Australia: Minimising payment disputes through contract

Last Updated: 22 August 2016
Article by Dorota Bryks

The Building and Construction Industry Security of Payment Act 1999 (NSW) (the Act) is designed to streamline the process to getting paid in the building and construction industry. The Act grants any person that undertakes construction work in NSW a statutory right to receive a progress payment on a reference date that is prescribed in the legislation or that is set out in a construction contract.

The process for making a claim to receive a progress payment is fairly simple. All that a claimant must do to comply with the Act is serve a payment claim on the respondent that identifies the relevant construction work performed and sets out the amount that the claimant is entitled to receive at that particular stage of the project. Once a claim has been served, the onus is then on the respondent to pay the claimant within the prescribed period of payment either:

  1. the full amount stated on the payment claim; or
  2. an alternative sum that the respondent proposes to pay, if any. In proposing an alternative sum or no sum, the respondent must provide its reasons for disputing the claimed amount, whether this is for the reason of a set-off, deduction or otherwise.

Whether a respondent intends to pay the full amount of a payment claim or proposes to pay an alternative sum, the Act sets out clear dates for payment that cannot be carved out by the terms of a contract. If a respondent does not pay on time, a claimant has the opportunity to refer the matter to adjudication to obtain the money they are owed.

Simple, right?

Not quite.

As a law practice with numerous clients in the building and construction industry, we find it all too common that suppliers and subcontractors are left hanging for payment without any comfort that a claimed amount (or any alternative amount proposed by a respondent, for that matter) will in fact be paid on time and in full. Most of our clients express overwhelming feelings of frustration by the prospect of escalating a disputed payment to adjudication. This is particularly the case for our clients that fully perform their end of the bargain and deliver the works according to the construction contract and in compliance with the Act. Whilst in these cases it is reasonable for claimants to expect prompt and complete payment, the unfortunate reality is that respondents will often use any excuse they can find to withhold, set off or retain a portion or the whole of any such payment claim from a claimant.

The Problem

We find that our clients are most satisfied and feel empowered when they are able to negotiate construction contracts to include fair payments terms that allow them to manage their cash flow effectively. An obstacle to this and a significant problem that our clients face is when they contract with players in the industry with greater commercial standing and bargaining power. More often than not, these players use their position in the market as a means to pressure modest subcontractors and suppliers to accept their standard form contracts, with onerous payment terms, on a take it or leave it basis.

An example of an unreasonable term that commonly pops up in construction contracts is one that allows the respondent to withhold making any payment to a claimant until a dispute between the parties has been resolved. Depending on the nature of the dispute and the relationship of the parties, resolving a dispute may take many months. This means that a claimant will receive payment well after performing the works, which is a cash-flow nightmare and simply unsustainable for anyone looking to make a serious mark in the building and construction industry.

Practical Solutions

Recently, we attended to a contract review for one of our clients that is in the business of supplying architectural structures and finishes for mid-range commercial projects. A particularly onerous term that we found was one that allowed the respondent to withhold making any payments to our client in the event that it disputed the sum of our client's payment claims, regardless of whether it disputed the whole or part of our client's claim. Whilst clearly a slap in the face to the Act and to our client's prospects of sustaining commercial success, this potentially unfair contract term is seen all too commonly in contracts that are put forth by parties with the greater bargaining power. As the contract was silent in providing any specific mechanism or timeframe for resolving a payment dispute, we advised the client that its only remedy under contract would be to exercise its rights under the general dispute resolution clause.

Dispute resolution clauses are an effective means to resolve common disputes that may arise under contract and the process is protracted in such a way so as to allow the parties the opportunity to meet, discuss and resolve the dispute in good faith. However, this drawn out process is not a practical means to resolving payment disputes, as businesses rely on prompt payment of invoices to remain commercially viable. As such, we negotiated to include a mechanism in the contract to specifically deal with disputed invoices in a manner that was consistent with our client's payment terms so that our client was not left in a financial vacuum in the event of a disputed payment claim.

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.

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