Construction Contracts Act - Security of payment legislation in WA

The Construction Contracts Act 2004 (WA) received Royal Assent on 8July 2004. It is likely to come into operation by proclamation before the end of this year.

The legislation is similar in purpose and effect to legislation already enacted in New South Wales, Victoria and most recently, Queensland. The Act has three aspects:

• implied terms;
• prohibited provisions; and
• swift adjudication.

The provisions of this Act are going to impact both the drafting of construction contracts and their administration.

Likely impact of the Act

The effect of similar legislation in New South Wales, Victoria and Queensland may provide some guide to the likely impact of the Act in WA. The New South Wales legislation has had a significant impact. Since March 2003, when legislation was amended to provide for payment rather than security for an adjudicator's determination, there have been over 800 adjudications with close to 65% of those being determined. The maximum amount claimed was in excess of $33 million.

On the other hand, in Victoria there have been only a handful of adjudications. The most likely reason for this is that currently the Victorian legislation like the original New South Wales legislation, allows for provision of security rather than payment of the progress claim where the dispute is already the subject of arbitration or litigation. Like Western Australia, the amended New South Wales legislation requires payment rather than the provision of security. The Victorian legislation is presently being reviewed by the building commission which is due to report early in 2005.

The Queensland Building and Construction Industry Payments Act 2004 is set to be implemented on 1October 2004 and largely parallels the current New South Wales legislation.

Because the WA Act is based on contractual entitlement to payment rather than a statutory entitlement as in the other states, the ability for the parties to affect the application of the Act by tailored contractual provisions and contract administration is greater in WA. Careful consideration therefore needs to be given to inclusion of appropriate contract mechanisms in construction contracts.

Implied provisions

Where a construction contract does not contain a written provision, then certain provisions will be implied into the contract. The implied provisions include terms relating to:

• Variations
• Contractor's entitlement to be paid
• Ability to make progress claims
• Mechanisms for making payment claims
• Interest on overdue payments
• Ownership of goods
• Duties as to unfixed goods on insolvency

Matters prohibited

Two types of provision are prohibited under the Act:

1. pay when paid provisions; and
2. clauses allowing payment to be made more than 50 days after payment claims are made which are to be read down to require payment within 50 days.

Adjudication of payment disputes

The Act describes the object of the adjudication process as being resolution of payment disputes:

• fairly;
• quickly;
• informally; and
• inexpensively.

Unlike the legislation in the other states, the entitlement to payment must arise under the provisions of a contract. In New South Wales, Victoria and Queensland the right to make progress claims arises under the legislation.

The scope of works covered by the WA legislation is also broader than that in the other states in that it covers home building contracts. They are excluded from the operation of the acts in the other states.

Another area of differentiation between the WA Act and those of the other states is that the exception in relation to mining and exploration works is more extensive under the WA Act.

Payment disputes

The adjudication process relates only to payment disputes. A payment dispute arises where a payment is not made or security/retention not released as required under the provisions of the contract.

Within 28 days of the payment dispute arising, a party can apply for adjudication. Application is by way of a written claim being served on the other party as well as on the body responsible for appointment of the adjudicator.

The other party to the contract has 14 days from the date of service of the application on it to respond. The Act prescribes what must be included in the application and the response.

It should be noted that a party cannot apply for an adjudication of a dispute which is the subject of an order, judgment or other finding of an arbitrator or court.

On its face the adjudication process is limited to non payment of amounts in accordance with the contract. Whilst this may seem a straightforward criterion, it may prove problematic in application. For example, the Act does not, on its face at least, envisage resolution of disputes concerning such things as entitlements to extensions of time. However, whether a contractor is entitled to receive a payment under a contract may be affected by the principal's entitlement to liquidated damages which in turn may be affected by the contractor's entitlement to extensions of time. A contractor may make a progress claim which is partially or totally rejected by the principal on the basis that liquidated damages for failure to achieve practical completion offset the claim. In those circumstances, in order to determine whether payment under the contract is due as claimed, the adjudicator will be required to make some determination as to the entitlement of the contractor to an extension of time.

On one view, all claims come down to a monetary value which would come within the definition of a payment claim for the purpose of the Act. It may be that regulation and judicial consideration of the scope of the Act will better define and limit the types of disputes which can be adjudicated under the Act.

Adjudication procedure

The adjudicator must, within 14 days of being served with a response to an application, or within 24 days of the last date on which a response should have been served:

• dismiss the application; or
• determine, on the balance of probabilities, whether one party is liable to pay and in what amount or whether security or retention should be returned.

The adjudicator, in making a determination, is to act informally. He is not bound by the rules of evidence and may inform himself in any manner he thinks fit. He does have the power to request further written submissions, request the parties to attend a conference and, unless the parties object, is entitled to inspect the work the subject of the dispute and to engage an expert to report.

The adjudicator has power to award interest. The parties are to bear their own costs except where the adjudicator is satisfied that a party has unnecessarily incurred costs because of frivolous or vexatious conduct by the other party.

Effect of determination

An adjudicator's determination is final and binding. There is limited power on the adjudicator to correct accidental slips and omissions and a limited right of review to the State Administrative Tribunal. That Tribunal does not presently exist and it is unlikely that the legislation to set it up will be passed until well into 2005. The adjudicator's decision can be enforced like a judgment or an award.

Additionally, where an adjudicator has determined an amount payable to the contractor and that amount is not paid, the contractor may suspend its obligations under the contract.

Effect of adjudication on arbitration/litigation

The stated purpose of the adjudication process is to grant expeditious interim relief. In particular, its purpose is to enable unpaid contractors and subcontractors to receive payment of disputed claims sufficiently expeditiously to prevent dire financial consequences. Payments pursuant to an adjudicator's determination are on account only and are subject to being reversed by subsequent judgment or award of an arbitrator.

Accordingly, the theory at least, is that the adjudication process will run in parallel with the more detailed litigation and arbitration processes.