“…this schism over reviewability [as between Victoria and New South Wales] may have turned the Murray River into something of a gulf”.1
3.1 In Australia, all six State and two Territory legislatures have enacted security of payment legislation in order to address the problem of inadequate security of payment for sub-contractors in the building and construction industry. Security of payment legislation is a term used to describe the Acts listed in paragraph 3.2 below. In the explanatory statement of the relevant Australian Capital Territory Bill,2 the reasons behind enacting this régime were well explained:
“Security of payment has been an issue in the building and construction industry over many decades. Several taskforces and the 2003 Cole Royal Commission into the Building and Construction Industry flagged security of payment as a significant industry matter and cited strong anecdotal evidence across all jurisdictions to support the notion that security of payment problems are widespread within the industry. The building and construction industry is particularly vulnerable to security of payment issues because it typically operates under a hierarchical chain of contracts with inherent imbalances in bargaining power. The failure of any one party in the contractual chain to honour its obligations can cause a domino effect on other parties resulting in restricted cash flow, and in some cases, insolvency.”
3.2 The security of payment legislation across States sought to modify payment behaviour in the construction industry to limit the fight of sub-contractors to recover due payments and to shift the risk of insolvency to the parties further up the contractual chain. The legislation aimed to provide a statutory right to ensure security of payment in the building and construction industry introducing a rapid statutory adjudication process to resolve payments disputes. Basically, there are two distinct Australian models of security of payment legislation. Those models have been traditionally classified as the “East Coast” and “West Coast” models.3
- .1 The East Coast model applies in New South Wales, Queensland, Victoria, South Australia, the Australian Capital Territory, Tasmania and South Australia, as follows:
New South Wales (NSW)
Building and Construction Industry Security of Payment Act 1999 (NSW).
Amended by Building and Construction Industry Security of Payment Amendment Act 2002.
Amended by Building and Construction Industry Security of Payment Amendment Act 2013.
Building and Construction Industry Security of Payment Act 2002 (Vic).
Amended by Building and Construction Industry Security of Payment Amendment Act 2006.
Building and Construction Industry Payment Act 2004 (Qld).
Amended by Building and Construction Industry Payment Amendment Act 2014
Australian Capital Territory (ACT)
Building and Construction Industry (Security of Payment) Act 2009 (ACT).
Building and Construction Industry Security of Payment Act 2009 (Tas).
Under amendment by Building and Construction Industry Security of Payment Amendment Bill 2015.
South Australia (SA)
Building and Construction Industry Security of Payment Act 2009 (SA).
- .2 West Coast model applies in Western Australia and Northern Territory as follows:
Western Australia (WA)
Construction Contracts Act 2004 (WA).
Northern Territory (NT)
Construction Contracts (Security of Payments) Act 2004 (NT).
3.3 Both models are based upon similar legislation in the United Kingdom (the Housing Grants, Construction and Regeneration Act 1996), which applies in England, Wales, Northern Ireland and Scotland. Whilst both models aim to provide a speedy dispute resolution mechanism for payment disputes through adjudication, there are key differences between them. The common object of legislation in all States is to facilitate timely payment as between contracting parties within the construction and building industry, by improving the flow of cash down the contractual hierarchy.
3.4 The East Coast model creates a “dual payment system”, which creates a statutory payment system alongside any contractual payment régime. Thus, the model renders void any clause in building and construction contracts that aims to frustrate the operation of the régime, such as the “paid when paid” clause. Under this model, an entity (whether person or firm) carrying out construction work (the claimant) is entitled to progress payments by serving a progress payment claim on the paying party (the respondent), who must then serve what is so called a “payment schedule”. The “payment schedule” must state how much, if anything, the respondent will pay the claimant and the respondent’s grounds for withholding payment of any of the claimed amount. If the respondent fails to serve a payment schedule on the claimant within a prescribed time, the respondent must pay the claimant the whole of the claimed amount by the due date for payment. If the respondent fails so to do, the claimant is entitled to suspend work and recover the whole of the claimed amount as a debt. In the alternative, the claimant can seek adjudication of the payment claim. If the respondent has provided a payment schedule that includes reasons for withholding payment of the claimed amount, or any part thereof, the claimant may seek adjudication of the payment claim.
3.5 Perhaps the most important feature of the East Coast model is that it provides a tool to help ensure the cash-flow down the contractual chain and does not affect the rights of the parties as regards the final contract sum. Rather, it simply provides an interim mechanism for the recovery of progress payments on account during the course of a contract.4 The legislation imposing this model excludes construction contracts related to the drilling or extraction of oil and natural gas, or the extraction of minerals, and do not apply to residential contracts, except in Tasmania.
3.6 Except in Queensland, this model provides for authorised nominating authorities (ANAs), appointed by the government, which train and nominate adjudicators. The adjudication process must be completed within a prescribed time. Sometimes this is 10 business days after the adjudicator is appointed. An adjudication decision is binding and final on an interim basis, pending any final curial proceedings. The rôle of the adjudicator under this model is largely that of a “statutory certifier” who essentially determines the amount of the progress payment due but does not decide any claims for debt or damages.5 The progress payment to which a claimant is entitled is an amount calculated under the construction contract, or, if the contract does not provide for such calculation, an amount calculated in accordance with the statute. Some construction contracts provide that, in calculating the amount of a progress payment, account must be taken of claims for damages by the claimant, or claims by the respondent of set-off for debt, or damages. When the construction contract so provides, the adjudicator will have to decide the amount of the progress payment, taking into account such claims, or set-offs. Adjudication decisions under this model are not subject to judicial review, except upon limited grounds related to jurisdictional errors and/or denial by the adjudicator of natural justice.
3.7 The East Coast model has been the subject of much criticism over the recent years.6 First, it is said that it encourages a “rubber stamp” approach, whereby the overwhelming majority of claims are waved through, without any substantive determination of the merits, leading to the aggrieved party taking an intransigent attitude in subsequent litigation, exacerbating disputation and encouraging costly litigation. Secondly, the lack of freedom to agree an adjudicator has led to a parasitic industry of adjudicators with a monopoly. Thirdly, restricted hearings necessitate further litigation and poor decision-making. Fourthly, completion of the process within 10 business days is too short a time schedule for all but the simplest of cases. Fifthly, the use of “ambush claims” leads to further litigation. Sixthly, the “one way street” of the model, whereby a claim for damages can be used as a defence, but not by way of attack, distorts the adjudication process and, again, encourages satellite litigation. Finally, it is said that the exclusion of financial institutions and residential contracts from the ambit of the legislation in question is unjustified.
3.8 One particular feature of the East Coast model that has attracted criticism is what has been described as a “procedural trap”, which prevents a fair hearing and requires the respondent to divert significant resources to the massive task of preparing appropriate payment schedules.7 It is also said that respondents’ ignorance of the legislation often prevents them from submitting payment schedules.8 The appointment of adjudicators (by ANAs) has also been criticised as leading to the perception that profit-driven ANAs are biased towards claimants9 and allegations of “adjudicator shopping” whereby a claimant, or its representative, demands that an ANA should either appoint, or not appoint, certain adjudicators, otherwise the claimant will refer its adjudication application to another ANA.
3.9 Under the East Coast model, the rôle of adjudicators is more analogous to an administrative tribunal, for which the ambit of jurisdictional error is broader.10 Having said that, within the East Coast model States, the courts in NSW and Queensland are currently upholding adjudication decisions on a “pay now, argue later” basis11 and, as in the United Kingdom jurisdictions, an adjudication decision is not required to be reasonable, nor correct, in order to be enforceable, provided that it otherwise complies with the basic and essential requirements.12 The situation is no different in South Australia and Tasmania, which have quite similar legislation, whilst the Australian Capital Territory is an anomaly, having an express legislative arrangement of appeal. In Victoria, it remains the position that relief in the nature of certiorari, on all of the grounds available under that writ, including error on the face of the record, is not excluded.13 The East Coast courts maintain the view that the security of payment legislation only offers interim remedy, and so if a claimant is insolvent, the courts will be reluctant to allow enforcement of its right under this legislation.14
3.10 There has been considerable court involvement in adjudication in the Eastern States. It is reported that there have been 197 cases challenging the adjudicator’s determinations in the courts of New South Wales, Queensland and Victoria up until the end of 2013,15 80% of which have been successful.16 Apparently, the courts have been gradually losing confidence in the quality of adjudication outcome, after seeing “more and more cases where the quality of the adjudication decision making process has been so poor that the courts have been increasingly willing to intervene”.17 In 2014, the East Coast courts dealt with at least 50 applications in relation to adjudication decisions (20 in New South Wales, 19 in Queensland and 3 in Victoria, 4 in Australian Capital Territory, 3 in South Australia and 1 in Tasmania).18 This somehow reflects the ongoing dissatisfaction of respondents with the adjudication appointment process and/or adjudication outcomes. Since, under the East Coast model, an adjudication decision can only be for payment of a progress payment, it is invariably the person liable to make the progress payment (the respondent) who challenges the validity of the adjudication decision.
3.11 The West Coast model is adopted by Western Australia and the Northern Territory, with some differences as between the two jurisdictions. The model is much more akin to that of the UK model. Similar to the East Coast model, the West Coast model provides for an interim payment régime, leading to a rapid adjudication process. Some significant differences from the East Coast model include that the claim can be done both up and down the contractual chain. Certain provisions are prohibited, like “pay when paid” and payment due dates of greater than 50 days after the claim is made. Also, the payment claim is not limited to one specific type of money claim under a construction contract; and any party to a construction contract may refer a disputed payment claim to an adjudicator for determination. Thus, principals are not barred from raising claims for payment on account for liquidated damages, or disruption costs, or for the costs of remedial works.
3.12 Unlike the East Coast model, the concept of a “payment schedule” is not applicable as a precondition to entitle a respondent to make submissions and to be heard in any subsequent adjudication and there is no limitation on what might be included in the adjudication response. All adjudicators must be registered in order to adjudicate and parties are allowed to select their adjudicator or the appointing body. The adjudicator adopts an evaluative approach; they are not bound by documents and the submissions of the parties. The adjudicator also enjoys wider powers, including allowing legal representation in conferences, engaging experts and arranging testing of certain works.
3.13 Under this model, the adjudicator makes an assessment on the balance of probabilities about what has already occurred under the construction contract with respect to a payment claim.19 The process under this model somewhat mirrors a court process and the adjudicator’s rôle is analogous to an inferior court, rather than an administrative tribunal.20 Accordingly, the test and ambit of jurisdictional error is very narrow, as inferior courts would commit a jurisdictional error when purporting to act wholly, or partly, outside their jurisdiction, or whilst acting within their jurisdiction, but doing something for which they lack authority.21 The adjudicator has authority to decide questions of law authoritatively and wrongly as long as the error is not jurisdictional.22 The model also provides for the right of either party to seek limited review of an adjudicator’s decision to dismiss an application upon grounds related to validity of a payment claim, existence of a construction contract and complexity of the payment dispute. The review is conducted, whether by the state administrative tribunal (as is the case in WA), or a local court (as is the case in NT).
3.14 As such, and unlike the situation under the East Coast model, there have been comparatively very few judicial review applications to challenge adjudication decision in the Western States and very few of these have been successful. As reported, from the commencement of the WA Act to the end of June 2014, 23 cases have been referred to the WA Supreme Court, amounting to fewer than 2% of all adjudications. Seven out of the 23 cases have been referred to the court in the 2013–2014 reporting year in relation to adjudicator’s determination.23
3.15 The current level of inconsistency across States has been identified as a matter that ought to be addressed on an urgent basis and it is not obvious why sub-contractors in one State, or Territory, have better prospects of receiving payment for their work than sub-contractors working in any other State or Territory.24 It has also been suggested that it is now time to capture the best from all jurisdictions and consolidate them into a coherent national framework.25 In August 2001, the Federal Royal Commissioner conducted the first national overview of the conduct and practices of the Australian building and construction industry. In February 2003, the Federal Royal Commission released the final report (the Cole Report),26 which addressed, inter alia, the need to harmonise security of payment legislation across Australia. The Cole Report included a “Draft Bill” of the likely national legislation, which was, more or less, akin to the West Coast model. The call for a national scheme came into being to primarily ease the business of construction firms operating in several States and to combine the strength of all statutes. Many other calls for harmonisation have followed since then;27 however, neither the Cole Report nor subsequent calls, have been considered by any legislature at the time of writing.
3.16 The Building and Construction Industry Security of Payment Act 1999 (NSW) was the first security of payment legislation enacted in Australia and is the basis for all other East Coast security of payment legislation that has been progressively passed since then.28 South Australia was the final jurisdiction to commence operation of its Building and Construction Industry Security of Payment Act 2009 (SA) on 10 December 2011. NSW and Queensland are currently the two most active jurisdictions using the legislation in Australia, as is indicated by the annual adjudication applications lodged in both States in the last three years.29
3.17 For the purpose of this publication, this chapter will continue to cover the NSW legislation as the first security of payment legislation, which has heavily influenced all other Australian security of payment legislation. The remainder of this chapter will therefore seek comprehensively to demonstrate the key aspects of the NSW legislation in some depth, so as to stand as a reference point when considering other legislation. Thus, the discussion in other East Coast chapters will merely focus upon the deviations and differences from the NSW model. In other words, reading the NSW section first is essential for those interested to have sufficient information about any of the other East Coast legislation.
3.18 On that basis, the smaller Eastern jurisdictions, namely Victoria, the Australian Capital Territory, South Australia and Tasmania will be covered in a separate chapter, with more detailed focus upon the Victorian Act by reason of its massive differences and the comparatively excessive case law. The Queensland legislation will also be covered in a separate chapter, so as adequately to address its substantial differences and far-reaching new features, as amended in 2014. The two pieces of legislation under the West Coast model are also covered independently in a separate chapter.
3.19 The Building and Construction Industry Security of Payment Act 1999 (NSW) (the SOP Act) received assent on 5 October 1999 and entered into force on 26 March 2000, following a number of reviews of payment practices in the construction industry. It was a continuation of the State’s attempts to protect small and vulnerable sub-contractors, following the enactment of the Contractors’ Debts Act 1997. The SOP Act was the first of its kind in Australia.
3.20 In the second reading of the relevant Bill, the Minister for Public Works and Services advocated the need to enact such novel security of payment legislation and stated, as follows:30
“I remind the House that on 15 February the Premier announced the Government’s intention to stamp out the un-Australian practice of not paying contractors for work they undertake on construction. It is all too frequently the case that small subcontractors, such as bricklayers, carpenters, electricians and plumbers, do not get paid for their work. Many of them cannot survive financially when that occurs, with severe consequences to themselves and their families. The Government is determined to rid the construction industry of such totally unacceptable practices.”
The Minister went on to state that:
“The main thrust of this bill is to reform payment behaviour in the construction industry. The bill creates fair and balanced payment standards for construction contracts. The standards include use of progress payments, quick adjudication of disputes over progress payment amounts and provision of security for disputed payments while a dispute is being resolved. The bill will speed up payments by removing incentives to delay.”
3.21 After three years of the operation of the SOP Act, it was further amended through the Building and Construction Industry Security of Payment Amendment Act 2002 (NSW) No 133, to improve the original legislation, which was loosely modelled upon the UK Act. The 2002 statutory amendments provide more clarity regarding time frames, their application and the consequences of not complying. Notably, the reform repealed the provision in the original statute that was permitting respondents to place the determined amount in security, or trust, until the dispute was finally heard. Also, the definition of progress payment was amended so as to include final payment in order to overcome the negative effect of a previous court decision, excluding final payments from the scope of the SOP Act.31 Since then, the NSW legislation has been prone to various governmental reviews, aiming to improve its operation against the set objectives.
3.22 In 2004, the NSW Department of Commerce released a review report on the 2002 amendments and concluded that the amendments remained valid and that the terms of the SOP Act remained appropriate, so the SOP Act should continue to operate. The review report also suggested further improvement in the SOP Act including, but not limited to, a requirement for minimum qualifications for adjudicators and allowing a longer duration for adjudication determinations.32 The report identified genuine industry concerns regarding the lack of a documented mechanism to bring complaints about adjudicators and the lack of transparency in the authorisation and operation of nominating authorities.
3.23 In 2010, the Department of Services, Technology and Administration released a discussion paper, drawing upon the 2004 report. The discussion paper proposed significant improvement to the SOP Act aiming to increase confidence in the régime and adding certainty to the outcome of an adjudicator’s determination.33 The paper introduced administrative improvements to adjudication, as well as legislative proposals. The paper also addressed serious concerns regarding, inter alia, the need for better regulation of adjudicators and ANAs and the capacity for the SOP Act to deal with complex claims, especially in high value contracts, in which the risk and impact of incorrect adjudication is severe. Accordingly, some of the recommendations have been adopted in the Building and Construction Industry Security of Payment Amendment Act (2010).
3.24 The 2010 amendments (now sections 26A to 26F of the SOP Act) allow a claimant who has made an adjudication application for a progress payment allegedly owed by a contractor to require a principal contractor, who, in turn, owes money to the contractor for work carried out or materials supplied by the contractor to the principal contractor as part of, or incidental to, the work or materials that the contractor engaged the claimant to carry out or supply, to withhold payment of that money owed as regard the amount of the payment claim submitted to adjudication. It also provides that, if the principal contractor does not withhold that money, the principal contractor shall be liable, along with the contractor, for the amount owed to the claimant. It empowers an adjudicator, at the request of the claimant, to direct the respondent to provide information to the claimant as to the identity and contact details of any person who is a principal contractor in relation to the claim. The respondent can be subject to a fine for failing to comply.34
3.25 In 2012, Bruce Collin QC was commissioned by the NSW Government to conduct an independent inquiry on construction industry insolvency following the shocking report of 1,113 insolvencies in the NSW building and construction industry in the 2011–2012 financial fear. The inquiry sought to assess the cause and extent of insolvency in the industry and recommend measures better to protect sub-contractors from the effects of insolvency. The inquiry’s final report (the Collin report) addressed various recommendations to improve the SOP Act in order to give better protection to sub-contractors.35 The most important recommendation was for legislation for a construction trust, similar to that in many Canadian Provinces and States in the United States. In addition, the report endorsed collective submissions from the industry, proposing to allow a sliding scale of time frames based on the size of adjudicated claim, so, the larger the claim, the more duration is given to respondents and adjudicators. The report also recommended a specific training system for adjudicators and proposed core topics to be covered in that training course.
3.26 The Building and Construction Industry Security of Payment Amendment Act 2013 (NSW) No. 93 adopted selected recommendations from the Collin report, but not the most important recommendation, namely the construction trust. For construction contracts entered after the commencement of the amending Act, except if the construction contract is connected with an exempt residential construction contract, the claimant is no longer required to include in a payment claim a statement that it is a payment claim made pursuant to the SOP Act. This means that any invoice, or claim for payment, which otherwise complies with section 13(1) of the SOP Act is a payment claim within the statutory definition, even though the claimant may not intend it to be a payment claim under the SOP Act. This has led to some unintended consequences. Section 13(5) of the SOP Act provides that a claimant cannot serve more than one payment claim in respect of each reference date under the construction contract. Sometimes, a claimant finds that recourse to adjudication is barred because the claimant failed to make an adjudication application within the prescribed time, after serving an invoice that the claimant appreciated was a payment claim under the Act. The amendment also established mandatory deadlines for paying progress payments. Unless the contract provides for earlier payment, progress payments must be paid no later than 15 business days after a payment claim is submitted by a head contractor to a principal; and no later than 30 business days after a payment claim is submitted by a sub-contractor to a head contractor.36
3.27 The amendment also provides that a head contractor must not serve a payment claim on the principal, unless that claim is accompanied by a supporting statement that includes a declaration to the effect that all sub-contractors, if any, have been paid all undisputed amounts that have become due and payable, in relation to the construction work concerned.37 This requirement (that is an offence if not complied with) may have a significant impact upon the cash flow of head contractors, who, in the past, used to rely on collecting payment from their principals, in order to pay their sub-contractors. A payment claim issued without a supporting statement could not be relied upon to enforce rights under the SOP Act.38 A head contractor must not serve a payment claim upon the principal accompanied by a supporting statement knowing that that statement is false or misleading. The penalties for not complying with this requirement are significant (eg, a maximum penalty of either $22,000 or three months’ imprisonment).
3.28 In order to ensure compliance with these requirements, the amendment established a specific scheme. The Director-General of the Department of Finance and Services may appoint an “authorised officer “(for the purpose of investigating compliance), who may require a head contractor to provide that officer with information or documents, relating to the payment of sub-contractors by, or on behalf of, the head contractor in respect of specified construction work.39 The amendment also provided for the making of regulations, which will require head contractors to create a trust account to hold retention money for sub-contractors.
3.29 In 2014, the NSW Government further amended the Building and Construction Industry Security of Payment Regulation 2008, which came into effect on 1 May 2015. The amended regulation (in line with the recommendations of the Collin report) requires head contractors holding retention money of subcontractors under a construction contract with a project value of not less than $20 million to hold the money in a trust account, established with an authorised deposit-taking institution. The regulations were made to put an end to the traditional practice whereby the retention money payable to sub-contractors is withheld by head contractors, who may become insolvent, putting such sub-contractors at significant risk of not being able to recover their retention moneys. The usefulness and effectiveness of the retention money trust has been criticised.40
3.30 The phrase of the “SOP Act” referred to in the following parts of this chapter is to the SOP Act in its amended form at that particular time, as applicable.
3.31 As in the case of other Australian legislation, the SOP Act identifies its object, to ensure that any person who undertakes to carry out construction work (or who undertakes to supply related goods and services) under a construction contract is entitled to receive, and is able to recover, progress payments in relation to the carrying out of that work and the supplying of those goods and services.41 This means that a person is entitled to receive a progress payment by granting a statutory entitlement to such payment, regardless of whether the relevant construction contract makes provision for progress payments.42 Judicially, it has been held that:
“The SOP Act seeks to ensure, among other things, that those who perform construction work pursuant to construction contracts have enforceable rights to progress payments. The statutory mechanisms for achieving that aim include a number of elements. There is a statutory right to progress payments despite any contractual provision to the contrary. In the event of disagreement, there is a statutory mechanism, called adjudication, for the interim determination of entitlements to progress payments.”43
3.32 In order to achieve its express object, the SOP Act established a procedure that involves:44
- .1 The making of a payment claim by the person claiming payment, and
- .2 The provision of a payment schedule by the person by whom the payment is payable, and
- .3 The referral of any disputed claim to an adjudicator for determination, and
- .4 The payment of the progress payment so determined.
It has argued that such procedures provided for in the SOP Act indicate some relaxations with regard to compliance with natural justice requirements. Hence, it was judicially decided that “an adjudicator under the Act is obliged to afford the parties to the adjudication natural justice, there being no indication of any legislative intention to exclude that fundamental right”.45
3.33 The SOP Act applies to “construction contracts”, which may be written or oral, or partly written and partly oral.46 “Construction work” is broadly defined and exclusions are essentially limited to mining operations. Basically, the SOP Act provides that construction work includes construction, alteration, repair, maintenance and demolition of most structures that can be fixed to land. This means that the SOP Act will apply to most typical construction contracts and related consultancy agreements. However, the SOP Act does not apply to a construction contract:47
- .1 Which forms part of a loan agreement, a contract of guarantee, or a contract of indemnity;
- .2 For residential building work, if the owner lives, or intends to live, in the building;
- .3 Where it is agreed that the consideration payable is not calculated by reference to the value of the work carried out, or the goods and services supplied;
- .4 Under which a party undertakes to carry out construction work, or supply related goods and services, as an employee, and
- .5 To the extent that the construction work, or related services, are carried out outside NSW.
3.34 The “construction contract” is defined in the SOP Act as “a contract or other arrangement under which one party undertakes to carry out construction work, or to supply related goods and services, for another party”. The word “arrangement” denotes some engagement, or state of affairs, or agreement (whether legally enforceable, or not), under which, perhaps amongst other things, one party undertakes to perform construction work for another.48 Judicially, it has been held that an “arrangement” as between the proprietor and the builder in a conversation can be an engagement, or agreement (not legally enforceable as a contract), under which the proprietor assures the builder that he had sufficient personal resources to pay it if the proprietor did not; that he would do so; and that the builder accepted and acted upon this assurance by executing the building contract and the bonus deed.49
3.35 The NSW Act provides for a statutory right to progress payments, alongside the existing contractual right, through a speedy and strict statutory procedure. A person who has undertaken to carry out construction work under the contract, or who has undertaken to supply related goods and services under the contract, is entitled to a progress payment on and from each “reference date” under a construction contract.50 The “reference date” means a date determined in accordance with the terms of the contract as the date on which a claim for a progress payment may be made in relation to work carried out, or undertaken to be carried out.51 This indicates that the parties are not prohibited by the SOP Act from “limiting” the occurrence of reference dates in their construction contract. However, if the contract is silent about the “reference date”, it is the last day of the named month in which the construction work was first carried out under the contract and the last day of each subsequent named month.52 The claimant can only make one claim for each reference date.53 However, if money has not been paid for a previous claim, it can be included in the next claim. Where reference dates are provided in a construction contract and the contract does not provide that the reference dates will survive termination of the contract, then termination of the contract may extinguish all future reference dates.54
3.36 The statutory adjudication mechanism starts when a person who claims to be entitled to a progress payment (the claimant) serves a valid payment claim on the person who, under the construction contract concerned, is, or may be, liable to make that payment in accordance with the legislation guidelines (the respondent).55 The claim must be served within the period determined by the terms of the construction contract, or the period of 12 months after the construction work to which the claim relates was last carried out, whichever is the later.56 A statutory payment claim can be made at the same time as a progress payment claim under the contract.57 The respondent can reply to the claim by providing a payment schedule to the claimant, which must identify the payment claim to which it relates and indicate the amount of the payment (if any) that the respondent proposes to make.58 If the scheduled amount is less than the claimed amount, the payment schedule must indicate why the scheduled amount is less and the respondent’s reasons for withholding payment.59 As a matter of good practice, those reasons should include any jurisdictional objections concerning validity of the payment claim or the existence of a construction contract. The payment schedule may be served by the respondent or his agent (ie, the superintendent) provided that a proper delegation is made by the respondent to his agent with a clear statement that this is a respondent payment schedule and not merely a superintendent’s certificate.60 The respondent must issue a payment schedule within ten business days, or as specified in the contract, whichever time expires earlier.61
3.37 The SOP Act also provides for the consequences of not paying the claimant where there is no payment schedule. If the respondent becomes liable to pay the claimed amount to the claimant as a consequence of having failed to provide a payment schedule and fails to pay the whole or any part of the claimed amount by the due date, the claimant may:
- .1 recover the unpaid portion of the claimed amount from the respondent, as a debt due to the claimant, in any court of competent jurisdiction,62 or
- .2 make an adjudication application in relation to the payment claim, and
- .3 may serve notice upon the respondent of the claimant’s intention to suspend the carrying out of the work.63 The reason why a claimant may choose the option of adjudication, rather than suing on the statutory debt, is to avoid the requirement to issue a summons for the statutory debt.64
3.38 Subsequently, if the claimant commences proceedings in order to recover the unpaid portion of the claimed amount from the respondent as a debt, judgment in favour of the claimant is not to be given, unless the court is satisfied of the existence of the relevant circumstances. Also, the respondent has very limited grounds to contest liability in those proceedings. The respondent is not entitled to bring any cross-claim against the claimant or to raise any defence in relation to matters arising under the construction contract.65 However, the respondent may challenge the claimant’s application in these proceedings upon grounds related to the validity of the payment claim.66 For instance, the respondent may use “misleading and deceptive conduct” of the claimant as a possible defence to the consequences of failing to provide a payment schedule within the relevant time frame, notwithstanding the fact that the SOP Act does not require the payment claim to be served in a good faith, nor having a genuine belief in the claimant’s entitlement so to do.67
3.39 If there is a payment schedule and the claimant is unhappy with it, or if the respondent does not pay the amount stated in the payment schedule, the claimant may serve an adjudication application to an ANA to nominate an adjudicator. That application must be accompanied by an application fee as may be determined by the ANA.68 Currently, there are eight ANAs practicing in NSW.69 The adjudication application must be in writing and made to a nominated authorising authority chosen by the claimant.70 Judicially, it has been held that the adjudication application must not provide arguments altering the position in the payment claim or introducing new issues.71 The fact that the claimant has the discretion to choose its favourite ANA raised significant concerns within the industry about the apprehended bias, claiming that the appointment process is claimant friendly, thus flawed.72
3.40 The adjudication application must be made within 10 business days after the claimant receives the payment schedule, or within 20 business days after the due date for payment, where any part of the scheduled amount has not been paid by the due date.73 If there is no payment schedule and the claimant elects to go to adjudication, the claimant must serve a notice upon the respondent of the claimant’s intention to commence adjudication and give the respondent a second chance to issue the payment schedule within five business days.74 In this case, the adjudication application must be served within 10 business days after the expiry of the five business days.75
3.41 The respondent has the right to serve an “adjudication response” within five business days after receiving the adjudication application or two business days after the adjudicator is appointed, whichever time expires later,76 provided that the respondent has served a payment schedule.77 The response must be in writing, identify the adjudication application to which it relates, and contain such submissions relevant to the response as the respondent wishes to include,78 although the respondent is not entitled to raise new reasons, other than those mentioned in the payment schedule.79 As such, the SOP Act somewhat facilitates the game of “ambush claims”, where the claimant may spend several months (assisted by lawyers and experts) preparing a comprehensive and lengthy payment claim for a substantial monetary amount, leaving the unsuspecting respondent only a few days to respond in its payment schedule and adjudication response.
3.42 If the chosen ANA80 refers an adjudication application to an adjudicator, that adjudicator may accept the adjudication application by serving a notice of acceptance on the parties.81 Some ANAs will only refer an adjudication application to an adjudicator who has contracted to pay the ANA a proportion (up to one third) of the adjudicator’s fees.82 The adjudicator’s notice should be served within four business days after the application is made, since, otherwise, the claimant may opt to withdraw its application.83 Having said that, the SOP Act has no express time limit for issue of an adjudicator’s acceptance to the parties. Such gap was criticised as it unnecessarily leads to a prolonged period of determination.84
3.43 By their acceptance, the adjudicator is taken to have been appointed to determine the adjudication application and is obliged to determine it as expeditiously as possible and in any case within 10 business days after the adjudicator notifies the parties their acceptance of the application, or within such further time as both parties may agree.85 Since the respondent can submit the adjudication response within two business days after the adjudicator’s acceptance, it is very likely for an adjudicator to issue their acceptance, without having any clue how the adjudication response will look. This, of course, will limit the adjudicator’s ability to assess their capability of reviewing extremely complex cases. The “one size fits all” approach inherent in the statutory mechanism (dealing with all types and sizes of claims) has been much criticised for its inability to produce quality determinations for larger and more complex payment claims.86
3.44 The respondent must pay the adjudicated amount within five business days.87 Failure to do so will allow the claimant to request an adjudication certificate from the ANA and to serve notice on the respondent of the claimant’s intention to suspend the carrying out of construction work.88 The adjudication certificate may be filed as a judgment for a debt in any court of competent jurisdiction and is enforceable accordingly.89 Section 7(1A) of the Contractors Debts Act 1997 provides that: “If an Adjudication Certificate … has been filed as a judgment for a debt in accordance with section 25 of the SOP Act, the court may … issue a Debt Certificate in respect of the debt due under this section.” However, such certificate cannot be filed, unless it is accompanied by an affidavit by the claimant, stating that the whole, or any part, of the adjudicated amount has not been paid at the time the certificate is filed.90
3.45 In order for an adjudicator to be eligible to practise, they must be natural persons and have such qualifications, expertise and experience as may be prescribed by regulations made under the SOP Act,91 although no regulations have yet been made to prescribe such qualifications or experience. Rather, NSW Fair Trading has released the so-called Authorised Nominating Authority Code of Practice92 (The Code). The Code establishes certain requirements that regulate the ANA’s functions under the SOP Act. For example, an ANA must notify the Minister’s representative of any complaint, or allegation, made against an adjudicator or the ANA, including court actions or adjudications submitted for judicial review, within seven days of becoming aware of the complaint or allegation, whether by formal or informal means. An ANA will manage the processes of selection, training and monitoring of adjudicators, as outlined in a referred Schedule within The Code. That Schedule provides that an ANA must:
- .1 Determine the necessary core competencies of adjudicators required to undertake the adjudication process under the SOP Act;
- .2 Select, train and monitor adjudicator performance and compliance with the SOP Act on a continuous basis;
- .3 Monitor and report any instance of non-compliance and unsatisfactory adjudicator performance, including details on remediation actions to ensure that such issues do not arise again;
- .4 Establish and maintain a training, accreditation and pre-qualification scheme, where necessary;
- .5 Establish and maintain effective ANA services, including but not limited to the numbers and type of adjudicators necessary to cater for all such adjudications;
- .6 Maintain a suitable quality system that supports consistent and reliable adjudicator selection, training and monitoring;
- .7 Ensure, when nominating an adjudicator, that:
- .7.1 The adjudicator has the core competencies to carry out each specific adjudication determination, noting that all adjudications are unique and may require varying degrees of competencies;
- .7.2 The adjudicator has been adequately trained and retrained in the adjudication process relating to the SOP Act;
- .7.3 Any perception of conflict of interest has been addressed prior to nomination.
- .7.1 The adjudicator has the core competencies to carry out each specific adjudication determination, noting that all adjudications are unique and may require varying degrees of competencies;
3.46 It is submitted that The Code provides a free hand to ANAs to decide upon the required training, qualifications and competencies of adjudicators. It also provides no deterrent against adjudicators accepting adjudication appointments when they lack the necessary competencies properly to deal with the disputed matters. The lack of quality control over adjudicators in NSW attracts some criticism, driven by the risk of injustice in rapid adjudication, which requires a high standard of adjudicator expertise.93 It was argued that ANAs in NSW do not have similar quality control over adjudicators and their training courses vary significantly, where some ANAs provide training for months, whilst others provide training for only a few days.94 It is likely that one of the reasons for the recent high rate of adjudication determinations that have been quashed by the courts in NSW is linked to perceived shortcomings in the manner in which adjudicators are regulated.