Victorian construction contracts will require changes due to upcoming reforms

One of the most significant features of the proposed bill is that it is drafted to be retrospective and will apply to contracts signed before the amendments come into force. Existing contracts will require review, as without amendment, they may conflict with the updated act.

Any contracts which parties are currently negotiating, and existing template contracts, should also be future proofed in anticipation of the updated act coming into force.

Key changes proposed in the reforms include: 

Potential Christmas shutdown

The period from 22 December to 10 January is proposed in the bill to be excluded from the definition of ‘business day’, reflecting the traditional industry shutdown period. Contracts that do not adopt this definition may inadvertently create shorter timeframes for issuing payment schedules and, as a result, find themselves unable to benefit from this otherwise welcome reform.

Under the act, payment schedules are to be served at the earlier of the time specified in the contract, or 10 business days after the payment claim is served. If a contract provides that a payment claim must be served within 10 business days and has a definition of business days that does not exclude the shutdown period, then the payment schedule will be due earlier than the 10 business days as defined under the act. In Allencon Pty Ltd v Palmgrove Holdings Pty Ltd trading as Carruthers Contracting, similar contractual provisions applied and the schedule was found to be served out of time.

This potential trap can be avoided by aligning the definition of business days in a contract to the updated act. Given the length of the shutdown period, parties may however prefer to keep time running over the shutdown period for other contractual notices, such as extension of time claims. Adopting a two-tier definition of business day, where one is used for the payment mechanisms and the other for all other contractual processes, may be a practical solution in this case.

Timing of payment

In the bill, the due date for payment of a progress claim or release of performance security is proposed to be capped at 20 business days after the relevant claim is served. Any contractual provision allowing for a longer period will have no effect.

Performance security regime

Under the proposed bill, claimants can claim for the release of performance security, including performance bonds, whether in the form of a bank guarantee or insurance bond. A claim may be served no earlier than the earliest of either 20 business days after the end of the relevant defects liability period, or when specified in the construction contract.

The proposed definition of defects liability period is somewhat vague and may lead to confusion and challenges. It is hoped that this will be clarified before the bill becomes law, however, in the interim, parties should pay attention to the relevant contractual trigger for release of performance security, which may provide an alternative for the earliest date from which a claim for the release of performance security can be made.

The release of security should also not be contingent on any upstream security being returned, as this would contravene the ‘pay when paid’ prohibitions in the proposed bill.

Currently in Victoria, bank guarantees are seen as more favourable than cash retention because, firstly, the act did not apply to bank guarantees and, secondly, because bank guarantees could be used as leverage for liquidated damages, which cannot be set off under the current act. Under the proposed bill, these two benefits will be no longer.

Recourse to security

The bill proposes to prohibit a party having recourse to any performance security it holds unless five business days’ notice is given.  As a result of this notice requirement, we expect to see an increase in applications for injunctive relief. To mitigate the risks of injunctions, contractual rights to have recourse to security should be broad and clear.

Notice based time bars

In a significant change, the proposed bill will enable adjudicators, courts, arbitrators or expert determiners to declare that a notice-based time bar provision is unfair if compliance is not reasonably possible or would be unreasonably onerous.

We expect to see this amendment to the act result in a greater scrutiny of notice provisions, however, due to the absence of judicial interpretation of comparable provisions in Western Australian legislation, the potential application of this key amendment remains uncertain. Parties should nonetheless carefully consider the notice provisions in their contracts and whether each of the requirements specified for a particular notice are required or able to be given in the relevant time frame. This will offer the best protection against a finding that the relevant notice provision is of no effect. Parties may also consider including a table of all notice provisions, initialling notice requirements, cascading time frames for notices and warranties regarding the commercial and technical competency of a contractor in their contracts.

Excluded amounts and claimable variations

The proposed bill removes the excluded amounts and claimable variations regime from the act. This brings the Victoria in line with the other states and may mean that we see a greater use of the legislation. Contractual provisions prescribing the form of payment schedule should be updated to remove any reference to excluded amounts being set out in payment schedules.

No more reference dates

The concept of reference dates is removed by the proposed bill and instead, payment claims may be served from the last day of the month in which work was carried out, or an earlier day specified in the contract. Claims served early are treated as served on the earliest allowable date, but only one claim may be made per month. While this change is not likely to require parties to make significant changes to their contracts, it will provide much needed clarity as to when payment claims can be made.

Authorised nominating authority

Although this is not a change contained in the bill, it is reminder to consider specifying three authorised nominating authorities in construction contracts, which is binding on a claimant when choosing an authorised nominating authority to adjudicate a payment claim or performance security payment claim.

These suggestions are intended as a general guide, but each contract will need to be considered on its own terms, and these suggestions may not be appropriate for all contracts.

Co-written by Miranda Brooks, Emma Northope and Yurii Tarasenko of Pinsent Masons.