Excluded amounts and security of payment claims
Update at 12 February 2025:
Planned reforms to the Building and Construction Industry Security of Payment Act 2002 (Vic) (SOP Act) are designed to improve the functioning of the Act and make it easier to get paid. The changes are likely to be implemented early in 2025.
The proposed amendments will remove the “excluded amounts” regime in Victoria, which has not been amended since 2006. The proposed amendments will also bring Victoria in line with other states such as the prohibition on ‘unfair’ time bar contract clauses. The proposed changes aim to improve payments within the Victorian Construction Industry.
The Victorian Government hopes to improve the cash flow for contractors and reduce the risk of contractor insolvencies. This is done in response to the demand for housing supply, where more housing requires more (solvent) builders.
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Original Article as at 14 August 2024:
Any builder, be it head contractor or subcontractor, needs to understand how security of payment claims can help them secure their cash flow. The Building and Construction Industry Security of Payment Act 2002 (Vic) (SOP Act) create additional avenues of enforcing claims that are not available outside the construction industry.
However, where a payment claim contains a claim for an ‘excluded amount’ under the SOP Act contractors will be prevented from recovering the claimed amount as a debt in a court proceeding: see, Yuanda Vic Pty Ltd v Façade Designs International Pty Ltd [2021] VSCA 44.
Before we delve into how excluded amounts are treated in Victoria, this blog will first discuss the SOP Act more generally, and the process of making payment claims under it. It will then consider the implications of the Yuanda decision for contractors and how contractors may adopt a two-step claims process to recover excluded amounts.
Payment claims under the SOP Act
The main objective of the SOP Act is to create a ‘pay now, argue later’ regime to enable contractors to recover progress payments in a timely and cost effective manner.
In line with this objective, under the SOP Act, contractors can claim ‘payment claims’ to recover progress payments. Once you make a payment claim, the Principal is required to respond to the payment claim in one of two ways:
- pay the amount claimed in full, on or before the due date; or
- serve a payment schedule within 10 business days setting out what the Principal is willing to pay and why it is different from the amount claimed.
If the Principal fails to provide a payment schedule and does not pay on time, you can apply for adjudication, or go to court and seek a summary judgment to enforce the payment as a judgment debt.
When are you not able to seek a summary judgment?
As a result of Yuanda decision mentioned above, you will not be able to pursue the second option – that is, seek a summary judgment to enforce the payment claimed as a judgment debt – if your payment claim contains an ‘excluded amount’.
Importantly, the existence of an ‘excluded amount’ in a payment claim will make the entire payment claim unenforceable by the courts even if part of the claim relates to non-excluded amounts. That is, the courts will not carve-out the ‘excluded amounts’ and award a judgment debt in respect of the non-excluded amounts.
The only option to recover a progress payment in these circumstances is to apply for adjudication, which tends to be a more costly option.
How does the outcome of Yuanda affect contractors? And what can you do about it?
An ‘excluded amount’ is an amount that is expressly excluded under the SOP Act from being claimed in a payment claim. This can include variations that are not claimable variations, amounts relating to latent conditions, time-related costs, amounts for changes in regulatory requirements, and amounts claimed as damages for breach of contract (see sections 10B(1), 10B(2), 14(3)(b), 16(4)(a) and 23(2A)(a) of the SOP Act).
It’s common for contractors to incur costs that are treated as excluded amounts. The inability to recover progress payments whenever excluded amounts are included can create significant cash flow risks for contractors and affect the ongoing economic viability of construction projects
Excluded amounts should never be included in security of payment claims in Victoria. Instead any claim for these amounts needs to be dealt with separately under the contractual regime for payments between the parties. This difference should be considered when drafting to make it clear how excluded amounts shall be dealt with to avoid disputes arising.
If you would like to discuss the issues raised above please get in touch with us here.
The above article was written by Pippin Barry (BA, JD - 2012, The University of Melbourne), an Australian Legal Practitioner, and Hyein Kim, paralegal.
