Australia: Payment Legislation - An Update On Overseas Developments

The New South Wales Building and Construction Industry Security of Payment Act 1999 has entered its sixth year of operation. Similar legislation is now in operation in Queensland, the Northern Territory and Western Australia. The NSW scheme has already undergone one series of amendments in 2002.

Legislation addressing the issue of contractor cash-flow and providing for adjudication of construction disputes exists abroad. In the UK, the relevant legislation is the Housing Grants Construction and Regeneration Act 1996 and the Scheme for Construction Contracts (England and Wales) Regulations 1998.

The UK legislation is, in some important respects, materially different from the legislation in Australia. For example, the UK legislation is wider in its application than that in operation in Australia, since it captures all disputes arising from construction contracts, including extra-contractual claims. There are however some similarities in the approaches taken in each jurisdiction and English cases have often been used by way of analogy in the rapidly accumulating case law on this topic in NSW. A review process is currently taking place in the UK and developments there should provide a useful comparative yardstick for measuring the success and to gain an awareness of the issues confronting the UK scheme that will shortly reach its tenth anniversary.

In March 2005, the Department of Trade and Industry in the UK released its request for consultation proposals from the industry participants following the recent review and report of Sir Michael Latham on the UK legislation ("the Review Report"). Following the consultation process, if there is clear support for changes to the legislation, then consultation will be sought on draft amendments.

In total there are 14 key proposals for amendment to the UK regime. Some of the more significant amendments being considered are discussed below.

The Review Report recommended that the UK legislation should define the features of what constitutes "an adequate payment mechanism" for the purposes of clarity. It is proposed that contracts should include terms defining the payment, when the payment should be assessed, the method of determining an amount, the period of time that should elapse from the "assessment date" before the final date of payment and the nature of information to be communicated between the parties.

Introducing a right to reimbursement for the costs of suspension and remobilisation and providing additional time for remobilisation

Similar to the NSW legislation, the current UK legislation empowers the contractor to suspend work under a construction contract in the event of non-payment by a respondent to a payment claim.

The Review Report raised the effectiveness of this statutory entitlement in the UK. The problem has been that the cost of suspending performance and remobilising is often disproportionate to the benefit of exercising such entitlement, and this has been a significant disincentive to contractors invoking this statutory right. Consideration is therefore being given to supplementing the current legislation so that the contractor can reclaim the reasonable costs of suspension and remobilisation.

Preventing the use of "trustee stakeholder accounts" to suspend an adjudicator's award pending litigation other than when the recipient is involved in insolvency proceedings

The UK legislation permits respondents to make payment into trust rather than making payment to a contractor. The Review Report highlighted that this provision is potentially problematic for contractors with short term issues with solvency.

The 2002 amendments to the NSW legislation removed the option for a respondent to provide security rather than making payment of an entitlement.

While the NSW amendments have been criticised by respondents in the local industry, the UK is considering following the NSW lead.

Providing the adjudicator with the power to rule on certain aspects of his own jurisdiction and providing a right to payment in cases where the adjudicator stands down due to lack of jurisdiction

The Review Report considered the frequency of jurisdictional challenges during adjudications and also at the enforcement stage. In the UK, some construction contracts provide adjudicators with the power to decide jurisdictional issues themselves, although the legislation does not address this.

Consideration is being given to amending the UK legislation to compel an adjudicator to decide disputes about whether there is a "construction contract" to which the legislation applies, whether there is a dispute and whether the adjudicator was properly appointed.

The deadline for the submission of responses in the UK is in late June 2005, after which consideration will be given to drafting proposed amendments to the scheme. Updates on the process will be provided in future issues of Project Insights and in particular, analysis will be provided in relation to the proposed reforms that are of most direct relevance to Australian owners and contractors to stimulate further debate on ways to improve the current legislative landscape in the various States and Territories.

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.