Security of payment special edition overview

Key Points:

Legislation specifically directed at securing payment for participants in the construction industry was first introduced in Australia in 1999 by New South Wales. In the relatively short period of time since its introduction, that legislation has had a huge impact on the construction industry in that state. This could perhaps have been expected, given the UK experience with similar legislation, despite the narrower scope of the New South Wales legislation.

Given that impact and the recent commencement of security of payment (SOP) legislation in Queensland and Western Australia, the Northern Territory Government's assent to such legislation, and the review of the Victorian and New South Wales SOP statutes, it is a good point in time to take stock and to look at where we are and where we might be going. This special edition of Insights aims to do just that.

In very brief summary, the SOP legislation is intended to protect contractors, subcontractors and suppliers in the building and construction industry from poor payment practices and to ensure the timely flow of monies to those parties performing construction work or supplying related goods and services. The rapid adjudication process and other statutory rights which sit alongside the contractual regime have revolutionised the treatment of payment in the construction industry. Ignorance of the legislation and its strict time limits can have major financial consequences.

SOP legislation sets out to achieve its aims by adoption of the following features:

• Making "pay when paid" or "pay if paid" clauses unenforceable (that is, preventing a contractor from making payment to subcontractors contingent upon receiving payment from the principal)
• Providing a right to progress payments
• Creating a liability for amounts claimed but not rejected within the time required by the legislation (in some jurisdictions in spite of the contract)
• Providing an expedited dispute resolution process (termed "adjudication") by which disputes concerning payment are resolved on an interim basis within a very short period of time
• Providing for enforcement of adjudication determinations as court judgments
• Providing a statutory right to suspend for non-payment.

These features can assist the contractor's cash flow and ability to prosecute underlying payment disputes to final resolution by the courts or other contractual dispute resolution process. In doing so, the legislation can effectively shift the risk of non-payment from contractors to owners and from subcontractors to contractors.

Unfortunately, since the SOP legislation is not federal legislation, each state in Australia has progressed in its development of SOP legislation in different ways and at different times. Accordingly, considerable care needs to be taken to ensure that the relevant statutory regime is complied with.

Although New South Wales introduced its SOP legislation in 1999, it was not until the commencement of the 2002 amendments in March 2003 that the NSW Act provided a powerful tool for contractors and subcontractors to obtain timely payment for construction work. The key aspects of the amendments were the removal of the ability of a principal to provide security for an adjudicated amount in lieu of actual payment, and the prohibition on raising defences and cross-claims in response to proceedings to enforce an entitlement to payment under the Act. The changes made in New South Wales have caused a dramatic upsurge in the use of the SOP legislation. In the first four years of operation there were only 116 adjudication applications. In less than two years since the amendments there have been in excess of 1,000 applications. This in turn has led to an increasing number of applications to the courts which have quickly established a body of law in relation to the legislation.

The Victorian Act has been in force since 31 January 2003 and is based upon the original New South Wales Act. However, consistent with the New South Wales experience prior to amendment, there has only been a handful of adjudications in Victoria. The Victorian Building Commission (the body responsible for administering the Act) is presently conducting a review of the Act and is due to report its findings in 2005.

The Queensland Act, which largely parallels the New South Wales Act, came into force in October 2004. Western Australia has enacted legislation which differs in many respects from that passed in the eastern States. This Act came into force on 1 January 2005. A bill modelled on the Western Australian legislation was assented to by the Northern Territory legislature on 21 December 2004 and will come into effect shortly. It remains to be seen whether the remaining States and Territories follow suit. A review and comparison of the features of the different SOP legislation across Australia is undertaken by Frazer Moss in section 2.

Much of this special edition of Project Insights is directed to the lessons which can be learned in other States from experience in New South Wales where the legislation has been the subject of considerable examination by the courts. This must be, of course, balanced with an understanding of the differences between the legislation in the different states which have proceeded down this path. Jonathan Hoyle discusses the practical implications of some recent NSW decisions in section 3 (particularly with reference to payment claims) while the pitfalls of challenging adjudications are investigated by Rory Murphy in section 4. Notwithstanding the amendments in 2003, New South Wales is again considering further amendments to its legislation based on its experience with the current round of amendments. In section 5, Frank Bannon comments on the review of the New South Wales SOP legislation and the changes proposed by industry participants.