pay up or else

Pay up or Else! The New Reality inResource Projects

Simon Davis*

SUMMARY

This paper will address the potentially dramatic effect on the energy andresources industries of the security of payment legislation currently in force in NewSouth Wales and Victoria and coming into force in Queensland and WesternAustralia.

The legislation is aimed at protecting subcontractors from harsh paymentpractices traditionally imposed on them by contractors, and at protectingcontractors from similar practices imposed by clients.

However, in seeking to redress the balance in those often skewed contractualrelationships, the legislation in some of the States has arguably swung the other way,giving a “big stick” to subcontractors to wield against their contractor clients, andto main contractors to use against project owners.

There are four key features of the legislation: (a) under three of the Acts, anabsolute and inalienable right to periodic, prompt, progress payments;(b) under allthe Acts, a complete prohibition on “pay when paid” and “pay if paid” clauses;(c)under all the Acts, mandatory independent adjudication of payment disputes withinan extremely short time-scale; and (d) the practical effectiveness of the legislation:non-payment can have draconian, project-threatening results.

The broad scope of the legislation means that it is likely to apply to the majority ofconstruction-type contracts in energy and resources projects located in any of thefour relevant States, as well as to contracts for the supply of materials and servicesin connection with those projects.

The power of the legislation, in New South Wales at least, is illustrated by therecent surge in the number of adjudications, and the fact that these have spawnedupwards of 50 separate pieces of litigation as parties faced with payment claims andadjudicators’determinations look for an escape route.

157

* LLB (European) Hons (Exon), Diploma of French Private Law Studies (Aix-Marseille);Barrister, Francis Burt Chambers, Perth.

return to AMPLA 2004 Table of Contents

This paper seeks to give lawyers and project managers in the energy andresources industries an understanding of the legislation, its applicability and its keyfeatures, and of how to take advantage of the rights available under the Acts, or tryto avoid their more extreme consequences.

OVERVIEW OF THE LEGISLATION

New South Wales

The Building and Construction Industry Security of Payment Act 1999 (NSW)(the NSW Act) came into force on 26 March 2000 and applies to all “constructioncontracts” entered into after that date.

The NSW Act was amended in 2002, with the amendments commencing on 3March 2003. The amendments apply to any payment claim served after that date(even those arising from contracts entered into before that date).

The object of the NSW Act, according to s 3(1), is:

“to ensure that any person who undertakes to carry out construction work (or whoundertakes to supply related goods and services) under a construction contract isentitled to receive, and is able to recover, progress payments in relation to thecarrying out of that work and the supplying of those goods and services.”

The amendments to the NSW Act make it far more powerful than it was beforeit was amended, because it effectively now forces progress moneys to be paid overto claimants, rather than simply securing moneys for future payment.

As a result, New South Wales has seen not only a surge in the use of theadjudication procedure, but also a flood of litigation arising out of adjudicators’decisions.

Victoria

The Building and Construction Industry Security of Payment Act 2002 (Vic)(the Victorian Act) came into force on 31 January 2003 and applies to all“construction contracts” entered into after that date.

The object of the Victorian Act1 is virtually identical to that of the NSW Act.

Anecdotal evidence suggests that there are very few adjudications happening inVictoria, and there does not appear to have been any litigation in Victoria arisingout of adjudications.

This would seem to be because the Victorian Act is very similar to the NSW Actbefore it was amended. Therefore in Victoria, a contractor may be able to use the

158 AMPLA YEARBOOK 2004

1 See s 3(1) of the Victorian Act.

adjudication process to secure a progress payment for later payment by its client,but – unlike in New South Wales – cannot insist on the money awarded by theadjudicator being paid to the contractor immediately after the adjudication.

Queensland

The Building and Construction Industry Payments Act 2004 (Qld) (theQueensland Act) was assented to on 20 May 2004. Enabling and administrativeprovisions came into force on 1 July 2004; operative provisions will come intoforce on 1 October 2004.

The Queensland Act will apply to “construction contracts” entered into from1 October 2004 onwards.

The object of the Queensland Act2 is very similar to that of the NSW Act.Further, the Queensland Act is generally in very similar terms to the NSW Act inits current form (ie as amended). There is therefore every reason to expect asimilar flood of adjudications in Queensland and consequent litigation in theQueensland courts.

Western Australia

The Construction Contracts Act 2004 (WA) (the WA Act) was assented to on 8July 2004. It is yet to be proclaimed, but it is understood that the WesternAustralian Government is working towards having in place the requisiteRegulations and “infrastructure” in time for the WA Act to come into force at thebeginning of 2005.

Although (unlike the other Acts) it does not contain an express statement of itsobject, the WA Act appears to be the same as that of the other Acts.

The WA Act is different from the other State Acts in certain important respectsthat will be focused on as appropriate throughout this paper. One of the keydifferences appears to be the ability for the parties to agree on certain matters intheir contract and effectively exclude some of the WA Act’s more potentiallydraconian provisions. Absent effective drafting in the contract, however, the WAAct may turn out to be as powerful as the amended NSW Act, and could result in alarge number of adjudications and consequential litigation.

THE SCOPE OF THE LEGISLATION: TO WHAT CONTRACTSDOES IT APPLY?

All the Acts apply to construction contracts. The definitions of this term in theNSW, Victorian and Queensland Acts are virtually identical: contracts or other

PAY UP OR ELSE! THE NEW REALITY IN RESOURCE PROJECTS 159

2 See s 7 of the Queensland Act.

arrangements under which one party undertakes to carry out construction work, orto supply related goods and services, for another party.3 The way constructioncontract is defined in the WA Act is different,4 but the effect is similar.

These phrases are in turn defined very broadly.

Construction Work

The definition of construction work in the NSW,5 Victorian6 and Queensland7

Acts is extremely broad and virtually identical. The definition in the WA Act8 iscast differently but appears just as broad except in one relevant respect which isconsidered below.

The definition in the NSW Act is as follows:

“5(1) In this Act, ‘construction work’ means any of the following work:(a) the construction, alteration, repair, restoration, maintenance,

extension, demolition or dismantling of buildings or structuresforming, or to form, part of land (whether permanent or not),

(b) the construction, alteration, repair, restoration, maintenance,extension, demolition or dismantling of any works forming, or toform, part of land, including walls, roadworks, power-lines,telecommunication apparatus, aircraft runways, docks andharbours, railways, inland waterways, pipelines, reservoirs, watermains, wells, sewers, industrial plant and installations forpurposes of land drainage or coast protection,

(c) the installation in any building, structure or works of fittingsforming, or to form, part of land, including heating, lighting, air-conditioning, ventilation, power supply, drainage, sanitation,water supply, fire protection, security and communicationssystems,

(d) the external or internal cleaning of buildings, structures andworks, so far as it is carried out in the course of their construction,alteration, repair, restoration, maintenance or extension,

(e) any operation which forms an integral part of, or is preparatory toor is for rendering complete, work of the kind referred to inparagraph (a), (b) or (c), including:(i) site clearance, earth-moving, excavation, tunnelling and

boring, and(ii) the laying of foundations, and(iii) the erection, maintenance or dismantling of scaffolding, and


3 See s 4 of the NSW Act, s 4 of the Victorian Act and Sched 2 to the Queensland Act. 4 See s 3 of the WA Act.5 See s 5 of the NSW Act.6 See s 5 of the Victorian Act.7 See s 10 of the Queensland Act.8 See s 4 of the WA Act.

(iv) the prefabrication of components to form part of any building,structure or works, whether carried out on-site or off-site, and

(v) site restoration, landscaping and the provision of roadwaysand other access works,

(f) the painting or decorating of the internal or external surfaces ofany building, structure or works,

(g) any other work of a kind prescribed by the regulations for thepurposes of this subsection.

5(2) Despite subsection (1), ‘construction work’ does not include any ofthe following work:(a) the drilling for, or extraction of, oil or natural gas,(b) the extraction (whether by underground or surface working) of

minerals, including tunnelling or boring, or constructingunderground works, for that purpose,

(c) any other work of a kind prescribed by the regulations for thepurposes of this subsection.”

Critically for the energy and resources sectors, it can be seen immediately froms 5(2) of the NSW Act9 that the exclusion refers only to the process of drilling orextraction. Therefore the construction of all infrastructure preparatory to theseprocesses will fall within the definition of construction work (except whereunderground works are built for tunnelling or boring).

In the WA Act there is a wider exclusion of construction contracts in the energyand resources sectors. Under s 4(3) of the WA Act:

“…construction work does not include any of the following work on a site inWA:(a) drilling for the purposes of discovering or extracting oil or natural gas,

whether on land or not;(b) constructing a shaft, pit or quarry, or drilling, for the purposes of

discovering or extracting any mineral bearing or other substance;(c) constructing any plant for the purposes of extracting or processing oil,

natural gas or any derivative of natural gas, or any mineral bearing orother substance.”

Related Goods and Services

The definition of related goods and services in the NSW Act is as follows10 (thedefinition in the Victorian11 and Queensland12 Acts is virtually identical):

“6(1) In this Act, related goods and services, in relation to constructionwork, means any of the following goods and services:(a) goods of the following kind:


9 See also s 5(2) of the Victorian Act and s 10(3) of the Queensland Act.10 See s 6 of the NSW Act.11 See s 6 of the Victorian Act.12 See s 11 of the Queensland Act.

(i) materials and components to form part of any building,structure or work arising from construction work,

(ii) plant or materials (whether supplied by sale, hire orotherwise) for use in connection with the carrying out ofconstruction work,

(b) services of the following kind:(i) the provision of labour to carry out construction work,(ii) architectural, design, surveying or quantity surveying

services in relation to construction work,(iii) building, engineering, interior or exterior decoration or

landscape advisory services in relation to construction work,(c) goods and services of a kind prescribed by the regulations for the

purposes of this subsection.6(2) Despite subsection (1), related goods and services does not include

any goods or services of a kind prescribed by the regulations for thepurposes of this subsection.

6(3) In this Act, a reference to related goods and services includes areference to related goods or services.”

The WA Act is again drafted differently in this regard, but the effect is similar.The WA Act contains separate definitions of how “goods”, “professional services”and “on-site services” are “related to construction work”, which is what bringsthem within the definition of “construction contract” and hence within the scopeof the WA Act. One noteworthy point is that professional services to assess thefeasibility of construction work are covered whether or not the construction workproceeds.13

Other exclusions

The NSW, Victorian and Queensland Acts expressly exclude from the scope ofthe Acts, any construction contract which:

(a) forms part of a loan agreement, guarantee or contract of insurance;(b) provides for consideration to be calculated otherwise than by reference to

the value of the work performed; or(c) is for the performance of residential building work for someone who resides

in or proposes to reside in the premises.14

The WA Act does not exclude these from its scope, although it does excludefinancial, accounting and legal services from its definition of “professionalservices”.15

Geographical application

Many “construction contracts” will cross state borders; for example, a Victorianfirm of quantity surveyors, under contract with the main contractor, may be


13 See s 5(2)(a) of the WA Act.14 See s 7(2) of the NSW Act, s 7(2) of the Victorian Act and s 3(2) of the Queensland Act.15 See s 5(2)(a)(ii) of the WA Act.

working at a project office in Sydney on a report in relation to a constructionproject in Western Australia. Does any security of payment legislation cover thesurveyor’s contract? If so, is it the NSW Act, the Victorian Act or the WA Act?

For each of New South Wales, Victoria and Queensland the position isidentical: the Act expressly states that it does not apply to a construction contractto the extent that it deals with construction work carried out outside that State orrelated goods and services supplied in respect of construction work carried outoutside that State.16

The WA Act appears to achieve the same result by:

• limiting its definition of construction work to “work on a site in WA” (whetheron land or offshore);

• defining construction contract so as to cover:

– the supply of related goods to the site where construction work is beingcarried (ie in WA); and

– the provision of related professional services on or off the site whereconstruction work is being carried out.

So in the above example, the Victorian and NSW Acts do not apply to thequantity surveyors’ contract because their services do not relate to constructionwork in Victoria or New South Wales. But the WA Act will apply to the contractbecause the professional services relate to a site in Western Australia even thoughthey are being carried out in New South Wales.

Finally it should be noted that the parties’express choice of law in their contractwill not be relevant to the applicability of any of the Acts. Each of them providesthat it applies to a construction contract (as defined) irrespective of whether thecontract is expressed to be governed by the law of a place other than the State inquestion.17

Applicability of legislation to energy and resources projects

A very considerable proportion of the suite of contracts commonly entered intoin relation to a resources or oil & gas project in New South Wales, Victoria orQueensland will be construction contracts for the purposes of those States’Acts.

Whilst the mining or drilling contract itself may not be a construction contract,many others will be, such as contracts for the supply of earth moving equipment,contracts to build power and water infrastructure, road, rail and air access,maintenance contracts, engineering, design, procurement, supply contracts forraw materials and so on.


16 See s 7(4) of the NSW Act, s 7(4) of the Victorian Act and s 3(4) of the Queensland Act.17 See s 7(1) of the NSW Act, s 7(1) of the Victorian Act, s 3(1) of the Queensland Act and

s 7(2) of the WA Act.

It is submitted that the majority of these contracts will also be constructioncontracts for the purposes of the WA Act, where, as noted above, the exclusion isslightly wider, encompassing drilling and extraction work, the construction of theshaft, pit or quarry and the construction of “any plant for the purposes of extractingor processing” oil, gas or minerals. This will certainly exclude, for example,contracts to construct mine shafts, quarries and processing plants, as well asprofessional services contracts for the design of the same. But it seems likely thatthe many contracts for related infrastructure in a resources project in WesternAustralia will still be caught by the WA Act, unless “plant for the purposes ofextracting or processing” is given a very wide interpretation.

Clearly, then, the security of payment legislation is highly relevant to lawyersinvolved in energy and resources projects, whether they are drafting the contractsin the first place or involved in the resolution of disputes arising under them.

Having reviewed the broad scope of the legislation, its substantive provisionsand practical effect now fall for consideration. As is clear from the above,construction contracts can be head contracts, sub-contracts, sub-sub-contracts andso on, of contracts for supplies of goods or services. In the followingconsideration, unless the context otherwise provides, the term “contractor” will beused to signify the party performing work under a construction contract, and theterm “client” will be used to mean the party for who that work is being performedunder that contract.18

THE ABOLITION OF “PAY WHEN PAID” CLAUSES

Pay when paid clauses link the time for payment downstream to the time ofreceipt of payment upstream. Traditionally they are common in sub-contracts inthe construction industry. But they can obviously be unfair and onerous oncontractors and sub-contractors, and they have now been rendered ineffectiveunder all four Acts.

Section 12(2) of the NSW Act contains the following broad definition of theprovisions that are caught:

“pay when paid provision of a construction contract means a provision ofthe contract:(a) that makes the liability of one party (the first party) to pay money

owing to another party (the second party) contingent on payment to thefirst party by a further party (the third party) of the whole or any part ofthat money, or


18 This follows the WA Act, where the term “contractor” is defined as a person who has anobligation under a construction contract to perform construction work or supply relatedgoods, professional services or on-site services. A “contractor” therefore includes asubcontractor under a subcontract.

(b) that makes the due date for payment of money owing by the first party tothe second party dependent on the date on which payment of the wholeor any part of that money is made to the first party by the third party, or

(c) that otherwise makes the liability to pay money owing, or the due datefor payment of money owing, contingent or dependent on the operationof another contract.”

Paragraph (c) was brought in when the NSW Act was amended. It is not in thedefinition in the Victorian Act (which is otherwise identical to the definition in theNSW Act).19 The definition in the Queensland Act20 is substantially identical tothat in the current NSW Act.

The WA Act states that a provision in a construction contract has no effect if itpurports to make the liability of a party (“A”) to pay money under the contract toanother party contingent, whether directly or indirectly, on A being paid money byanother person (whether or not a party).

It has been suggested that it may be possible to circumvent s 12 of the NSW Act(and the equivalent provisions of the other Acts) by restricting rights of recoveryrather than liability, or by making the due day for payment depend on theoccurrence of something other than money being paid, for example a certificate orthe resolution of a dispute.

There is as yet no judicial guidance as to the true meaning of s 12 of the NSWAct or of the equivalent provisions of the other Acts. However, the NSW courtshave shown a strong inclination to follow the intention of the NSW Act withrespect to its other provisions, and it is suggested that most attempts to avoid theban on “pay when paid” clauses are likely to be met by a court adopting apurposive approach and striking them down. This is particularly so in relation tothe NSW, Victorian and Queensland Acts, which contain a broad prohibition oncontracting out of the Acts (see below).

THE RIGHT TO PROGRESS PAYMENTS

New South Wales,Victoria and Queensland

The NSW, Victorian and Queensland Acts give parties who performconstruction work an entitlement to progress payments, in the event that theconstruction contract fails to do so.

These Acts entitle any party who has undertaken to carry out construction workor supply related goods and services to a progress payment on and from eachreference date under a construction contract.21


19 See s 13(2) of the Victorian Act.20 See s 16(2) of the Queensland Act.21 See s 8(1) of the NSW Act, s 9(1) of the Victorian Act and s 12 of the Queensland Act.

A reference date is the date determined under the contract as the date on whicha claim for progress payment can be made or, absent such an express provision:

• under the NSW and Queensland Acts, the last day of the named month in whichthe work was carried out and the last day of each subsequent named month;22 or

• in the Victorian Act, the date occurring 20 business days after the previousreference date or (in the case of the first reference date), 20 business days afterconstruction work was first carried out or related goods or services were firstsupplied.23

All three Acts provide that the amount of a progress payment is the amountcalculated in accordance with the terms of the contract or, absent such a term, theamount calculated on the basis of the value of construction work carried out or thegoods or services supplied.24

The three Acts then set out how construction work is to be valued, which is inaccordance with the contract, unless the contract does not make express provision,in which case regard is had to:

(a) the contract price for the work;(b) any other rates and prices in the contract;(c) any variation; and(d) the cost of rectifying any defective work.25

Western Australia

The WA Act implies provisions giving the contractor an entitlement to progresspayments into a construction contract “that does not have a written provisionabout whether or not the contractor is able to make a claim to the principal for aprogress payment for the obligations the contractor has performed”.26

Therefore, under the WA Act, it is permissible for the contract to disentitle thecontractor from claiming progress payments.

The WA Act is less prescriptive than the other Acts in relation to progresspayments. In the absence of written provisions in the construction contract aboutwhether the contractor is able to make a claim for a progress payment,straightforward provisions are implied which:

• give the contractor an entitlement to make one or more claims for a progresspayment in relation to those of the contractor’s obligations that the contractorhas performed and for which it has not been paid by the principal; and


22 See s 8(2) of the NSW Act and the definition of “reference date” in Sched 2 to theQueensland Act.

23 See s 9(2) of the Victorian Act.24 See s 9 of the NSW Act, s 10 of the Victorian Act and s 13 of the Queensland Act.25 See s 10 of the NSW Act, s 11 of the Victorian Act and s 14 of the Queensland Act.26 See s 15 of the WA Act.

• allow the contractor to make a claim for a progress payment at any time afterthe contractor has performed any of its obligations.27

As to the amount payable in respect of a progress payment, this will bewhatever the contract dictates. If the contract does not have a written provisionabout the amount, or the means of determining the amount, that the contractor isentitled to be paid for the obligations he performs, the WA Act implies aprovision that he is entitled to be paid a reasonable amount for performing hisobligations.28

General comment

Standard form contracts and subcontracts used in the construction industry, andon most if not all energy and resources projects, all provide for progress payments,and in those cases these provisions of the Acts will have little work to do.

However:

• where dealing with a construction contract that is silent on the issue, all the Actswill overturn the common law approach to entire contracts which would onlyrequire payment on completion of all work;

• where a construction contract specifically provides that the contractor is notentitled to progress payments, the WA Act will allow the principal to rely onthose provisions, but the NSW, Victorian and Queensland Acts will not.

THE CLAIM FOR PROGRESS PAYMENTS


These Acts give parties who are entitled to progress payments underconstruction contracts an inalienable statutory right, in addition to any right underthe contract, to make a payment claim for a progress payment.29

The amendments to the NSW Act expressly extended this entitlement to partieswho claim to be entitled to progress payments. These words appear in theQueensland Act but not in the Victorian Act.

Therefore, under the NSW and Queensland Acts, it is not necessary to show thatpayment is due and payable in accordance with the terms of the contract (ie aftercertification of a contractual progress claim) in order to make a payment claim.

It is possible that this is so under the Victorian Act also, despite the absence ofthose express words, because the intention of the provision appears to be to enable


27 See Sched 1, Div 3 of the WA Act.28 See s 14 and Sched 1, Div 2 of the WA Act.29 See s 13 of the NSW Act, s 14 of the Victorian Act and s 17 of the Queensland Act.

a contractor to make a payment claim whose entitlement to a progress paymentarises under the Act rather than under the contract.30

Under the NSW and Queensland Acts it is expressly stated that progresspayments include final payments, one off payments or milestone payments.31

Again, this was brought in when the NSW Act was amended, and under the NSWAct prior to amendment, which contained no such express provision, it was heldthat a progress payment did not include a final payment.32 The definition of“progress payment” in the Victorian Act33 is silent as to final payments, and it issuggested that in Victoria final payments are not progress payments and claims forfinal payments do not lie under the Victorian Act.

A payment claim must comply with certain requirements, including identifyingthe construction work (or related goods and services) to which the claim relatesand the amount of the progress payment claimed.34

The NSW and Queensland Acts (but not the Victorian Act) provide that aclaimant has up to 12 months after the construction work to which the claimrelates was last carried out to serve a payment claim (or longer if the constructioncontract itself so provides).35

Western Australia

Under the WA Act there is no statutory right to make a payment claim inaddition to any right under the construction contract.

However, if a construction contract does not have a written provision about howa party is to make a claim to another party for payment, the WA Act impliesprovisions dealing with not only how a contractor makes a payment claim againsta principal, but also how a principal makes a payment claim against a contractor.36

A payment claim by the contractor to the principal is a claim for payment of anamount in relation to the performance by the contractor of its obligations under thecontract.37 This broad definition appears to encompass progress, final, one-off andmilestone payments.


30 Beckhaus Civil Pty Ltd v Council of the Shire of Brewarrina [2002] NSWSC 960 at [60]-[63] and Walter Construction Group v CPL (Surry Hills) [2003] NSWSC 266 at [52]-[55] (both of which decisions deal with this position under the NSW Act before it wasamended, which is relevantly the same as the current Victorian Act).

31 See definitions of “progress payment” in s 4 of the NSW Act and Sched 2 to theQueensland Act.

32 Jemzone v Trytan [2002] NSWSC 395 at [35]-[39]; De Martin & Gasparini v EnergyAustralia [2002] NSWCA 330 at [53]-[57].

33 See definition of “progress payment” in s 4 of the Victorian Act.34 See s 13(2) of the NSW Act, s 14(3) of the Victorian Act and s 17(2) of the Queensland

Act.35 See s 13(4) of the NSW Act and s 17(4) of the Queensland Act.36 See s 16 and Sched 1, Div 4 of the WA Act.37 See Sched 1, Div 4, s 5(1) of the WA Act.

A payment claim by the principal to the contractor is a claim for payment of anamount in relation to the performance or non-performance by the contractor of itsobligations under the contract.38

The implied provisions set out various requirements that must be complied within making a payment claim. But no time limit is imposed within which a paymentclaim may be made.

RESPONDING TO THE CLAIM FOR PROGRESS PAYMENTS


A party liable to make payment under a construction contract has theopportunity to respond to the payment claim by delivering a payment schedule.39

If there is anything at all in the payment claim with which the respondent doesnot agree, this is an opportunity that should on no account be missed.

Whilst a claimant has up to a year in which to make a payment claim, arespondent has only 10 business days after receiving the payment claim (or thetime provided in the construction contract, if shorter) in which to deliver apayment schedule in response.

The payment schedule must satisfy certain basic requirements, includingindicating the amount of the payment that the respondent proposes to make and,where that amount is less than the claim, an indication of why that is, and why anyamounts are being withheld.

Western Australia

If a construction contract does not have a written provision about when and howa party is to respond to a claim for payment made by another party, the WA Actimplies provisions according to which the recipient of a payment claim must givethe claimant a notice of dispute if he considers that the claim has not been made inaccordance with the contract or if he disputes the whole or part of the claim.40

The notice of dispute must be served within 14 days after receipt of the paymentclaim, and must satisfy certain requirements that are similar to those for paymentschedules under the other Acts.41


38 Ibid.39 See s 14 of the NSW Act, s 15 of the Victorian Act and s 18 of the Queensland Act.40 See s 17 and Sched 1, Div 5 of the WA Act.41 See Sched 1, Div 5 of the WA Act.

CONSEQUENCES OF NOT PAYING A PAYMENT CLAIM


Debt recovery

If the respondent fails to deliver a payment schedule and fails to pay the wholeor part of the payment claim, the claimant may bring proceedings in any court torecover the unpaid portion of the claim as a debt.42

The perils of not serving a payment schedule are illustrated by the case ofWalter Construction v CPL (Surry Hills)43 in which the plaintiff constructioncompany served a payment claim for just under $15 million on the respondentowner on 20 December 2002, the owner ignored it (ie did not serve a paymentschedule) and the plaintiff obtained summary judgment for the amount claimed on9 April 2003. The defendant raised a number of technical defences to no avail.

If that payment claim had been brought a few months later, the defendant wouldnot even have been able to raise defences, because one of the amendments to theNSW Act that came into force in March 2003 was to the effect that the respondentcannot, in debt proceedings brought by the claimant, bring any cross-claim/counter-claim, or any defence in relation to matters arising under the constructioncontract.44

This provision is in the Queensland Act45 but not the Victorian Act.

Some claimants have tried to rely on the creation of a debt pursuant to one ofthe Acts as a basis for a statutory demand under the Corporations Act. However,the NSW courts have made it clear that the provisions of the NSW Act are not aconclusive answer to an application to set aside a statutory demand on the basisthat there is a genuine underlying dispute.46

Suspension of work

Non-payment also entitles the claimant to give notice of an intention to suspendfurther work.47

Suspension can take effect once two business days have passed after notice ofintention has been given. Under the NSW and Queensland Acts suspension can


42 See s 15 of the NSW Act, s 16 of the Victorian Act and s 19 of the Queensland Act.43 [2003] NSWSC 266.44 See s 15(4) of the NSW Act.45 See s 19(4) of the Queensland Act.46 See Jemzone v Trytan (2002) 42 ACSR 42, Oxbara v Geotech [2002] ACTSC 116,

Tooma v Eaton [2002] NSWSC 514, Max Cooper & Sons v M & E Booth & Sons (2003)202 ALR 680.

47 See s 15(2)(b) of the NSW Act, s 17(2)(b) of the Victorian Act and s 19(2)(b) of theQueensland Act.

remain in place until three business days after payment is made. In Victoria theright to suspend work ceases to exist upon payment being made.48

The NSW and Queensland Acts state that suspension does not make a claimantliable for any loss or damage suffered by the respondent. They also state that ifsuspension occurs and a respondent removes any part of the work which in turncauses the claimant loss or expense (eg in the form of profit forgone) then therespondent is also liable to pay that amount.49

The Victorian Act, by comparison, simply provides that suspension of work inthese circumstances does not constitute breach of the construction contract.50

Clearly the protection from liability of contractors who suspend work in relation toprojects in Victoria is far less than those who do the same in relation to New SouthWales and Queensland projects.

Western Australia

If a construction contract does not have a written provision about the time bywhen a payment must be made, the WA Act implies provisions according towhich, within 28 days after receiving a payment claim, a party must pay either theundisputed part of the claim or the whole of it, unless he has timeously served anotice of dispute rejecting the claim as not having been made in accordance withthe contract or disputing the whole of the claim.51

There is no provision in the WA Act for any of the potentially draconianconsequences of simply not disputing a claim within the statutory time limitsunder the NSW, Victorian and Queensland Acts (considered immediately above).

FAST TRACK ADJUDICATION OF DISPUTES UNDERCONSTRUCTION CONTRACTS

All four Acts entitle a contractor with a disputed payment claim against a clientto seek independent adjudication of the dispute. The WA Act gives the sameentitlement to a client who has a disputed payment claim against a contractor.Adjudication under all four Acts is on an extremely fast track basis.

The Adjudication Process

In New South Wales and Queensland the process is triggered by the claimantmaking a written adjudication application to any Authorised Nominating


48 See s 27(1) and (2) of the NSW Act, s 29(1) and (2) of the Victorian Act and s 33(1) and(2) of the Queensland Act.

49 See s 27(2A) and (3) of the NSW Act and s 33(3) and (4) of the Queensland Act.50 See s 29(3) of the Victorian Act.51 See s 18 and Sched 1, Div 5 of the WA Act.

Authority (ANA) chosen by the claimant.52 ANAs are authorised by the Minister(under the NSW Act) or registered by the Adjudication Registrar created under theQueensland Act. In New South Wales these include IAMA, LEADR and anumber of industry specific and other bodies.

In New South Wales the ANA refers the application to an independentadjudicator with the qualifications, experience and expertise set out in theRegulations made under the NSW Act. In Queensland, the ANA will refer anapplication to one of a number of registered adjudicators.53

In Victoria the process can be triggered by the claimant making an adjudicationapplication to an adjudicator chosen by agreement with the respondent, or to anANA agreed with the respondent, or absent such agreement to an ANA chosen bythe claimant.54

In Western Australia there will be a choice as to how to trigger the process likein Victoria, and a system of registering adjudicators like in Queensland.55

All four Acts require a claimant to initiate any adjudication application quickly.

Under the Victorian Act a claimant has only five business days from receipt ofthe payment schedule.56 Under the NSW and Queensland Acts:57

• if the respondent disputes the amount in the payment claim (ie the amount inthe payment schedule is less than that in the payment claim), the claimant has10 business days from receipt of the payment schedule in which to make anadjudication application;

• if the respondent fails to pay to the claimant the whole or any part of the amountin the payment schedule by the due date for payment, the claimant has 20business days from the due date for payment in which to make an adjudicationapplication.

The WA Act requires a party to make an adjudication application within 28days after a payment dispute arises.58

Responding to the claim

The respondent then has an opportunity to set out its arguments as to why itshould not pay the amount of the claim.

In all four Acts there is very limited time for the respondent to prepare theadjudication response.


52 See s 17 of the NSW Act and s 21 of the Queensland Act.53 See s 18 of the NSW Act and s 22 of the Queensland Act.54 See s 18 of the Victorian Act. ANAs are authorised by the Victorian Building Commission.55 See s 26 of the WA Act. In WA adjudicators will have to be registered with the

Construction Contracts Registrar, as will appointors (the WA equivalent of ANAs).56 See s 18(3) of the Victorian Act.57 See s 17(3) of the NSW Act and s 21(3) of the Queensland Act.58 See s 26(1) of the WA Act, and also s 6 which stipulates when a payment dispute arises

for the purposes of the Act.

In New South Wales, Victoria and Queensland the response must be submittedwithin the later of five business days from receipt of the adjudication applicationor two business days after notice of the adjudicator’s acceptance of appointment.59

In Western Australia the time limit will be a more generous 14 days from receipt ofthe adjudication application.60

In New South Wales and Queensland there are additional severe limitations onthe content of the adjudication response. A respondent is not permitted:

• to submit any response unless he earlier served a payment schedule within theapplicable time limits;61 and

• to include in his response any reasons for withholding payment unless thosereasons were already included in his earlier payment schedule.62

These restrictions highlight the critical importance for principals not only ofserving a payment schedule in respect of any disputed aspect of a payment claim,but also of making that payment schedule as fulsome as possible in terms of thereasons for withholding payment.

The adjudication process

Adjudication is similar to expert determination, and the adjudicator determinesthe dispute as a matter of his or her own expertise rather than as an arbitrator. TheWA Act states that the adjudicator acts informally and is not bound by the rules ofevidence,63 but it is submitted that this must be the position under the other Actsalso.

The speed with which an adjudicator must come to grips with and thendetermine the dispute, as well as the limited material which he or she is entitled tohave regard to (see below), make adjudication a very different process to whatmost parties are used to, and one for which clients of contractors underconstruction contracts need to be very well prepared.

In New South Wales and Victoria an adjudicator must determine anadjudication application within 10 business days after notifying the parties of hisor her acceptance of the appointment unless the parties agree to an extension.64

Under the Queensland and WA Acts the period for determining the adjudicationruns from the receipt by the adjudicator of the adjudication response, or if nonewas received, from the last day on which an adjudication response could have beenserved. The period in Queensland is 10 business days, and in Western Australia itis 14 days.65


59 See s 20(1) of the NSW Act, s 21(1) of the Victorian Act and s 24(1) of the QueenslandAct.

60 See s 27(1) of the WA Act.61 See s 20(2A) of the NSW Act and s 24(3) of the Queensland Act.62 See s 20(2B) of the NSW Act and s 24(4) of the Queensland Act.63 See s 32 of the WA Act.64 See s 21(3) of the NSW Act and s 22(4) of the Victorian Act.65 See s 25(3) of the Queensland Act and s 31(1) of the WA Act.

Under all the Acts an adjudicator may carry out an inspection, or request furthersubmissions, or call a conference (at which, in New South Wales and Queensland,the parties are not entitled to any legal representation).66 However, theseprocedures are in practice uncommon, at least in relation to disputes of any size orcomplexity, because of the remarkably short time limit available for making thedetermination. The common approach is for the adjudicator to proceed to adetermination “on the papers”.67

The determination

Under the NSW, Victorian and Queensland Acts, the adjudicator mustdetermine the amount of the progress payment to be paid and the date on which theamount was or is payable. In New South Wales and Queensland the rate of interestpayable on that amount must also be determined. The adjudicator can only haveregard to:

(a) the provisions of the Act;68

(b) the provisions of the construction contract;(c) the payment claim and claimant’s submissions;(d) the payment schedule and respondent’s submissions;(e) the result of any inspection.69

In New South Wales and Queensland the adjudicator must give a reasoneddetermination unless both parties have requested him not to do so.70 In Victoria theadjudicator need only give reasons if asked to do so by either of the parties beforethe making of the determination.71

Those responsible for drafting the WA Act have taken heed of comments inpublic consultation to the effect that for complex disputes the adjudicationprocedure is not suitable. In Western Australia the adjudicator will have to dismissthe application without determining it on its merits if satisfied that it is not possibleto fairly make a determination because of the complexity of the matter or theprescribed time or any extension of it is not sufficient for any other reason.72

Otherwise, under the WA Act an adjudicator must determine whether any partyis liable to make any payment or return any security, and if so how much(including any interest), and on what date.73


66 See s 21(4) and (4A) of the NSW Act, s 22(5) of the Victorian Act, s 25(4) and (5) of theQueensland Act and s 32(2) of the WA Act.

67 Under s 32(1) of the WA Act the adjudicator must if possible make the determination onthe basis of the application, the response (if any) and their attachments.

68 And, in Queensland, Pt 4A of the Queensland Building Services Authority Act 1991(Qld): see s 26(2)(a) of the Queensland Act.

69 See s 22 of the NSW Act, s 23 of the Victorian Act and s 26 of the Queensland Act.70 See s 22(3) of the NSW Act and s 26(3) of the Queensland Act.71 See s 23(3) of the Victorian Act.72 See s 31(2) of the WA Act.73 Ibid.

Costs of adjudication

The parties are jointly and severally liable for the adjudicator’s fees andexpenses. The parties are liable to contribute equally, or in such proportions as tothe adjudicator may determine.74 Typically an adjudicator will require each partyto contribute equally to its fees and expenses irrespective of the outcome of thecase. An adjudicator will normally advise the parties once it has reached itsdecision and call for payment of its fees before the decision is released.

CONSEQUENCES OF DETERMINATION BY ADJUDICATOR

New South Wales and Queensland

The respondent must pay the amount determined by the adjudicator within fivebusiness days after service of the determination.75

In the event of non-payment, collection of the adjudicated amount by theclaimant is extremely straightforward. A further application can be made by theclaimant to the ANA for the issuing of an adjudication certificate, which simplystates the names of the parties, the adjudicated amount and the date on which itwas to be paid. That certificate (not the determination itself) can then be registeredat any court as a judgment for a debt and is enforceable accordingly.76

There is practically no basis for a respondent to successfully overturn the effectof such a judgment.

There is also a right to suspend work where the adjudicated amount is not paidin time, on the same terms as where a respondent fails to make payment of anamount in a payment claim in respect of which he failed to serve a paymentschedule (see above).

Western Australia

The position is similar in Western Australia, where an adjudicator’sdetermination can be enforced as a judgment, but only with the leave of the court.77

There is no guidance in the WA Act as to what factors a court should take intoaccount when exercising its discretion as to the granting of leave.

How the Western Australian court exercises its discretion will dictate howcertain a contractor can be of actually being paid the amount the adjudicator hasdetermined. This is therefore likely to dictate, to a considerable extent, whether


74 See s 29 of the NSW Act, s 45 of the Victorian Act, s 35 of the Queensland Act and s 44of the WA Act.

75 See s 23 of the NSW Act and s 29 of the Queensland Act.76 See ss 24 and 25 of the NSW Act and ss 30 and 31 of the Queensland Act.77 See s 43 of the WA Act.

adjudication under the WA Act becomes as popular with contractors as hasadjudication under the NSW Act.

The WA Act also gives a contractor the right to suspend work where theprincipal does not pay an adjudicated amount in time, on very similar terms to theNSW and Queensland Acts, and with similar protection against liability for lossesincurred by the principal.78

Victoria

The respondent must either pay the amount determined by the adjudicator tothe claimant or, if the respondent has commenced litigation or arbitration (asappropriate) against the claimant in relation to a dispute under the constructioncontract, security may be given pending final determination of matters in disputebetween the parties. Security may be given by way of guarantee (or similar) froma recognised financial institution or by payment into a designated trust account.79

The fact that in Victoria contractors are only guaranteed security for paymentlater on, rather than actual payment “now”, may be the principal reason why,anecdotally, there are very few adjudications happening under the Victorian Act.

DEALING WITH THE ACTS FROM THE POINT OF VIEWOFTHE CLIENT

It will be clear from the above that the security of payment legislation is radicalin that it tilts the “balance of power” in construction contracts in favour ofcontractors. This is particularly the case in New South Wales and Queensland.

The Relative Strengths of the Acts

It should be recalled that whilst the Acts are certainly powerful, they do onlyprovide interim benefits. Underlying rights remain unaffected. Nothing in theadjudication process affects any right that a party may have under a constructioncontract, nor does the adjudication affect any civil proceedings. Further, inproceedings before a court or tribunal, the court or tribunal must allow for anypayment made under the Act and may make orders as appropriate for restitution ofany amounts so paid.80

So a party aggrieved by an adjudicator’s determination can always take thedispute to court (or arbitration, if that is what the contract provides).


78 See s 42 of the WA Act.79 See s 25 of the Victorian Act.80 See s 32 of the NSW Act, s 47 of the Victorian Act, s 100 of the Queensland Act and s 45

of the WA Act.

But in New South Wales and Queensland, and possibly Western Australia, longbefore a court or arbitral tribunal finally decides the dispute, the adjudicator’sdetermination will have had to have been complied with. If the determination wasthe payment to the contractor of a substantial amount, and the court or tribunalultimately decides that the adjudicator was wrong and the amount should berepaid, then the risk of the contractor’s insolvency in the meantime will have beencarried by the client.

Clearly, then, the intention of the NSW and Queensland Acts (and to a certainextent the WA Act) is that rather than leaving money in the hands of the principalwhile the dispute is being resolved, interim payments are to be made to thecontractor while allowing a principal to sue to recover that payment if it considersthat the adjudicator was wrong and that a more thorough analysis of the evidenceby a court or arbitrator will result in a different outcome.

As noted above, the legislation in New South Wales and Queensland effectivelyensures that the contractor must be paid an adjudicated amount immediately. Thisis no doubt the key to the recent popularity of the process amongst contractors inNew South Wales. It seems likely that when the Queensland Act comes into forceadjudication will be popular amongst contractors there also.

As long as the Victorian Act enables a client to avoid having to pay over theadjudicated amount to the contractor by putting the money into a trust account andcommencing litigation or arbitration against the contractor, adjudication isunlikely to be as popular as in the other States.

Adjudication under the WA Act could be popular, depending perhaps on howready the courts are to give leave to enforce adjudication determinations asjudgments, and how often adjudicators decline to make a determination at all, onthe basis that they consider the matter too complex.

So what can a client do to mitigate the more draconian aspects of the Acts?

Dealing with the Acts in the Contract

There is virtually no scope to contract out of the NSW, Victorian andQueensland Acts. Section 34 of the NSW Act reads as follows:

“34 No contracting out(1) The provisions of this Act have effect despite any provision to the

contrary in any contract.(2) A provision of any agreement (whether in writing or not):

(a) under which the operation of this Act is, or is purported to be,excluded, modified or restricted (or that has the effect ofexcluding, modifying or restricting the operation of this Act), or

(b) that may reasonably be construed as an attempt to deter aperson from taking action under this Act,

is void.”


The Queensland Act contains a very similar provision which is just as broad,and the Victorian Act provides in similar though slightly less far-reaching terms.81

The WA Act also contains a prohibition on contracting out.82 However, giventhe way in which the WA Act is drafted, it seems that parties to constructioncontracts could effectively contract out of the WA Act by not giving the contractora right to claim progress payments in the contract.

In the other States, even if the Acts cannot be contracted out of, the partiesshould adequately draft clauses in construction contracts that deal with howfrequently progress payments can be claimed, how they are to be calculated, howconstruction work or goods or services are to be valued, and what is the due datefor payment. This should help ensure that the various default provisions in theActs do not come into effect instead.

Thought should be given to drafting construction contracts under the NSW,Queensland and Victorian Acts such that time periods for making payment claimsand serving payment schedules comply with those in the Acts, so that there is aslittle divergence as possible between the contractual payment rights and thestatutory ones. This should minimise the risk of inadvertently failing to serve apayment schedule in time or at all.

Challenging Adjudications

In New South Wales clients have suddenly found themselves having to pay overvast sums to contractors or risk project shutdown. These payments can wreakhavoc on a client’s own cash flow and financial project management, quite apartfrom the risk of the contractor’s insolvency lying with the client.

It is perhaps understandable, therefore, that “victims” of substantial adjudicationawards have looked for ways of challenging some of the more draconian effects ofthe NSW Act and adjudicators’ determinations. Indeed, the NSW Act has spawneddozens of separate pieces of litigation arising out of adjudications that awardedmillions of dollars in favour of contractors.

Administrative law remedies

There is no express requirement in any of the Acts for the adjudicator to accordnatural justice to the parties.83 It is clear, however, that the adjudicator must dowhat is possible in this regard within the very strict time limits accorded to him,because the New South Wales courts have now held on numerous occasions thatadjudicators’ determinations under the NSW Act are amenable to judicial review


81 See s 99 of the Queensland Act and s 48 of the Victorian Act.82 See s 53 of the WA Act.83 In an earlier consultation draft of the WA Bill there was an express provision that the

adjudicator is not bound by the rules of natural justice, but this was removed before itwas introduced into Parliament.

and that the administrative law remedies are therefore available to quash anadjudicator’s determination84.

The WA Act expressly provides that adjudicators’ decisions will be subject tojudicial review under the new State Administrative Tribunal Act 2004 (WA) whenit comes into force.

Injunctions

In appropriate cases a respondent may be able to avoid an adjudication in theclaimant’s favour by seeking an injunction restraining the claimant and perhapsthe adjudicator from proceeding with an adjudication. Such a case wouldprobably relate to a jurisdictional issue, for example there being a serious questionas to whether the contract falls within the definition of “construction contract” inthe relevant Act.

It may also be possible to obtain an injunction restraining a claimant fromenforcing an adjudicator’s determination, for example pending a hearing of anapplication for judicial review of the determination. Such an injunction wasdenied on the basis that the Act only provides interim relief anyway and it isalways open to litigate or arbitrate the underlying dispute.85 Such an injunctionwas granted pending an application for judicial review of an adjudicator’sdetermination, but conditional upon the respondent (who was seeking theinjunction) paying the adjudicated amount into court in the meantime.86

Dealing with the Acts during Performance of ConstructionContracts

Today’s contracts on a major project may often be in the nature of “partnering”or “alliancing”, so as to foster a cooperative attitude to the project. There may beconsultative procedures set out in the contract, perhaps even an external DisputeReview Board established, to deal with disputes as and when they arise.

But a contractor might still invoke the right to make a statutory payment claimor seek adjudication, notwithstanding what the contract says about disputeresolution or the parties’ attitudes to the project.

A responsible client has no choice but to be prepared to deal with paymentclaims and adjudication applications under the Acts as they arise on an immediateurgent basis.

This means that while a project is under way, the client should have a system inplace to deal with payment claims and adjudication applications. On largeconstruction contracts, the relevant managers must be able to put together a team


84 See most recently Kembla Coal & Coke v Select Civil [2004] NSWSC 628 (23 July2004) per McDougall J; Brambles v Davenport [2004] NSWSC 120 (12 March 2004)per Einstein J and the cases referred to at [7].

85 See Lucchiti v Tolco [2003] NSWSC 1070.86 See Abacus Funds Management v Davenport [2003] NSWSC 935.

of people with sufficient expertise to be able to prepare a detailed paymentschedule (or notice of dispute in WA) within a matter of days of receiving apayment claim.

In these circumstances in house lawyers involved in major projects clearly needto know their way around the relevant Acts and the procedures they provide for,and be in a position to consult responsive external lawyers with experience of howthe Acts operate in practice.


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