Security of Payment legislation and alliance contracts

By Owen Hayford and Stuart Connor.

Key Points:
Security of Payment legislation may well apply to alliance contracts. No dispute clauses in alliance contracts can be consistent with the adjudication regimes set out in Security of Payment legislation but cannot exclude adjudication proceedings under it.

When enacting the Building and Construction Industry Security of Payment Act 1999 (NSW) (which is identical to Victoria's Building and Construction Industry Security of Payment Act 2002 in all respects material to this article), the legislature clearly had quite a narrow objective in mind - the conventionally structured lump sum construction contract between an owner and a head contractor or a head contractor and a subcontractor. However the Act was framed so as to have rather wider application than may have been intended, given this narrow objective, and in particular may well apply to many alliance contracts.

As a starting point, the Act applies to "construction contracts" which includes contracts to carry out "construction work" or to supply related goods or services. The definition of "construction work" is wide and will encompass the work undertaken in most building and construction alliance contracts.

An alliance contract differs from conventional construction contracts in a number of respects, but perhaps most notably in respect of the pain/gain share structure of the remuneration, and the no blame/no dispute regimes it usually incorporates.

Pain/gain share remuneration

What makes an alliance contract unique, as far as remuneration goes, is that typically the owner is obliged to reimburse the contractor its actual costs of the work (regardless of whether or not those costs are higher than expected) plus an additional profit amount reflecting how successfully the contractor has achieved a set of specified key performance indicators. This obviously differs from a traditional construction contract where the remuneration is a fixed lump sum.

The Act will only apply to an alliance contract if none of the specific exclusions apply. Relevantly, the Act will not apply if "the consideration payable for construction work carried out under the contract, or for related goods and services supplied under the contract, is to be calculated otherwise than by reference to the value of the work carried out or the value of the goods and services supplied."

The Government explained in making the Act that this exclusion was meant to be aimed at concession agreements, however is it arguable that because of the different remuneration regime under an alliance contract, the exclusion could apply. The better answer seems probably not. Remember, an alliance contract relates remuneration to actual costs plus a profit amount based on how well the work is performed. It seems difficult to argue that such a method of calculation is less likely than a predetermined lump sum amount (probably reflecting a pre-estimate of the cost plus a profit margin) to lead to a payment that reflects the value of the work done.

No blame/no dispute

The other pillar of the classic alliance contract is an attempt to invoke a culture of 'no disputes' and perhaps to a lesser extent 'no blame', by including tiered mechanisms for resolving 'issues', with an emphasis on reaching a final and binding resolution within the alliance rather than resorting to external dispute resolution. But how does this attempt to internalise disputes sit alongside the provisions of the Act that allow a contractor to initiate adjudication procedures to recover amounts owed?

The first thing to realise is that the Act prevails over the contract in this respect. In particular, because of the anti-avoidance provisions of the Act, a contractor is entitled to serve a payment claim, and initiate adjudication procedures under the Act despite any provision in an alliance contract that seeks to internalise issue resolution.

However, there is an important distinction between:

• an adjudication under the Act, which can require an owner to make a payment on account (ie. a payment that shifts the cash flow position in favour of the contractor, but leaves the ultimate rights between the parties to be regulated by the contract); and
• a provision in an alliance contract that limits the final entitlements of the parties by reference to a particular issue resolution mechanism[1].

There is no legal or logical inconsistency between these two outcomes - a contractor can initiate an adjudication under the Act and win an entitlement to a payment from the owner for the moment, but then be obliged to repay the amount if it is so later determined under the issue resolution mechanism described in the alliance contract. Certainly, it may seem peculiar for parties negotiating an issue in good faith pursuant to a 'no disputes' clause to make an application for a payment on account under the Act in the meantime, however there is no legal inconsistency.

An inconsistency only arises if the alliance contract attempts to prevent any recourse to external dispute resolution methods, as distinct from making the final rights of the parties subject to an internal process. The anti-avoidance provisions of the Act will void any clause that "purports to exclude, modify or restrict the operation of the Act, or has that effect, or if it may reasonably be construed as an attempt to deter a person from taking action under the Act". This would almost certainly be the case with a clause seeking to prevent a contractor instituting adjudication procedures under the Act.

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[1] New South Wales courts have generally held that clauses of this type can validly regulate the parties' rights under a contract.

For further information, please contact Owen Hayford and Stuart Connor.