Review of NSW SOP Act

By Frank Bannon.

Key Points:
The review concludes that the policy objectives of the NSW SOP Act remain valid and that the Act should continue. A discussion paper is due for release in March 2005, which will propose certain amendments to improve some aspects of the adjudication process.

State and Territory Governments are committed to bringing change to the payment behaviour of the construction industry.

In NSW this commitment is reflected in the significant 2002 amendments to the NSW SOP Act, which themselves required a further review of the Act after 12 months.

The further review was carried out by the Department of Commerce in late 2003/early 2004. The Department invited and received submissions from industry and employer associations, Authorised Nominating Authorities, adjudicators, law firms, developers, builders, contractors and subcontractors. While the submissions were generally positive and supportive of the intentions of the Act a number of issues were raised for consideration with a view to improving certain aspects of its operation. The review concluded that the policy objectives of the Act remain valid and that the terms of the Act remain appropriate and should continue. The review also recommended development and release of a discussion paper for public comment, which will propose some further amendments in light of the review. The discussion paper is expected to be released in March this year.

Some of the key issues considered in the review are discussed below.

Scope of the Act

Probably the most significant issue considered by the review was the scope of the Act. The Act currently is limited to progress payments and disputes in respect of them. Although that can involve consideration of defective work, variations and extensions of time, it is only where those issues are relevant to determination of the amount of a progress payment that the Act has application.

The review considered whether the scope of the Act should be expanded to capture all disputes arising from construction contracts, including breach of contract and extra contractual claims such as quantum meruit. This would bring New South Wales in line with the English legislation.

The width of the English legislation has led to fundamental changes in the way in which construction disputes are dealt with and a consequent decline in the number of matters going to arbitration or litigation. Adjudication has become the default method of dealing with disputes in the industry. Although this outcome has been generally welcomed in England, there is some disquiet that a swift determination process (which tends to favour claimants) has been applied to all disputes - particularly where the necessity to have the matter heard again in arbitration or litigation may lead to parties not pursuing their rights.

The New South Wales may one day follow suit, but at the moment it is still be too early in the development of the legislation for it to be expanded in this way.

Time limits

A number of submissions called for clarification of the claim and adjudication processes so as to minimise challenges based on procedural grounds.

Recipients of payment claims know that responding to a payment claim within 10 business days can be difficult. This is particularly so where a Claimant has spent many months preparing materials in support of a payment claim which involves complex technical and factual issues. Responding to an adjudication application in half that time can also present difficulties. Some submissions challenged the appropriateness and fairness of the time frames that currently apply to the process.

Suggestions included that:

• Respondents be entitled to increased periods of time to provide payment schedules and adjudication responses
• Claimants be entitled to submit payment claims at any time prior to the period which ends 12 months after the expiry of the defects liability period
• Respondents who fail to provide a payment schedule within time be afforded a second chance to do so prior to a Claimant becoming entitled to apply for a judgment debt in court

Exemptions from the Act

Section 7 of the Act excludes the application of the Act to certain construction contracts.

Some submissions called for reconsideration of the following exemptions.

• construction contracts which form part of a loan agreement, a contract of guarantee or a contract of insurance on the basis that the financial institutions and insurers should familiarise themselves with the Act prior to providing the loan or financial guarantee
• residential building governed by the Home Building Act 1989 where the principal is an owner-builder or other licensed contractor, because they are in a position to understand and comply with the requirements of the Act

Conversely, it was suggested that contracts associated with Public Private Partnerships or Privately Financed Infrastructure projects should be exempt from the Act.

Adjudication process

As noted above, an adjudicator is required to determine the amount of a progress payment. Where a contract makes express provision for that, then the Act requires the adjudicator to calculate the amount in accordance with the terms of the contract (section 9 of the Act).

In a number of court challenges to adjudication determinations, this provision has formed the basis of a submission that the adjudicator was bound by an assessment of the amount of a progress payment by a superintendent or a principal's representative made in accordance with a construction contract. Transgrid v Siemens [2004] NSWSC 87 at first instance supports this contention. However the weight of authority, including a comment by the Court of Appeal in Transgrid v Siemens [2004] NSWCA 395, is to the contrary leaving the way clear for adjudicators to do their own calculations in accordance with applicable terms of a construction contract.

Many submissions sought clarification of the role of the adjudicator and the effect of a prior assessment of a progress payment carried out in accordance with the contract mechanism.

Other submissions

Space in this edition of Insights does not permit reference to or discussion of all of the other significant suggestions, but a few of these are briefly referred to below:

• adjudicators be entitled unilaterally to extend the time for making their determinations, to 15 business days
• adjudicators' fees be capped or set by reference to a scale
• ANAs be responsible for training and accrediting adjudicators
• service of adjudication claims be by way of service on ANAs.

Recent decisions on scope of challenge

The rise in the number of adjudication applications since the 2002 amendments, has also seen a rise in the number of challenges to adjudication determinations. The Courts have applied administrative law principles to adjudication determinations and quashed a number of determinations on the grounds of jurisdictional error. A number of submissions proposed reform to reduce the scope for litigious recourse. One proposal involved the establishment of an adjudication appeals panel, so that the adjudication process itself provided recourse to dissatisfied parties.

The likelihood of significant change in this regard may have diminished in light of the recent NSW Court of Appeal judgments in Brodyn Pty Ltd t/as Time Cost and Quality v Davenport [2004] NSWCA 394 and Transgrid v Siemens [2004] NSWCA 395. As discussed in the article by Rory Murphy, those two cases have effectively narrowed the scope of challenge to adjudication determinations.

For further information, please contact Frank Bannon.