Draft Construction Contracts Bill - Security of payment legislation in NT

A draft Bill providing for the securing of payments to construction contractors in the Northern Territory has been released by the NT Department of Justice. Called the Construction Contracts Bill 2004 (NT Bill), it is modelled on the recently enacted Construction Contracts Act 2004 of Western Australia (WA Act) which has a similar purpose as the security of payment legislation already operating in New South Wales, Victoria and soon (1 October 2004) in Queensland. If passed, the legislation will affect both the drafting of construction contracts and their administration.

The Bill is expected to be introduced in the Legislative Assembly sittings beginning 5 October 2004. It is understood that there will be no public consultation process, other than normal parliamentary debate. If passed, the legislation is not likely to come into operation until some time in 2005.

In its current form, the legislation will repeal the ancient workmen’s liens scheme currently in force in the Territory and will replace it with an adjudication process for payment disputes under construction contracts governed by relatively tight timeframes. The Bill covers both written and unwritten contracts, and has three main aspects:

• implied terms in construction contracts;
• prohibited provisions in construction contracts; and
• swift adjudication of payment disputes.

The scope of construction contracts covered by the NT Bill and WA Act is broader than that in the other states as it will extend to home building contracts. These are excluded from the operation of legislation in the other states because of specific separate legislation for those types of contracts.

Another difference between the NT Bill and WA Act and the legislation in other states is that the exception in relation to mining and exploration works is more extensive under the NT Bill and WA Act.

The NT Bill does not extend to constructing watercraft.

Implied provisions

Where a construction contract does not contain a specific written provision dealing with certain matters, the NT Bill provides that terms dealing with those matter will be implied into the contract. The implied provisions include terms relating to:

• variations;
• contractors' entitlement to be paid;
• ability to make progress claims;
• mechanisms for making payment claims;
• responding to claims for payment;
• interest on overdue payments;
• ownership of goods;
• duties as to unfixed goods on insolvency; and
• retention money.

Matters prohibited

Two types of provisions in construction contract are prohibited under the NT Bill:

• pay when paid provisions which provide that the contractor is only entitled to be paid when the principal is paid; and
• clauses allowing payment to be made more than 50 days after payment claims are made - these clauses are to be read down to require payment within 28 days.

Adjudication of payment disputes

The NT Bill will establish a statutory right to a prescribed adjudication process in the event of payment disputes. It describes the object of the adjudication process as being the resolution of payment disputes fairly, quickly, informally and inexpensively.

Unlike the legislation in New South Wales, Victoria and Queensland, the NT Bill does not prescribe a specific procedure for making progress claims and responding to them for the adjudication process to be available. Parties to a contract will be free to make whatever arrangement they wish about how claims are made and responses given. If, out of that process, there is a payment dispute, then any party to the contract may refer the dispute to adjudication. In New South Wales, Victoria and Queensland only the party who is claiming money can refer a payment dispute to adjudication.

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

Payment disputes

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

While this may seem straightforward, it may prove problematic in application. For example, the Bill 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. It may be that regulations and judicial consideration of the scope of the legislation will better define and limit the types of disputes which can be adjudicated.

Adjudication procedure

Within 28 days of a 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 an adjudicator (if one has been agreed) or on a registered organisation responsible for appointment of adjudicators. The Bill is silent on how notices and applications are "given" or "served".

The other party to the contract has 10 working days from the date of service of the application on it to respond. The Bill prescribes what must be included in the application and the response.

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.

The adjudicator must, within 10 days of being served with a response to an application, or within 10 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.

In making a determination, adjudicators are to act informally. They are not bound by the rules of evidence and may inform themselves in any matter they think fit. They 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.

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

Effect of determination

The purpose of the adjudication process is to provide an expeditious decision on payment disputes. It gives contractors the potential to receive payment of disputed claims expeditiously (if a determination is given in their favour) and so prevent possibly dire financial consequences.

An adjudicator's determination is binding, even though other proceedings may have been commenced in relation to the payment dispute. However, progress payments which may be determined by an adjudicator as payable are payable on account only, and can be reversed by a subsequent court judgment or award of an arbitrator. Accordingly, in theory at least, the adjudication process will run in parallel with the more detailed litigation and arbitration processes.

There is limited power on the adjudicator to correct accidental slips and omissions and a limited right of review to the Local Court. The adjudicator's decision can be enforced like a judgment or an award.

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

Likely impact of the Bill if passed

The effect of similar legislation in New South Wales provides some guide as to the likely impact of the NT Bill. Since March 2003, when the NSW legislation was amended to require payment of an adjudicator's determination rather than the provision of security (as had previously been the case), there have been over 800 adjudications dealing with claims of up to $33 million. The NT Bill adopts the same requirement for payment of an adjudicator's determination, so the NT legislation is likely to be similarly utilised by contractors.