06 September 2005
Key Points:
The security of payment scheme applies widely because of the broad definition of a "payment dispute".
Tight margins and relatively low capital backing mean that cashflow is the lifeblood of the construction industry. Over the last decade Commonwealth and various State and Territory Governments have formed the view that existing legal remedies were inadequate for securing that cashflow, and introduced security of payment legislation.
First introduced in Australia in 1999 in NSW, security of payment legislation has also been put in place in Victoria, Queensland and WA. The new Construction Contracts (Security of Payments) Act 2004 (NT) will apply to all Northern Territory "construction contracts" entered into from 1 July 2005 onwards. The existing workmen's lien regime will continue to apply to contracts entered into before 1 July.
While consistent in objective, the legislation across the different jurisdictions is not uniform, and there are important differences between the various statutes. The NT Act is modelled on the equivalent WA legislation, and there has developed a broad divide between the eastern seaboard states and the west and north in the approach taken for a contractor to obtain statutory assistance in securing progress payments, with a much more interfering approach taken in the eastern states.
The main object of the Act is to facilitate the timely payment between contracting parties and to establish a statutory system for rapidly resolving payment disputes. The Act intends to achieve this by:
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.
It is the adjudication process which, out of all of the features of the Act, is likely to have the most impact. Most properly drafted contracts have provisions relating to the various implied terms and, in any event, none of the implied terms are particularly onerous.
In this article we'll look at the main features of the new regime.
Likely impact of the Act
The effect of similar legislation in New South Wales, Victoria and Queensland provides some guide as to the likely impact of the Act in the NT. The New South Wales legislation has had a significant impact. From March 2003, when legislation was amended to provide for payment rather than security for an adjudicator's determination, to August 2004 there were over 900 adjudications with close to 65 percent 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 requiring payment of an adjudicated amount where the dispute is already the subject of arbitration or litigation. Like the NT Act, the amended New South Wales legislation requires payment rather than the provision of security.
Because the WA Act and NT Act are both based on a contractual entitlement to payment rather than a statutory entitlement as in the other states, the ability for the parties to affect the impact 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.
What's implied and what's prohibited
Where a construction contract does not contain written terms in relation to specified matters in relation to payment, then certain provisions 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 payment claims; interest on overdue payments; ownership of goods; duties as to unfixed goods on insolvency; and retention money.
In addition, the Act declares unenforcable some unfair payment provisions which have been sometimes used in construction contracts:
Regulations may prohibit other unfair provisions in the future.
Adjudication of payment disputes
The adjudication process is intended to resolve payment disputes fairly, quickly, informally, and inexpensively.
The scope of construction contracts covered by the NT Act and WA Act is broader than that in the other states in that it will extend to home building contracts. These are excluded from the operation of legislation in the other states.
Another difference between the NT and WA Acts and the legislation in other states is that the exception in relation to mining and exploration works is more extensive under the WA Act.
Finally, under the NT and WA Acts a claim for payment made by either party against the other which is disputed may be referred to adjudication. In the east, it is only a contractor who is able to initiate the statutory claim process and the subsequent adjudication process if there is a dispute about what is claimed.
A payment claim must be made under the provisions of the contract. A contractor can make a payment claim for payment under the contract, and a owner can make a claim seeking an amount in relation to the performance or non-performance by the contractor of its contract obligations. An example of when a owner might make a payment claim is for liquidated damages for delayed completion.
Payment disputes
The adjudication process relates only to payment disputes, which is where a payment is not made or security/ retention is not released as required under the provisions of the contract.
On its face the adjudication process is limited to non-payment of amounts in accordance with the contract. While this may seem straightforward, 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 owner'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 owner 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 legislation. 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 the payment dispute arising, a party can apply for adjudication. This requires a written claim to be served on the other party as well as on the particular body responsible for appointment of the adjudicator. The other party then has 10 working days from the date of service of the application on it to respond.
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:
Adjudicators, in making a determination, is to act informally. They are not bound by the rules of evidence and may inform themselves in any matter they think fit. They can request further written submissions, request the parties to attend a conference and, unless the parties object, are entitled to inspect the work the subject of the dispute and to engage an expert to report.
They can also award interest. Costs are to be borne by each party, unless the adjudicator is satisfied that a party has unnecessarily incurred costs because of a frivolous or vexatious application by the other party.
Adjudicators are obliged to dismiss the application without looking at the merits where they conclude that the dispute does not fall within the Act, where the claimant has not complied with the procedures under the Act, where a court or arbitrator has already made an order or finding in relation to the payment dispute, or where they conclude that it is not possible to fairly make a determination in the time required either because the matter is too complex or for any other reason the time is insufficient.
This last out for an adjudicator is an interesting one. Given that one of the aims of the adjudication process is to sideline complex disputes and allow for payment to be made in the meantime, it will be interesting to see how this out is utilised in practice. It has the potential to stymie the main objective of the adjudication process. This exemption does not appear in the equivalent legislation on the eastern seaboard, where the adjudication process has been criticised for requiring a decision within 10 business days, no matter how complex the dispute.
Effect of determination
Once made, 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 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.
The grounds for relief have been further restricted in recent NSW Court of Appeal decisions (which are likely to be followed in the NT) to the following:
If any of these occur then the determination will be void.
Effect of adjudication on arbitration/litigation
The purpose of the adjudication process is to grant expeditious interim relief. In particular, the Act will enable unpaid contractors to receive payment of disputed claims 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, in theory at least, the adjudication process will run in parallel with the more detailed litigation and arbitration processes.
What should be done now?
The Act has very wide application due to the broad definition of a "payment dispute", so the construction industry must prepare now.
Both owners and contractors should ensure that their contracts are drafted to protect their interests and potential interests under the Act. Keep contracts in writing. While contracts cannot exclude the operation of the Act, the provisions of the Act, particularly in relation to payment claims, can be drafted to prescribe the steps which must be taken before a payment dispute can arise. Contracts can also be tailored to expand the opportunities for owners to utilise the payment dispute procedure.
Those involved in administering construction contracts should keep good records, because of the very tight timeframes in the adjudication process, and consider briefing experts early if a matter is likely to turn nasty. Where appropriate, prepare expert evidence as soon as possible.
Where a payment dispute arises, because there is no right of appeal, claims and responses should be prepared carefully and comprehensively.
For further information, please contact Margaret Michaels.
