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“Don’t Delay! Payment Claim!” – Top 5 Common Misconceptions of the Security of Payment Regime

The Building and Construction Industry Security of Payment Act Regime (SOP Act) has proven to be an effective way for sub-contractors and contractors in the construction industry to be paid on time for their services.

The SOP Act operates unlike any other piece of legislation. It was enacted to address:

  • protracted and unjustified delays in payment for work done
  • retention monies being used as cash flow by contractors and head contractors, instead of being kept aside for defects
  • widespread insolvency in the contractual chain, leaving subcontractors unpaid.

At its best it allows contractors and subcontractors in the construction industry the ability to be paid for the construction works they perform in a fair and timely manner.

At its worst, it can appear to be a complex and restrictive piece of legislation. Claimants and Respondents are often caught out by misunderstanding how the strict timelines and requirements operate in practice.

 

  1. “I can’t use the SOP Act”

It is a common misconception that the SOP Act applies only to the main players in large commercial construction contracts. This is not true.

Section 7 of the SOP Act outlines who is covered under the legislation. The majority of commercial construction contracts will be subject to the SOP Act. The major exception to this is for residential building work in which the Principal lives, or is planning to live, at the premises that is the subject of the work.

Section 6 of the SOP Act covers any person who undertakes to supply related goods and services under a construction contract.

This includes:

  • Contractors against Principals/ Developers
  • Subcontractors against Contractors
  • Suppliers of materials and components to form any part of any building or structure
  • Suppliers of plant or materials for sale or hire
  • Providing labour to carry our construction work
  • Consultants
  • Architectural services
  • Design work
  • Building Surveyors
  • Surveying and Quantity Surveying services
  • Contracts involving residential investment properties, landlords, strata title bodies corporate, developers, builders, contractors, sub-contractors, consultants and suppliers.

 

  1. “I did the work, so I can use the system whenever I’d like”

It is important to note that a payment claim cannot be made under the SOP Act without the appropriate reference date. In Victoria, it must be served within three months after the reference date or the period specified in the contract.

In our experience, some of our clients have not able to use the SOP Act because they elect to grant indulgences to their debtors, or because they do not pursue the debts as and when they become due and payable.

We understand that as part of running a small to medium sized business, maintaining client relationships are important and acting on outstanding debts owed to you is often not a priority.

We recommend that you contact us to review contracts (before you enter into them) to preserve your rights under the SOP Act to extend beyond the three-month period.

In NSW, a payment claim must generally be served within twelve months after the reference date or the period specified in the contract.

 

  1. I can’t use it yet

Whilst you can use the SOP Act to make a claim when all your construction works/services are completed, the SOP Act has a much wider scope.

The Payment Claim can be used to claim progress payments including single payments, milestone payments, and final payments. You can make a claim under the SOP Act for interim payments whilst waiting for the resolution of your final entitlements under the construction contract.

Under the SOP Act, you can make a claim for:

  • interest on overdue progress payments
  • loss or additional expenses as a result of work being omitted from the construction contract whilst you suspended work under the protection of the Act
  • cash security and retention monies (subject to the terms of the contract).

 

  1. A payment claim is just a tax invoice

It is very important that a payment claim is valid under the SOP Act.

In University of Sydney v Cadence Australia Pty Ltd (2010) 26 BCL 445 the Court ruled that when a payment claim has been served and the payment claim adjudicated, the dissatisfied claimant cannot serve a further payment claim or proceed to adjudication. As such, in our view it is risky to rely on a Tax Invoice as a payment claim in order to issue the Adjudication Application. If an Adjudicator determined that it is not a valid payment claim, you may not be entitled to your claim.

In our opinion, a payment claim should:

(1)     outline the reference date for making a payment claim;

(2)     describe the detail and extent of the work that you have performed;

(3)     itemise the related goods or related services performed under contract; and

(4)     state the amount that is claimed based on the value of that work to the reference date; and

(5)     list the legal entities of the Claimant and Respondent Claim;

(6)     include the notice "This is a payment claim made under the Building and Construction Industry Security of Payment Act 2002 Victoria" or whichever is the applicable jurisdiction.

(7)     include Completion Certificates;

(8)     include Delivery Dockets;

(9)     attach Photographs; and

(10)   comply with all applicable contractual documentation.

The Payment Claim must be served on or after each reference date by delivering, posting or faxing it to the respondent.

 

  1. “It is too expensive”

After going through the process with us, some of our clients are able to use our standard form documents to prepare their own payment claims and s 17(2) notices for further debts owed to them. This enables clients to action a significant portion of the debt recovery process without the involvement of Lawyers.

Generally, the costs of utilising the SOP Act are less than half the costs of issuing proceedings in the relevant Australian court.

However, it should be noted that given the complexity of the SOP Act, failure to comply with the strict requirements means that you could severely limit your chances of recovery. Drafting an Adjudication Application is a complex process. If the underlying Payment Claim is not drafted well, it is possible that an Adjudicator may make a determination that is unfavourable to you.

If you would like to discuss if you can use the SOP Act for your particular needs, please contact Ryan Chelva at ryanc@lewisholdway.com.au or on (03) 9629 9629 to discuss.