Are Linked Claim regimes contrary to Security of Payment legislation?

30 March 2026

The Supreme Court of Victoria declined to invalidate a Linked Claims and Disputes regime (LCLD Regime) where no statutory payment claim was on foot, reinforcing the fact specific application of the Victorian Security of Payment Act (SOPA).

Background

This case concerned an application for declaratory relief by subcontractor Built Pty Ltd (Built) to avoid the operation of an LCLD Regime contained in its construction contract with Victorian Correctional Infrastructure Partnership Pty Ltd (VCIP).

VCIP had contracted with the State of Victoria (the Principal under the Head Contract), while Built was engaged by VCIP under a separate Construction Contract to perform the design and construction works.

The State issued a dispute notice against VCIP alleging defects in the construction works, and VCIP issued a concomitant notice against Built which additionally included claims for liquidated damages, among other things. The latter notice declared a Linked Claim and Linked Dispute and asserted that the claims within the notice, and Built's related claims for variations and an extension of time, would be stayed pending resolution of the upstream Linked Dispute with the State. Built sought declarations from the Court that: (a) the claims referred to in VCIP's dispute notice were neither Linked Claims nor Linked Disputes; and (b) the suspension regime was of no effect or void, either because: (i) it offended the pay-when-paid prohibition in s 13 of the SOPA, or (ii) it contravened the no-contracting out prohibition in s 48 of the SOPA.

Central to the Court's conclusion was that Built had no payment claim or adjudication application on foot.

Linked Claims & SOPA

Contractors engaged on PPP projects will be aware of LCLD Regimes. Linked Claims are generally defined as a claim by a subcontractor for which the head contractor may have a corresponding upstream entitlement. Linked Disputes are generally defined as disputes arising out of Linked Claims. The upshot of such regimes is usually that the subcontractor's entitlements for Linked Claims are confined to the head contractor's corresponding upstream entitlements.

Such regimes are said to ensure that claims and disputes under the construction contract and head contract are "back-to-back". As the head contractor in a PPP is often a special purpose vehicle, it will have typically passed on most of its obligations to the subcontractor. LCLD Regimes therefore manage, among other things, the risk of inconsistent findings under the two back-to-back contracts by ensuring that risk (and entitlement) flows through the contractual chain.

The LCLD Regime in this case provided that, among other things:

(a) Built accepted in full satisfaction of any Linked Claim the relevant proportion or the entitlement agreed to or settled by VCIP with the State: cl 48A.5(a);

(b) Built's entitlements in respect of a Linked Claim were limited to the relief actually granted, or compensation paid, to VCIP by the State: cl 48A.6(b);

(c) where VCIP received payment from the State in respect of a Linked Claim, its liability to Built for that Claim would be satisfied and discharged by it conferring on Built its corresponding entitlement under the Construction Contract: cl 48A.6(b); and

(d) where VCIP does not receive an entitlement from the State in respect of a Linked Claim, Built's claim is deemed to be satisfied on the determination under the Head Contract: cl 48A.6(d).

On the other hand, the SOPA regime seeks to ensure that payment for construction work is received on a timely basis by those who carry it out. SOPA contains restrictions on "pay-when-paid" provisions and a prohibition on contracting out of its operation.

Decision and commentary

Nichols J declined to grant discretionary declaratory relief in favour of Built.

Her Honour concluded that the claims set out in VCIP's dispute notice were "factually and contractually inter-related and connected" and declared that they were Linked Disputes because, in the language of the Contract, they "relate to disputes arising out of or in connection with Linked Claims". Built need not initiate a Linked Dispute; it need only be a party to it. Accordingly, a Linked Dispute may be initiated upstream.

More interesting is the interplay between the existence of the LCLD Regime and SOPA. Nichols J dismissed Built's application for a declaration in respect of the Linked Claim regime, which it argued was contrary to ss 13 and/or 48 of the SOPA, as it was sought in the abstract and removed from any real dispute. That was in part due to the dispute not concerning progress payments, which are the bedrock of the SOPA regime. In other words, the relief sought would not have materially resolved any dispute since there was no dispute on foot under the SOPA.

Nevertheless, the judgment highlights some key principles on the interplay between LCLD Regimes and the "pay-when-paid" restrictions and "no contracting out" prohibition under SOPA, as well as where a Court may grant declaratory relief.

Operation of SOPA and declaratory relief

First, a provision having "no effect in relation to any payment for" construction work (or related goods and services) is distinct from a provision being void. "Pay-when-paid" provisions under s 13 of the SOPA fall into the former category. Such provisions may be enforceable to the extent their operation is not directed to payment for construction work. On the other hand, void provisions under s 48 of the SOPA (and its interstate equivalents) are void for all purposes.

Second, s 13 of the SOPA may only apply where a payment is disputed and pursued in a payment claim. Here, Built had sought a declaration that the LCLD Regime was of no effect. However, the absence of any payment claim from Built meant that there was no "payment" under s 13(1) of the SOPA.

The outcome of this case may have differed if, for example, Built had a payment claim or adjudication application on foot, or if VCIP had cited the LCLD Regime as a reason for withholding payment in a payment schedule.

Third, Courts will not grant declaratory relief to resolve hypothetical questions of law. Doing so would be inconsistent with the efficient use of Court resources. Conversely, a declaration may be granted where it would have real and foreseeable consequences for the parties, which are directed at finally resolving the dispute or part of it.

In our view, the Court's refusal to grant declaratory relief for these reasons keeps the door ajar on whether LCLD Regimes are contrary to Security of Payment legislation.

LCLD Regimes moving forward

While LCLD Regimes may arguably be intended to prevent costly duplicitous proceedings, often involving the head contractor or special purpose vehicle fighting contrary positions on either side of the contractual chain, there remains a serious question to be determined on whether they are contrary to the spirit of Security of Payment legislation that aims to keep money flowing and prevent subcontractors facing insolvency.

Much turns on the drafting of the LCLD Regime and the specific claims referred under it. For example, we have seen LCLD Regimes expressed to be inapplicable in circumstances where any right to payment by the subcontractor may have the effect of making the regime a 'pay-when-paid provision' under Security of Payment legislation. However, this is unlikely to be an antidote to the overarching conundrum of inconsistency, as it provides little contractual certainty on when the regime applies. In light of Nichol J's decision, it may only take a subcontractor to adjudicate the claims asserted to be "Linked Claims" for the Court to be forced to decide on inconsistency. If the Court finds in the affirmative, this could have severe consequences for many PPP projects across Australia, which may require drafters to rethink the LCLD Regimes.