Australia: Lack of Uniformity in SOP Legislation Warrants Care

Teaser: Even though the need for security of payment laws was recognized nationally, says Frazer Moss, the result was five similar, but not identical, Acts.

Key point: Depending on which jurisdictions are being compared, there can be many other differences which can lead to unexpected pitfalls for claimants and respondents alike.

Cashflow. In an industry notorious for tight margins and relatively low capital backing, it is the lifeblood of the construction industry. The 1990s saw Commonwealth, and various State and Territory Governments developing the view that existing remedies under corporations law, contract law and common law were inadequate for securing that cashflow. In response, legislation specifically directed at securing payment in the construction industry has been put in place in four of the six States and will soon be in place in the Northern Territory.

It might have been hoped that this largely national identification of security of payment as an issue warranting Government intervention would have led to it being addressed in a nationally consistent approach. The Hon. TRH Cole in his Final Report of the Royal Commission into the Building and Construction Industry remarked:

Unfortunately, while consistent in objective, the legislation is not uniform, and there are some important differences between the various statutes. Those differences can be grouped into:

• application of the legislation
• prohibited terms
• process for claiming progress payments
• adjudication
• consequences of adjudication.

All of the statutes are broadly directed to regulating contracts for the performance of construction work and the supply of related goods and services. However, in each of them there are detailed definitions, all slightly different, which affect the particular contracts to which each Act applies. One cannot assume that the security of payment legislation in a particular state or territory does or does not apply to a particular type of contract simply because similar legislation in another state does or does not apply to a similar type of contract in that other state. By way of example, one of the more significant differences that exists in the WA legislation, when compared to the legislation in Qld, NSW, Vic and NT, is a much wider exclusion from the operation of the WA Act which extends to the construction of any plant for the purpose of extracting or processing oil, natural gas, or any mineral bearing or other substance.

The statutes share a uniform intention of prohibiting "pay if paid" and "pay when paid" clauses. However, the definitions of those types of clauses again differ between NSW, Victoria, Queensland, WA and NT. The almost identical NSW and Queensland definitions are wider than the almost identical WA and NT definitions. Victoria largely follows NSW, but omits one element of the NSW definition.

The WA and NT Acts also prohibit provisions in construction contracts which purport to require payment more than 50 days after payment is claimed. They provide that a clause which provides for in excess of that period is to be read as being amended to require payment within 28 days after payment is claimed.

Queensland has also imposed limitations on the periods for payment, though only in relation to building contracts. By an amendment made by the Queensland Act to Part 4A of the Queensland Building Services Authority Act 1991, clauses in a construction management trade contract or subcontract which provide for payment of progress payments later than 25 days after submission of a payment claim are void. In the case of commercial building contracts (ie. most head contracts) the period is 15 business days. Where such clauses are void, the Queensland Act provides that a progress payment is payable 10 business days after a payment claim is made under the Act.

There has developed a broad divide between the eastern seaboard states (NSW, Qld and Vic) and the west/north (WA and NT) in the approach taken for a contractor to obtain statutory assistance in securing progress payments.

The Queensland and Victorian statutes are modelled on the New South Wales legislation. The three are common in providing a statutory right to progress payments, and establishing a statutory procedure for the making of progress payment claims, responding to those claims, and the resolution of any payment disputes. That statutory procedure of claim and recovery stands in addition to any similar contractual procedure, and its operation can be commenced only at the election of a claimant. The statutory procedure:

• sets out when a payment claim under the statutory procedure can be made;
• prescribes what a payment claim under the procedure must, at a minimum, contain;
• prescribes the time (10 business days) for giving a payment schedule (in response to a payment claim) and what, as a minimum, the payment schedule must contain;
• provides that the whole of the amount claimed becomes payable if a payment schedule is not given within time;
• in the event of a dispute regarding the payment claim, provides a process for referral of the dispute to a process of rapid adjudication (which is discussed in more detail below).

Despite the general commonality of the procedure in the three eastern states, there are some important differences between the NSW and Queensland legislation on the one hand and the Victorian legislation on the other. That is because the Victorian legislation, modelled on the original form of the NSW legislation, has yet to take up the amendments that were introduced in NSW legislation in 2003. One of the more significant differences between the NSW/Queensland legislation and the Victorian legislation is that under the former, it is sufficient for a valid claim to be made under the statutory procedure if the claimant is or "claims to be" entitled to a progress payment under a construction contract. Under the Victorian legislation, a claimant must be a person who "is entitled" to a progress payment under a construction contract. Seemingly less important, but of potentially significant practical difference, are the Victorian provisions that faxes received after 4pm are deemed to be received the next business day and the definition of ‘business day’ which does not exclude the Christmas/New Year period (other than public holidays).

In contrast to the eastern seaboard, the WA and NT Acts adopt an approach similar to the UK’s wherein the parties are left to make their own arrangements regarding payment (subject only to certain prohibited terms such as "pay if paid" and "pay when paid" clauses). If, in connection with that contractual procedure, a payment dispute arises, then either party may refer that dispute to the statutory process of rapid adjudication established by the legislation. If an agreement is silent about any of:

• entitlement of the contractor to be paid;
• entitlement to claim progress payments;
• when progress claims can be made;
• the process for making progress claims; and
• responding to progress claims,

the WA and NT Acts step in to statutorily imply into the contract prescribed terms that fill the gap and govern (at a contractual level) the process for claiming and paying progress payments.

All of the security of payment statutes are consistent in adopting a process of rapid adjudication as the means of providing a short, sharp interim resolution of disputes regarding payment. They are also consistent in leaving the contractual process of dispute resolution (if any) to operate in parallel, so that if a party is dissatisfied with an adjudication determination, that party may take the dispute to court or utilize any other resolution process provided for under the contract.

In NSW, Queensland and Victoria, the referral to adjudication is a continuation of the statutory procedure mentioned earlier. Whether or not a payment dispute is referred to adjudication is in the hands of a claimant alone. If a dispute is referred to adjudication by a claimant (which must be done within a prescribed time), both parties are entitled to make submissions to the adjudicator. In the case of NSW and Queensland, the payment claim and payment schedule previously exchanged in the procedure sets the parameters for those submissions.

The WA and NT Acts also establish a statutory process of rapid adjudication, although the period within which a dispute may be referred to adjudication differ from the eastern Acts and either party may initiate the referral. Any application for adjudication, and any response to it by the other party, must contain certain prescribed information and must set out or have attached to it all the information, documentation and submissions on which the party making it relies. One of the criticisms made of the Acts in NSW, Queensland and Victoria has been that the legislation requires an adjudication decision to be made within 10 business days (unless extended by agreement) no matter how complex the dispute might be. The WA and NT Acts expressly oblige an adjudicator to dismiss an adjudication application if, amongst other things, the adjudicator is satisfied it is not possible to fairly make a determination because of the complexity of the matter or because the prescribed time for delivering a determination or any extension of it is not sufficient for another reason. A decision to dismiss is subject to review by the State Administrative Tribunal in WA and the Local Court in the NT.

The WA and NT statutes permit the parties to a contract to agree on a particular individual as adjudicator at any time (including in the contract), provided that person is from a pool of adjudicators registered under the legislation. In Victoria, parties are permitted to agree in their contract that a particular Authorised Nominating Authority (ANA) will be used to appoint an adjudicator. They can also agree on a particular individual as adjudicator, but only after the dispute has arisen. NSW and Queensland do not permit such agreements, and any clause of a contract in those states which purports to agree a particular adjudicator or ANA will be unenforceable. The Acts in those states instead provide that a claimant may make application to an ANA of its choice. The ANA selects the adjudicator who may confirm or reject his or her nomination.

Except in the case of a decision to dismiss an adjudication application under the WA and NT Acts, all of the security of payment legislation provide that the decision of the adjudicator is binding on the parties unless and until the dispute is resolved by a court, arbitrator or other process which may be set out in the contract.

In all jurisdictions other than Victoria, where a determination is made that a party is liable to the other to make a payment, the party that is liable must pay the adjudicated amount within a prescribed period. In default, the determination may be enforced as a judgment debt, statutory interest accrues, and the contract work may be suspended upon giving a prescribed notice.

In Victoria, the party liable to make payment has three options available to it. It can make payment of the adjudicated amount, or it can give security for payment of the whole or part of the adjudicated amount by either giving a written unconditional undertaking by a recognized financial institution or depositing the amount in a designated trust account. In default, the determination may be enforced as a judgment debt, statutory interest accrues, and the contract work may be suspended upon giving a prescribed notice. Additionally, where the contract in issue is a subcontract (or other contract further down the chain) and judgment is obtained, the legislation provides that a notice of claim can be served on the person immediately up the contractual chain (the "principal"). That notice operates as an assignment of debt under the higher contract and obliges the principal to pay to the claimant amounts which are owing under the higher contract until the judgment debt has been discharged.

This article highlights only some of the more significant differences between the security of payment legislation that is in place around Australia. Depending on which jurisdictions are being compared, there can be many other differences which can lead to unexpected pitfalls for claimants and respondents alike. Given that the NSW and Victorian statutes are presently under separate review, there is a prospect of there being still further discrepancies between the states developing in the future. It is therefore essential that specific advice should be obtained on the operation of the particular security of payment legislation in each jurisdiction.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.