What is the Building & Construction Industry Security of Payment Act 2002 (VIC) (“SOP Act”)?
Cash flow is an important consideration for any business, but particularly so for those in an industry that is heavily reliant on the process of contracting down the chain where a weak link can destabilise the entire process.
As is the purpose of the SOP Act, a legislative regime designed specifically to assist companies in the building and construction industry in Victoria to secure payment quickly and inexpensively. The Act provides an entitlement in favour of the contracting company for progress payments and interest in order to prevent the risk of becoming insolvent during the course of the lengthy debt recovery proceedings.
Who is covered under the SOP Act?
The SOP Act applies to commercial construction contracts including “construction work” and “construction related goods and services” within Victoria entered into on or after 30 March 2007.
It does not apply to domestic building contracts, being a contract between a building owner and a builder; however, it can apply to work arranged between a builder and sub-contractor working on a domestic building project.
The application of the SOP Act also provides the same allowances for oral, and partly written and partly oral contracts, as it does to solely written contracts.
How can the SOP Act be applied to recover payment?
There is great uncertainty in the building and construction industry as a result of, and in the wake of the COVID-19 pandemic. We have seen both the State and Federal governments attempt to boost building and development, including by providing grants for housing construction. This, coupled with increasing inflation and interest rates, has increased the risk for construction companies in not being paid for works performed.
The SOP Act provides an avenue available for construction contractors to be able to obtain fast payment and retain cash flow during this difficult time. Under the legislation, contractors can serve payment claims upon the party that owes them money for construction work, or goods or services provided under a construction contract.
There must be strict adherence to timeframes within which either the payment of a claimed amount can be made or disputed by the respondent to the claim. In Victoria, the timeframe for submission of a payment schedule or notice of dispute is as may be specified under the contract or 10 business days after the payment claim is served, whichever is earlier. The amount can be disputed by providing a ‘payment schedule’ or ‘notice of dispute’.
Failure to comply with this timeframe will result in liability for the entire amount of the claim which the contractor can then recover as a debt in court. Alternatively, the matter may proceed to adjudication.
How does the SOP Act improve prospects of debt recovery?
The benefits of an application under the SOP Act include both the imposition of strict timeframes for the payment of amounts claimed, and also a speedy dispute resolution process if the parties do not agree that the contractor is entitled to the amount claimed.
Ordinarily, a contractor would need to go through costly and slow litigation to enforce their rights, and there is no assurance that successful judgments ensure payment of the claimed amount. A SOP Act application allows contractors to develop an understanding of the respondent’s circumstances before launching into expensive, long and uncertain proceedings, and hopefully obtain a successful outcome in the process.
The Act also provides a statutory right for a contractor to suspend works if the amount due to be paid is not (subject to relevant steps in the Act being taken). Furthermore, under the SOP Act a lien may also be created over unfixed plant and materials as security for any unpaid amounts.
In an industry where cash flow is so important, the Act was designed to provide for a quick and effective process to keep cash moving. Particularly, in this current climate, this can mean the difference between businesses being able to continue to trade.
At Burke Lawyers, we provide experienced Commercial law and Dispute Resolution advice. If this article has prompted questions and believe you need advice or legal assistance please contact us today on +61 3 9822 8588 or email HERE.