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Pay Now and Argue Later

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It goes without saying that those involved in the construction, engineering and infrastructure industries, whether commercial, industrial, energy and resources or residential, will want to maximise their rights and legal protection in order to deal with payment for works or related goods and services.

A little knowledge can be a dangerous thing

It has been a few years since the Building and Construction Industry Security of Payment Act 2002 (Vic) came into force. It was heralded generally as a piece of legislation allowing for the cost-effective and fast-track determination of payment disputes together with associated enforcement procedures available to many if not most individuals, businesses and corporations undertaking works or the supply of related goods and services in the abovementioned industries. Since its inception, the legislation has received some criticism perhaps detracting from the perception of it being the perfect “silver bullet” as it was promoted initially, however it still has a lot to offer following recent amendments.

Ignorance of, or misapplication of, the legislation can translate into polarised legal and commercial bargaining positions (inevitably the better informed party ends up better protected) as well as, in some instances, sudden death financial consequences. Prudent operators within these industries would be well advised to seek pre-emptive risk management advice in relation to it, even at the contractual negotiation and drafting stage in which there is an increasing trend of referring to the application of the legislation well before the need to apply it arises in a payment dispute.

What does the legislation do?

The legislation provides for an “overlay” partially affecting contractual rights and obligations (without displacing the contract) as well as options for dispute resolution in relation to claims for payment.

It provides for rights and obligations over and above the contract and can “fill in the gaps” where the contract is silent on a particular payment term. Significantly, there are restrictions on contracting out of the legislation and it gives a right to suspend the performance of the works or the supply of related goods and services provided that certain criteria are met.

The use of the legislation by the provider of works or related goods and services is optional and, even if no formal action is taken under it, the changing of invoicing practices “front-end” in order to make those practices match the legislation’s requirements for a valid payment claim can increase bargaining power greatly, even in the early stages of a payment dispute.

Broadly speaking, the legislation sets up a regime for adjudication applications and awards (outside of Court proceedings) and as well as default judgment applications (Court proceedings). Some of the procedures (including strict and short time limits) for making and pursuing claims (or for responding to claims) depend on the specific facts of the claim as well as the history of the contract administration, paperwork and dealings between the parties.

The legislation affects the drafting and performance of contracts for the provision of works or related goods and services in the following categories (as well as providing statutory rights in relation to dispute resolution):

  • construction work and related goods and services as defined
  • alteration, repair, restoration, maintenance, extension, demolition, dismantling of buildings or structures regardless of whether permanent
  • walls, road works, power lines, telecommunication apparatus, aircraft runaways, docks and harbours, railways, inland waterways, pipelines, reservoirs, water mains, wells and sewers
  • industrial plant and installations for land drainage or coast protection
  • installation of fittings, heating, lighting, air-conditioning, ventilation, power supply, drainage, sanitation, water supply, fire protection, security and communication systems
  • external or internal cleaning of buildings, structures or works in connection with their construction, alteration, repair, restoration, maintenance or extension
  • any operation which forms an integral part of the above or an operation that is preparatory
  • site clearance
  • earth-moving
  • laying of foundations
  • prefabrication of components
  • site restoration, landscaping and the provision of roadways and other access works
  • painting and decorating of internal or external surfaces of any building or structure
  • an extremely broad range of related goods and services as defined – materials, plant, equipment, labour, architectural design, building surveying, quantity surveying, engineering consultancy and advice whether mechanical, electrical, transport and hydraulic

The legislation does not apply to domestic building contracts between an owner who intends to reside in the residence being constructed and the contractor, but does apply to multi-unit developments or larger residential developments.

There are exclusions for drilling or extracting oil or natural gas or for extracting minerals, and some other minor exceptions.

Ignore the legislation at your own risk

In the current economic climate, those within the captive audiences for which this legislation was intended should consider knowledge of it as mandatory. Invoicing practices should be amended in order to comply with the legislation.

From the point of view of the beneficiary of the works or related goods and services, ignorance of the legislation is perilous. For example, either no or an insufficient response by way of a “payment schedule” (a response to a payment claim) under the legislation can present real difficulties in raising defences, counterclaims or set-offs in adjudication applications and / or default judgment proceedings. These are but a few of the circumstances that can be visited upon an unsuspecting or ill-informed respondent.

Critically, the “cash-flow reinstatement” regime of the legislation effectively provides that payments or awards received under it can be revisited (and potentially “clawed back”) to varying extents in later and broader legal or arbitration proceedings, putting aside the limited ability to challenge awards of adjudicators handed down under the legislation at first instance. Accordingly, project-specific advice always should be sought in order to see whether this may influence the course of action in a significant way.

Author: Stuart Miller