribed form for a notice of intention to exercise a lien being Form 1 in the Schedule

5 5 Person owed money by way of a progress payment makes a payment claim: 14. A contractor 40 (referred to in the Act as the claimant ) who is, or claims to be, entitled to a progress payment can give the person, who under the contract is or may be liable to make the payment, a payment claim (referred to in the Act as the respondent) The payment claim must: (a) identify the work, or related goods or services to which the progress payment relates and the amount of the progress payment claimed, must state that it is made under the Act, and be in the relevant prescribed form containing the prescribed information (if any) 42 ; and (b) be served within the period within which the work is to be carried out under the terms of the contract, or 3 months whichever is the later, or for a final, single or one off payment, within the period determined by the contract, or where no express provision is made within 3 months of the s. 9(2) reference date that applies to the progress payment 43. Respondent either pays or provides a payment schedule: 16. The person who has received the payment claim can either pay the amount claimed in full, or if the amount or part is disputed, reply to the claim by giving a payment schedule identifying the payment claim to which it relates, indicating the amount of the payment that the respondent proposes to make (the scheduled amount), identifying any excluded amount, and if the scheduled amount is less than the claimed amount the reasons for withholding the difference being a person who has undertaken to carry out construction work or supplied related goods and services under a construction contract in Victoria as referred to in s Section 14(1) a sample form of Payment Claim and helpful notes for claimants is provided on the Victorian Building Authority (former Building Commission) website: 42 Section 14(1), (2), on the question of invalidity of payment claims, see Seabay Properties Pty Ltd v Galvin Constructions Pty Ltd [2011] VSC 183 per Vickery J; 470 St Kilda Road Pty Ltd v Reed Constructions Ausrtalia Pty Ltd [2012] VSC 235 and see also Gantley Pty Ltd v Phoenix Int l Group Pty Ltd [2010] VSC 106 per Vickery J which also deals with severance of invalid part of payment claim. On this issue, see also Seabay, ibid. 43 Section 14(4), (5). As to the premature submission of a payment claim, see Metacorp Australia Pty Ltd v Andeco Construction Group Pty Ltd (2010) 30 VR 141 and ibid, Seabay at [131] 44 Section 15 - a sample form of Payment Schedule and helpful notes for respondents is provided on the Victorian Building Authority (former Building Commission) website, see n. 27

6 6 17. A respondent which fails to pay or to provide a payment schedule within 10 business days or as required by the contract (whichever is earlier), or provides a payment schedule and does not pay the scheduled amount, is liable to pay the amount claimed, or the scheduled amount on the due date for the progress payment 45. In such circumstances, the claimant may: (a) recover any unpaid part of the claimed or scheduled amount as a debt due in any court of competent jurisdiction 46 ; or (b) make an adjudication application; and (c) may suspend carrying out construction work under the construction contract, or supplying related goods and services, after serving a notice 47 on the respondent of the claimant s intention to do so. Adjudication: Application for adjudication: 18. If the respondent fails to provide a payment schedule, or to pay the whole or any part of the amount claimed by the due date, or provides a payment schedule but the scheduled amount is less than the amount claimed in the payment claim, or fails to pay the scheduled amount, a claimant may apply for adjudication of the payment claim 48 provided it has notified the respondent within 10 days after the due date for payment of its intention to do so The adjudication application must 50 : (a) be in writing; (b) be made to an authorised nominating authority ( ANA) 51 ; (c) be made within 10 business days after the claimant receives the payment schedule, or after the due date for payment 52 ; 45 Section 15(4); s Section 16(2); judgment may be given if the court is satisfied that the respondent is liable to pay the claimed amount as a consequence of having failed to provide a payment schedule within time as set out in s 16(1) and the claimed amount does not include any excluded amount and the respondent is not entitled to bring any cross-claim, or raise any defence in relation to matters arising under the construction contract : s. 16(4)(a), (b) 47 Stating that it is made under the Act: s. 16(3) and for the right to suspend work, see s Section and the respondent has been given opportunity to provide a payment schedule within 2 business days after receiving the claimant s notice: s. 18(2)(b) - a sample form of Adjudication Application and helpful notes for claimants is provided on the Victorian Building Authority (former Building Commission) website, see n Section 18(3) 51 Section 18(3)(b) the ANA will nominate an adjudicator with the necessary skills and experience to adjudicate the dispute, see s. 19. In relation to ANAs, see Div 5, ss C

7 7 (d) (e) identify the payment claim and the payment schedule (if any) to which it relates; be accompanied by the application fee (if any) determined by the ANA; and may: (f) contain any submissions relevant to the application that the claimant chooses to include 53. The adjudication application must be served on the respondent 54. The adjudication - procedure and determination: 20. Once the adjudicator accepts the nomination 55 he or she has 10 business days (or up to 15 business days if the claimant agrees) to determine the adjudication application 56. Within this time the respondent may lodge with the adjudicator a response to the claimant s adjudication application which must be in writing and, inter alia, identify any excluded amount and contain any submissions relevant to the response The procedures for the adjudication are set out in s The adjudicator s determination must be in writing and must include the reasons for the determination, and the basis on which any amount or date has been decided 58. The determination is simply to determine the amount of the progress payment to be paid the respondent (if any) and the date when it is payable, and the rate of interest 52 Section 18(3)(c), (d); in the case of an application under s. 18 (1)(b), must be made within 5 business days after the end of the 2 day period referred to in s. 18 (2)(b): s. 18(3)(e) 53 Section 18 (3)(h) 54 Section 18(5) 55 Section 20(1); the adjudicator has the capacity to determine facts which go to his or her jurisdiction except for the case where the basic and essential requirements of the Act for a valid determination are not met, or where the determination is not a bona fide attempt to exercise the power granted under the Act: ibid, Grocon (No 2) at p. 26 VR 172 at the amount of the progress payment to be paid the respondent (if any) and the date when it is payable, and the rate of interest payable under s. 12(2): s Within (a) 5 business days after receiving a copy of the application; or (b) 2 business days after receiving notice of an adjudicator's acceptance of the application: section 21(1). The requirements for a response are contained in s. 21(2). A sample form of Adjudication Response and helpful notes for respondents is provided on the Victorian Building Authority (former Building Commission) website, see n Section 23(3)

8 8 payable under s. 12(2) 59 and in determining the application must only consider certain specified matters 60. If the determination considers other matters, it is void The adjudicator, on his or her own motion or on the application of the parties, has power to correct clerical mistakes, errors from accidental slips or omissions, a material miscalculation of figures, or mistake in description, or defect in form The adjudicator is entitled to be paid his or her agreed fees and expenses, or if no amount is agreed, his or her reasonable fees and expenses, and the claimant and respondent are jointly and severally liable for such fees and expenses 63. As between themselves, the parties are liable equally for the fees and expenses or in such other proportions as the adjudicator determines 64. An adjudicator is disentitled to his or her fees if he or she fails to make a decision on the application within the time allowed An adjudicator (including a review adjudicator) is not personally liable for anything done or omitted to be done in good faith in the exercise of a power or the discharge of a duty under the Act or the regulations (or in the reasonable belief that the act or omission was in the exercise of a power or the discharge of a duty under this Act or the regulations) The ANA must give a copy of the adjudication determination to the parties as soon as practicable after it is made, and to the Victorian Building Authority within 5 days after it is made A claimant may make a new application for an adjudication if the previous application was not accepted, or not determined s. 23 but must not simply reject the respondent s contentions, see Asian Pacific, ibid a nd Maxstra Constructions Pty Ltd v Active Crane Hire Pty Ltd [2013] VSC 177 per McMillan J 60 Section 23(2): the adjudicator must consider the provisions of the Act and regulations; subject to the Act, the terms of the construction contract; the payment claim and the payment schedule, submissions, and relevant documentation; and results of any inspection of any matter to which the claims relates by the adjudicator, but must not take into account, any excluded amount, or any matter prohibited from being taken into account by the Act. 61 Section 23(2B) 62 Section 24 a correction cannot be made if a review application under Div 2A has been made: s. 24(4) 63 Section 45(2), (3) 64 Section 45(4) 65 By ss, 22(4) or 28I(10), other than if the application is withdrawn or the dispute is settled: s. 45(5) 66 Section Section 23A

9 9 Adjudication review: 28. If the adjudicated amount exceeds $100,000, or any prescribed amount, either party can apply for an adjudication review, in a narrow range of circumstances. A respondent may only apply for a review 69 in specified circumstances 70 and only on the ground that the adjudicated amount included an excluded amount, and a claimant on a like basis 71. The procedure which applies on a review application is set out 72. Respondent must pay the adjudicated amount: 29. The respondent must pay the adjudicated amount to the claimant by the relevant date 73. If the respondent fails to pay the adjudicated amount the claimant may request an adjudication certificate from the ANA and may suspend carrying out construction work under the construction contract, or supplying related goods and services, after serving a notice on the respondent of the claimant s intention to do so 74. A claimant can also enforce payment of an adjudicated amount in court 75. The claimant files an adjudication certificate in the court, with an affidavit attesting that the respondent has failed to pay and the court can issue a warrant or other order requiring payment. A claimant may seek payment from the respondent s principal in certain circumstances 76. Court proceedings: 30. In order to enforce a liability, or an adjudication determination under the Act, or rather than taking the payment dispute to adjudication, the claimant can go to court to 68 Section Section 28B 70 If the respondent provided a payment schedule to the claimant within the time specified, and only on the ground that the adjudicated amount included an excluded amount which must be identified as such in the payment schedule or the adjudication response, and only if the respondent has paid to the claimant the adjudicated amount other than the amounts alleged to be excluded amounts, or has paid the alleged excluded amounts into a designated trust account: s. 28B(1)-(6). 71 Section 28C: on the ground that the adjudicator failed to take into account a relevant amount in making an adjudication determination because it was wrongly determined to be an excluded amount. 72 Section 28D-28L 73 Sections 28M and 28N. Relevant date is defined in s. 28M(2) 74 Section 28O. The requirements for adjudication certificates are set out in s. 28Q. 75 Section 28R. See also Asian pacific Building Corporation pty Ltd v Aircon Duct Fabrication Pty Ltd [2010] VSC 340 as to whether a Court may stay an adjudication determination on the ground of the claimant s insolvency 76 See Div 4 sections 29A-41 but nothing in Part 3 of the Act affects any right that a principal may have under any contract except as expressly provided for in the Act. A prescribed form for a notice of claim against a principal under s. 32(1)(b) is Form 2 to the BCISP Regs. The prescribed form a debt certificate under ss. 32(1)(a), 33(1) is Form 3 to the BCISP Regs. The discharge noti ce under s. 40 is Form 4 to the BCISP Regs and the notice setting out the name of the principal from whom the claimant may be able to recover the adjudicated amount is Form 5 to the BCISP Regs.

10 10 resolve the dispute, and may issue proceedings in one, or other of the three courts in the Victorian court hierarchy. Victorian courts, especially the Supreme Court, have seen far less judgments than in other Australia jurisdictions, notably NSW and Queensland Nothing about the procedure for recovering progress payments under the Act (contained in Part 3) affects any right that a party to a construction contract may have under the contract, may have under Part 2 of the Act in respect of the contract, or may have apart from the Act in respect of anything done or omitted to be done under the contract. Nothing done under such procedure affects any proceedings arising under the contract, including arbitration or other dispute resolution proceedings, except that a court, tribunal or arbitral tribunal must allow for any amount paid to a party, and may make orders for restitution of any amount so paid, and other orders having regard to its decision in the proceedings 78. Availability of judicial review: 32. Although on one view judicial review is contrary to the spirit of the Act, in Victoria it has been held that relief in the nature of certiorari, on all of the grounds available under the writ, including error on the face of the record, is not excluded either expressly or by implication under the Act in Victoria 79. Subsequently it has been held that it was not the intention of the legislature to limit the Court s jurisdiction by excluding or restricting judicial review by the Court, whether by certiorari or otherwise, of a determination of an adjudicator under the Act 80. Like relief may also be granted where the essential elements of an adjudication application under the Act 77 Security of Payment in Victoria A Update, Vicbar and Commercial Bar Assoc, Construction Law Section, 13 Sept., 2010, by Matthew Bell, p. 6, although the number of cases is gradually increasing. The Victorian Act has been subject to more than two dozen County Court cases, and a judgment in the Federal Co urt in Protectavale Pty Ltd v K2K Pty Ltd [2008] FCA 1248 per Finkelstein J, ibid Matthew Bell at p Section ibid, Hon Justice Peter Vickery at [50] citing Hickory Developments Pty Ltd v Schiavello (Vic) Pty Ltd (2009) 26 VR 112; [2009] VSC 156 and Grocon Constructors v Planit Cocciardi Joint Venture (No 2) (2009) 26 VR 172; [2009] VSC 426. Subsequently confirmed in Metacorp Australia Pty Ltd v Andeco Construction Group Pty Ltd (2010) 30 VR 141. And see Maxstra Constructions Pty Ltd v Gilbert & Ors [2013] VSC 243 per Vickery J. 80 Ibid, Hon Justice Peter Vickery, at [61] citing ibid, Grocon (No 2). The view has been expressed that Grocon does not change the legal landscape much, as reviewable jurisdictional error derived from Brodyn Pty Ltd (t/as Time, Cost and Quality) v Davenport (2004) 61 NSWLR 421 and other cases already encompass the adjudicator s failure to comply with the basic and essential requirements to make a bona fide attempt to exercise the power granted under the Act or to accord natural justice: ibid, Matthew Bell at p. 8 referring to T. Shnookal, Security of payments in Victoria its use as an effective payment tool (2010) 38 Building Dispute Practitioner s Society Newsletter 18.

11 11 are not met 81. In New South Wales since Chase Oyster Bar Pty Ltd v Hamo Industries Pty Ltd 82, certiorari is available to set aside an adjudicator s determination on the ground of jurisdictional error 83. Conclusion 33. Despite being subject to some criticism, it is generally recognised that the Act has assisted contractors in the construction industry in getting progress payments paid promptly so that cash flow, the industry s lifeblood, is able to move smoothly along the contracting chain. While the Act s object is simple, the legislative framework to achieve it is far from straight-forward. Timely advice will often be required. Recent Supreme Court cases have provided welcome guidance on the interpretation of the Act which will assist Victorian practitioners in becoming familiar with its provisions. Dated: July, 2013 John Arthur Barrister Isaacs Chambers Melbourne. Liability limited by a scheme approved under Professional Standards Legislation 81 Ibid, Brodyn which part of the decision was applied by Vickery J in Hickory and Grocon (No 2), ibid. See, Building balances into progress payments, by Ben Patrick (2010) 85 LIJ 28. See also Asian Pacific Building Corporation Pty Ltd v Aircon Duct Fabrication Pty Ltd [2010] VSC 300 at [25] and Claude Neo n Pty Ltd v Rhino Signmakers Pty Ltd [2010] VSC (2010) 78 NSWLR which overturned ibid, Brodyn Pty Ltd