Securing payment in the building and construction industry

By Frazer Moss and Robert Backstrom.

Key Points:
A failure to respond to payment claims and payment disputes under Security for Payment Legislation can give rise to significant liabilities and change who bears the solvency risk during payment disputes.

There is an old saying that "he who writes the cheques, calls the tune". Whoever came up with that expression probably had the building and construction industry in mind at the time.

Historically, because owners or head contractors (in the case of subcontracts) were the ones who wrote the cheques, they were usually in a better bargaining position if disputes about payment entitlements arise. However, times have changed. While the above saying still holds true, the advent of Security for Payment (SOP) legislation[1] in most states has shifted the balance of power from those who write the cheques to those seeking to receive them.

The legislation, introduced progressively around most of Australia since 1999, allows for private adjudication to accelerate an interim resolution of all payment disputes as the project proceeds, leaving the parties to later follow other dispute resolution procedures to adjust any interim decision should they so choose. The statistics show adjudication can be very effective at forcing early payment, potentially requiring owners / contractors to pay much earlier in the dispute process and leaving them with the task of recovering money they have historically retained in the event of a dispute.

Unfortunately, the adjudication scheme is not uniform across all states (and in South Australia and Tasmania currently does not exist at all), with the result that the SOP legislation is more widely used in some states than others. That lack of consistency complicates the management of security of payment issues at a national level and can lead to participants in the process being caught out to their detriment.

Broadly, there are two SOP legislative models in operation in Australia , though within each model there are variances between jurisdictions:

(a) The Eastern Model adopted by New South Wales, Victoria and Queensland (and proposed to be adopted by South Australia); and

(b) The Western Model adopted by Western Australia and Northern Territory.

Of the two models, it is the Eastern Model that owners and contractors must be the most alert to, because of the serious consequences which can flow if the recipient of a payment claim made under a relevant SOP Act does not take appropriate steps within a very tight timeframe.

It is the location of the construction site that determines which of the various SOP Acts apply. If the site is in Queensland, it is the Queensland Act that applies. If it is in WA, it is the WA Act that applies, and so on.

All of the SOP Acts apply to a very wide range of contracts connected with virtually any type of building and construction work (but generally excluding mining).

Eastern Model

The SOP Acts adopting the Eastern Model create a scheme for making payment claims under the Act which operates in addition to, and parallel with, any contractual scheme. Only the person who carries out the construction work or supplies the goods or services can make claims under the statutory process. An owner cannot make a payment claim against its head contractor or head contractor against its subcontractor.

The key feature for recognising a claim made under an SOP Act is that the claim must expressly state that it is a claim made under the relevant Act. Claimants often try to make this notation as insignificant as possible in the hope that the respondent will not take the timely and formal steps needed in response in order to fully participate in any adjudication process which follows.

To respond to a statutory payment claim a respondent must issue a Payment Schedule within 10 business days (or earlier if a shorter timeframe is required by the relevant contract) stating the amount (if any) that the respondent proposes to pay and fully setting out the reasons why there is any reduction from the amount claimed. If this is not done properly, there can be serious consequences for the respondent if there is a further dispute about the payment:

• if no Payment Schedule is given, the respondent becomes liable to pay the whole of the amount claimed (statutory debt); the claimant has a statutory entitlement to suspend its works if that amount is not paid when it falls due; the claimant can choose to recover the statutory debt in court and the respondent is severely limited in what defences it can raise in those proceedings; and
• in a subsequent adjudication the respondent is limited to defending the payment claim on the grounds set out in the Payment Schedule. Therefore, giving proper thought to the defence of the payment claim only when the adjudication subsequently commences will be too late.

A claimant who is dissatisfied with the amount stated in a Payment Schedule or if there is no Payment Schedule can choose to pursue its claim in adjudication (discussed further below).

Western Model

The Western Model differs to the extent that it does not provide for the statutory payment claim process. It leaves payment claims by either party against the other to the process stated in the contract or, if there is no process, the SOP Acts imply a process into the contract. If that process gives rise to a payment dispute (whether that dispute be about claims by the contractor against the owner or vice versa), either party can refer the payment dispute to adjudication (discussed next)

Adjudication - Eastern and Western Models

All the SOP Acts establish an adjudication process which is roughly the same in structure, though there are some variances with some elements and the timing of steps:

• It will occur if the claimant (or, in WA and NT , either contracting party) elects to go to adjudication because it is not happy with the amount the respondent proposes to pay (or actually pays) in respect of the payment claim made. The claimant must make this election within specified time frames;
• The adjudicator is nominated by an Authorised Nominating Authority (ANA) chosen by the claimant in NSW, Vic, Qld or, in the case of WA and NT, whichever party chooses to refer the payment dispute to adjudication. WA and NT permit pre-agreement on particular qualified adjudicators. Victoria allows pre-agreement of a particular ANA or, after a dispute has arisen, the agreement of an adjudicator.
• Adjudication is commenced by making an adjudication application. The respondent has only a very short timeframe to deliver a response (5 or 10 business days).
• The adjudicator considers the claim and any adjudication response made by the respondent within the boundaries set by the Payment Claim and Payment Schedule (in the Eastern Model), or what constitutes the payment dispute (in the Western Model).
• The adjudicator considers the dispute only on the basis of the written submissions received and must reach a decision within 10 days of receiving the adjudication response. This is a very short period of time and the adjudication process has been criticised for its inability to properly deal with complex disputes in this short timeframe. Only Western Australia and the Northern Territory allow (and in fact, require) an adjudicator to dismiss an adjudication which is too complex for the process and the time available.
• The adjudication decision is not subject to appeal (with very limited exceptions). The amount determined by the adjudicator must be paid to the claimant and if not paid, the adjudication decision can be registered with the courts and enforced as a court judgment.

After the adjudicated amount is paid, it is the respondent who has the inconvenience and solvency risk of pursuing the respondent for the repayment of any amount which the respondent believes the adjudicator awarded in error. And, if the money was sought to be withheld for what the respondent legitimately believed was defective or incomplete work, the making of the payment will have removed any leverage the respondent had to have that work properly completed.

For these reasons it is important that payment claims delivered under SOP legislation (in the case of NSW, Vic and Qld) and payment disputes (in the case of WA and NT) are recognised quickly and dealt with appropriately so that rights are not needlessly lost.

 

[1]        NSW: Building and Construction industry Security of Payment Act 1999
            NT: Construction Contract (Security of Payments) Act
            Qld: Building and Construction Industry Payments Act 2004
            Vic: Building and Construction Industry Security of Payment Act 2002
            WA: Construction Contracts Act 2004

For further information, please contact Frazer Moss and Robert Backstrom.