Payment Claims and Payment Schedules
*Please note that this article provides general information only and will not be applicable in all circumstances, nor should it be relied upon as legal advice. Should you wish to obtain legal advice, we recommend that you get in touch with us.
This journal entry is part 2 of a 4 part series: A Guide to the Building and Construction Industry Security of Payment Act.
In part 1 of this series, we introduced the SOPA, discussed the notion of progress payments, analysed the criteria that must be met for the SOPA to apply, and took note of the exclusions to the SOPA.
In part 2 of the series, we will explore the two pillars that the application of the SOPA is structured around, that is, Payment Claims and Payment Schedules.
Progress Claims
Reference Dates
As we now know, if contractors undertake construction work and/or supply related goods or services as defined under the SOPA, they are entitled to progress payments on and from each reference date under a construction contract.
But what is a reference date and how is it determined? Put simply, a reference date dictates the date on which a progress payment can be claimed and outlines the period of time that must elapse between each progress payment claimed (e.g. 10 business days).
A reference date is determined in accordance with the terms of the construction contract. That is, if the contract provides for when progress payments can be claimed, then that is the reference date that must be followed. However, if the contract is silent, the reference date reverts to 20 business days after the first date of work and/or supply and recurs every 20 business days thereafter.
For example, Company A begins work for Company B on 1 June 2022, but the construction contract is silent when progress payments can be claimed. Company A would claim its first progress payment 20 business days after 1 June 2022 and would continue every 20 business days thereafter until Company A performs all of its obligations under the construction contract.
Payment Claim
Once it has been established that a contractor has a right to claim a progress payment (including determining the correct reference date), the contractor may then serve a payment claim on the person liable to make payment pursuant to the construction contract.
The SOPA provides for strict requirements that must be followed when issuing a payment claim as set out at section 14(2), which provides that a payment claim must:
(a) be in the relevant prescribed form; and
(b) contain the prescribed information; and
(c) identify the construction work or related goods and services to which the progress payment relates; and
(d) indicate the amount of the progress payment that the claimant claims to be due; and
(e) state that it is made under the Act.
In Victoria, subsections (a) and (b) are largely irrelevant as Victoria does not currently have a ‘prescribed form’ that must be used, nor ‘prescribed information’ that a payment claim must contain. It is, therefore, appropriate to pay particular attention to subsections (c) through (e).
Subsections (d) and (e) are relatively self-explanatory, in that a payment claim must specify the dollar amount being claimed by the contractor and must also state that the payment claim is:
“made under the Building and Construction Industry Security of Payment Act 2002 (Vic)”.
When issuing payment claims, more often than not, it is subsection (c) where contractors tend to come unstuck, that is when identifying the work or related goods and services to which the progress payment relates.
Whilst this very issue has been intensely debated amongst legal practitioners since the inception of the SOPA, it isn’t necessary to scrutinise subsection (c) as heavily as what many would have you believe. Cutting through the unnecessary complexity, a payment claim simply must identify the works undertaken and/or goods and services supplied in the context of the construction contract or agreement, of which in an abbreviated form (i.e. line items), can be understood by the parties clearly.
In accordance with McDougall J’s comments in Isis Projects v Clarence Street [2004] NSWSC 714 [37], the following 4 step guide should be followed when applying section 14(2)(c):
the payment claim (unless specified otherwise) is to be taken as referring to the contractual agreement which gives rise to the entitlement to claim a progress payment;
the payment claim contains descriptive line items of works undertaken and/or goods and services supplied;
the payment claim outlines any amounts previously claimed and the amount now said to be completed (i.e. claimable) and includes the payment claim number (if multiple); and
the payment claim specifies the total amount claimed with respect to each line item (including GST) and a brief, collective summary of each of items (1) to (3) above.
The above does not take into account the process for issuing payment claims when a variation exists. Under the SOPA, a claimable variation occurs where the scope of construction work has been agreed upon, but for some reason, the work needs to be varied. A complicated question then arises as to whether a payment claim can be issued for the variation amount.
The SOPA contemplates this question within its provisions, and makes a distinction between the two types of variations that a payment claim may still be issued for:
a variation that the parties have agreed to in full, including:
i. the scope of the variation;
ii. the amount that is to be paid to the contractor for the variation;
iii. the value of the variation; and
iv. the time for payment; and
(Class 1 Variation).
2. a variation (that does not fall within the parameters of a Class 1 Variation) where:
i. the contractor has been directed to perform the work; and
ii. the contract is for the provision of works that are less than $150,000; then
the contractor will be able to issue a payment claim if they have provided the work and/or supplied the goods or services in compliance with the request or direction.
(Class 2 Variation).
Excluded amounts are where a payment claim cannot be issued for a variation and includes Class 2 Variations where:
(a) the contract sum is greater than $5 million; or
(b) the contract sum is between $150,000 and $5 million (if the contract contains a dispute resolution mechanism) and the amount claimed/varied exceeds 10% of the contract sum.
Claimable variations and excluded amounts are notoriously difficult mechanisms to rely upon when issuing payment claims. It is advisable that any variation works a contractor proposes to undertake meet the requirements of a Class 1 Variation, otherwise, they may be considered an excluded amount and therefore, not claimable.
Service of Payment Claims
To establish what will suffice as an effective service when issuing a Payment Claim, careful consideration should be given to the terms of the construction contract or agreement. If the contract or agreement specify how, where and to whom payment claims are to be sent, that is the method, address, and recipient to issue the payment claim.
If the contract or agreement is silent, efforts should be made in writing to establish these considerations before the first payment claim is issued.
Payment Schedules
A person or entity on whom a payment claim is served is known as the Respondent. Upon receipt of a payment claim from a contractor, a Respondent has two options:
to pay the amount specified within the payment claim in full by the due date; or
provide the contractor with a payment schedule in accordance with the SOPA.
Pursuant to section 15(4), a Respondent who is served with a payment claim and who intends to issue a payment schedule must do so within the time specified under the relevant construction contract, or if the contract is silent, within 10 business days after the payment claim is served.
In the event a payment schedule is not issued in response to a payment claim within the time stipulated, the Respondent then becomes liable to pay the claimed amount to the contractor on the due date outlined within the payment claim.
Form of Payment Schedules
Similar to the requirements that must be followed when issuing a payment claim, section 15(2) outlines similar obligations that a Respondent must follow when issuing a payment schedule, including that it:
(a) must identify the payment claim to which it relates; and
(b) must indicate the amount of the payment (if any) that the Respondent proposes to make; and
(c) must identify any amount of the claim that the Respondent alleges is an excluded amount; and
(d) must be in the relevant prescribed form (if any).
As is the case with payment claims, there is not currently any prescribed form for payment schedules used in Victoria and so once again, subsection (d) is largely irrelevant.
Identifying the payment claim to which the payment schedule relates is an inherently simple task and one that can be completed by looking at the payment claim served. The same is to be said for indicating the amount of the payment (if any) that the Respondent proposes to make.
It is subsection (c) of section 15(2) which is more cumbersome for Respondents. Under this subsection, Respondents are required to provide reasons as to why the amount paid to the contractor (if any) is less than the total amount claimed.
Once again, whilst debate has raged for the best part of two decades regarding the detail a Respondent is required to go into when providing reasons for a lesser payment, the answer is straight forward. When drafting the SOPA, the use of the word ‘indicate’ was deliberately used to provide contractors and Respondents alike a clear understanding that major detail is not required when responding to a payment schedule. An indication or a reason that points to an entitlement for the Respondent to withhold payment is usually sufficient.
This is not to say that in the event a payment claim moves to adjudication (discussed in part 3 of this series), such an indication would amount to proper justification to withhold payment from a contractor. The notion of merely indicating reasons as to why payments are being withheld is provided so that the contractor may assess, on the balance of convenience and costs, whether to pursue the payment claim at adjudication.
In the next article within the series, we will discuss recovering payment and how to agitate unpaid payment claims further.
Read Part 1 of the Building and Construction Industry Guide.
How we can help
Looking for assistance with drafting and issuing payment claims or payment schedules? Get in touch to book a meeting to discuss how we can help you.
Authors, Jack Rennex and Riley Bouveng.
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