Last chance to tell the NSW Government what you really think …

This weekend witnessed thousands of Sydneysiders hitting the streets to protest against lockout laws.  While the Security of Payment Act (SOP) is unlikely to generate mass protests, it can often be the cause of frustration and irritation for all construction industry participants (for different reasons).  In any event, NSW Fair Trading has circumvented the need to hit the streets by the release of its Discussion Paper, calling for submissions in respect of the SOP Act from industry stakeholders.

Recent amendments to the NSW SOP Act

Effective from April 2014, a raft of amendments were made to the NSW SOP Act as a result of the Collins Inquiry into contractor insolvencies in the construction industry.  Those amendments included:

  • the introduction of mandatory payment time frames;
  • the introduction of a requirement for head contractors to provide a supporting statement with payment claims;
  • the removal of the requirement for a payment claim to state that it is a payment claim under the SOP Act; and
  • the introduction of the requirement for head contractors to hold retention money in a retention money trust account on projects with a value greater than $20 million (introduced by the Building and Construction Industry Security of Payment Amendment (Retention Money Trust Account) Regulation 2015 and effective from 1 May 2015).

Discussion paper

Fair Trading’s discussion paper is accessible at: http://www.fairtrading.nsw.gov.au/biz_res/ftweb/pdfs/About_us/Have_your_say/
Building_and_Construction_Industry_Security_of_Payment_Act_1999_Discussion_Paper.pdf
), which is the beginning of the NSW Government’s full review of the SOP Act.

The Discussion Paper seeks submissions on a very broad range of issues, including issues such as whether:

  1. claims ought to be possible both up and down the contractor chain;
  2. the requirement for a payment claim to state that it is made under the SOP Act should be re-introduced;
  3. NSW should follow the Queensland legislation and introduce different time frames for the adjudication of high value payment claims;
  4. the current adjudication process and time frames are effective and appropriate;
  5. attempting to resolve a dispute by mediation should be a mandatory condition precedent to making an adjudication applications; and
  6. retention money trust accounts should be extended to all projects, not just those with a value greater than $20 million.

Essentially, it appears that nothing is off-limits in the review of the SOP Act.

Naturally, there will be contrasting experiences for principals, head contractors and subcontractors and each category of stakeholders will have different bugbears with the SOP Act.  The review provides industry stakeholders with a rare opportunity to directly lobby the NSW government, however time is running out.

The deadline for submissions to be lodged with NSW Fair Trading is Friday, 26 February 2016.  If you would like assistance in preparing submissions, please do not hesitate to contact us.

Respondents despondent as the Court of Appeal further narrows scope for judicial review

In an important decision for adjudications in New South Wales, the Court of Appeal has determined that the existence of a reference date is not a “jurisdictional fact” that warrants intervention by the Courts.  The decision of Lewence Constructions Pty Ltd v Southern Han Breakfast Point Pty Ltd [2015] NSWCA 288 marks an about turn from previous Supreme Court decisions where adjudication determinations have been quashed for lack of a reference date1.  In a unanimous decision, the Court of Appeal has determined that the existence of a reference date is a matter to be determined by the adjudicator, not the Court.

Relevant sections of the Security of Payment Act

Essentially, the Court considered the effect of sections 8 and 13 of the Act.

The Court of Appeal considered the extent to which “On and from each reference date” in section 8(1) of the Act was an essential pre-condition for making a payment claim.  The Court found that it was not.

The Court placed emphasis on the words “or claims to be” in section 13(1) of the Act to support the finding that a dispute as to a person’s entitlement to a progress payment (including whether or not a reference date existed) does not preclude the making of a valid payment claim.

The role of the adjudicator

It is a matter for the adjudicator to determine when a reference date arises under a contract or the Act.  Unless it can be established that the payment claim is the second payment claim in respect of the same reference date (in which case the second payment claim cannot be validly served), the adjudicator’s determination as to the existence of a reference date cannot be subject of judicial review.

In theory, respondents now have one less reason to apply to the Supreme Court if they are dissatisfied with the adjudicator’s determination.

Having said that, practically speaking, a typical reason for a respondent to assert that there is no reference date for a payment claim is because the payment claim is alleged to be the second payment claim in respect of the same reference date, in breach of section 13(5) of the Act.  The Court of Appeal has confirmed that section 13(5) of the Security of Payment Act prevents more than one payment claim being served in respect of the same reference date and therefore is a jurisdictional fact capable of judicial review.  It is likely that dissatisfied respondents will now alter the approach adopted when applying for judicial review to assert a breach of section 13(5) of the Act, rather than asserting that no reference date existed to make the payment claim.

The construction contract

As previously discussed in our article entitled “Contractors beware: risk of no reference dates after termination”, whether reference dates accrue after termination of a contract depends on the words of the contract.

If the contract makes no provision for reference dates, statutory reference dates under the Security of Payment Act apply and continue to apply after termination of the contract (see our article entitled “The importance of unequivocal termination of construction contracts in the eyes of Security of Payment legislation”).

If the contract makes provision for reference dates, whether reference dates continue to accrue after termination will require an interpretation of the contract by an adjudicator.  To avoid ambiguity, construction contracts should clearly state whether the accrual of reference dates survives termination of the contract.

Far reaching consequences for the validity of payment claims?

The Court of Appeal’s reasoning (at paragraph 93, Ward JA (and similarly at paragraph 120, Emmett JA)) is likely to have even more far reaching consequences than set out above because the Court said:

The appellant was a person who claimed entitlement under the construction contract to progress payments in the general sense contemplated by the Act.  It satisfied the description in s 8(1)(a) and (b).  Whether that claim was valid (including whether it was valid because it was supported by a reference date) is not a jurisdictional fact.

On its face, the word “claim” in the above paragraph may be interpreted as a reference to a payment claim and therefore a finding that an invalid payment claim (for whatever reason) does not warrant judicial intervention.  Further, in paragraph 136, Sackville AJA said:

If s 13(1) of the Act is construed as I think it should be, it permits a claimant to serve a valid payment claim if the following conditions are satisfied:

  • the claimant has undertaken to carry out construction work under a construction contract (or has undertaken to supply goods and services under the contract);
  • the claimant is or claims to be entitled to a progress claim under the construction contract; and
  • the claim is served on the person who, under the construction contract concerned, is or may be liable to make the payment.

A question remains whether a payment claim must comply with section 13(2) of the Act for it to be a valid payment claim and therefore invoke the jurisdiction of the Act.  For example, a payment claim that does not sufficiently identify the construction work claimed or does not claim a particular amount was previously considered to be invalid and a jurisdictional fact capable of judicial review2.

On the face of the Court of Appeal’s judgment, it appears that compliance with section 13(2) of the Act is not a jurisdictional fact and, therefore, whether or not a payment claim complies with section 13(2) of the Act is a matter for the adjudicator that cannot be subject of judicial review.  It is likely that this issue will be the subject of further litigation before the Supreme Court.

Payment claims

It follows from the Court of Appeal’s judgment that, to avoid falling foul of a jurisdictional fact, a payment claim under the Security of Payment Act must, at a minimum, be:

  1. made by a person who has entered into a construction contract (as that term is broadly defined in the Security of Payment Act);
  2. made by a person who has undertaken to carry out construction work or related goods and services;
  3. made by a person who is or, who claims to be, entitled to a progress payment (irrespective of whether or not there exists a reference date or the person, in fact, has any entitlement); and
  4. validly served on the person who is liable to make payment, which includes that:
    – the payment claim must be served in accordance with the requirements of the construction contract or the Act;
    – the payment claim must not be the second payment claim in respect of the same reference date; and
    – if the payment claim is made by a head contractor to a principal, the payment claim attaches a supporting statement in the form prescribed by the Security of Payment Act and that supporting statement cannot be false or misleading in a material particular.

1 Including the recent decisions in Patrick Stevedores Operations No 2 Pty Ltd v McConnell Dowell Constructors (Aust) Pty Ltd [2014] NSWSC 1413 and Omega House Pty Ltd v Khouzame [2014] NSWSC 1837

2 As summarised by Palmer J in Brookhollow Pty Ltd v R & R Consultants Pty Ltd [2006] NSWSC 1

Half-time, change sides! – invalid payment claims and the ‘net’ damage to respondents

The recent Supreme Court of New South Wales decision in The New South Wales Netball Association Ltd v Probuild Construction (Aust) Pty Ltd [2015] NSWSC 1339 highlights the often fickle strategies adopted by parties to jurisdictional disputes under the Building and Construction Industry Security of Payment Act 1999 (NSW) (SOP Act). The dispute concerned the construction of the “Netball Centre of Excellence” at Sydney Olympic Park.

Most jurisdictional arguments take place after an adjudication determination has been made. In those cases, the respondent asserts that an adjudicator did not have jurisdiction to make a determination and the claimant argues that the adjudicator did have jurisdiction. The respondent usually awaits the adjudication determination to assess the commercial merits of applying to the Court for relief.

The NSW Netball case was slightly different because NSW Netball (the respondent) applied to the Court before the amount determined was known (in an effort to avoid the unrecoverable costs of preparing an adjudication response).

Before the determination

Probuild (the claimant) issued payment claim #23 on 5 January 2015, which was made under cover of a document describing it as a “draft claim” (Claim 23), and payment claim # 24 on 2 March 2015 (Claim 24), both in respect of the same reference date.

NSW Netball issued a payment schedule to Probuild in response to each payment claim, on each occasion scheduling an amount payable of $Nil, stating that each claim was invalid.

Probuild lodged an adjudication application in respect of Claim 24 only. Shortly thereafter, NSW Netball commenced the proceedings seeking to restrain the adjudicator from determining the adjudication application. In that hearing before the Court:

  • despite asserting in the payment schedule to Claim 23 that Claim 23 was not a valid payment claim, NSW Netball argued, as it had thereafter done in its adjudication response, that Claim 24 was the second payment claim in respect of the same reference date and, therefore, not a valid payment claim under the Act; and
  • Probuild argued that Claim 24 was not the second payment claim in respect of the same reference date and was a valid payment claim under the Act. Probuild described NSW Netball’s case that Claim 24 was the second payment claim in respect of the same reference date as “very weak”.

The Court restrained Probuild from enforcing any adjudication certificate until further order of the Court, but allowed the adjudicator to determine the application. The Court considered that the balance of convenience favoured not restraining the adjudicator from making a determination because, notwithstanding that NSW Netball may incur significant costs in preparing the adjudication response, the Court is not empowered to amend the strict timetable under the SOP Act and so Probuild would be deprived of its rights under the SOP Act if a determination was not made. Probuild also provided an undertaking that it would pay all of the adjudicator’s fees if NSW Netball was successful in the proceedings.

NSW Netball amended its List Statement to take into account the interim orders made by the Court. Probuild’s defence to NSW Netball’s Amended List Statement was due the day after the adjudicator made her determination.

The effect of the determination

Crucially, the adjudicator determined that Probuild was entitled to only $124,599.23 (less than 2% of the $10,380,083.42 claimed). Suddenly, the commercial interests of both parties were reversed and the parties unashamedly altered their positions accordingly.

  • In stark contrast to the adjudication application and submissions previously made to the Court, Probuild amended its List Response to ‘admit’ that Claim 24 was invalid and the adjudicator had no jurisdiction. Probuild sought orders quashing the determination.
  • NSW Netball was granted leave to discontinue its claim that the determination should be quashed. By way of defence to Probuild’s claim, NSW Netball asserted that Probuild’s claim should be refused because of its approbation and reprobation, ie adoption of contradictory positions, and relief should be withheld because of Probuild’s bad faith and want of clean hands. NSW Netball also claimed damages to the extent that Probuild obtained the relief it sought.

Decision

His Honour Justice Stevenson accepted that Probuild had “certainly been opportunist” and acknowledged the principle at law that a party to litigation “cannot have it both ways”.

The Court found (and both parties agreed) that Claim 23 was a valid payment claim for the purposes of the SOP Act. As such, Claim 24 arose in respect of the same reference date and was served in contravention of s 13(5) of the SOP Act. Consequently, the Court found that the adjudicator did not have jurisdiction to make the determination, so the decision was a nullity, irrespective of whether the Court refused to grant the relief sought by NSW Netball. A relevant factor was that one further reference date under the contract was due to accrue and, the failure to grant the relief sought by Probuild would not affect the invalidity of the adjudication determination, it would only muddy the waters for the next adjudicator.

The Court quashed the adjudicator’s determination.

Damages for adjudication costs

NSW Netball sought damages for the costs that it had incurred to prepare the adjudication response in the amount of approximately $100,000. The claim was made under the Australian Consumer Law for misleading and deceptive conduct, as a result of alleged representations that Probuild’s payment claim was validly made and that NSW Netball was forced to respond to the claim or Probuild would enforce an adjudication determination as a judgment.

The Court rejected this claim, finding that Probuild had merely claimed to be entitled to the amount claimed in the payment claim and did not make representations to that effect. The Court noted established Court of Appeal authority that a bona fide belief was not required to serve a payment claim. Further, the Court did not accept that NSW Netball had incurred the damages ‘because of’ what was stated in the adjudication application, but because it did not agree with what was stated in the adjudication application and because of the requirements of the SOP Act.

Notes from this decision

  1. Jurisdiction under the SOP Act is a matter of law. Parties cannot consent to jurisdiction conferred by statute. Notwithstanding, the position adopted by parties to such disputes is, naturally, determined by the commercial upside to that party of a determination being upheld or quashed. That is made crystal clear by this case.
  2. The Court will not look favourably on parties that flip flop on their positions, but the paramount considerations by the Court will be whether or not the adjudicator had jurisdiction at law and the effect of relief in circumstances where a decision is made without jurisdiction and therefore a nullity.
  3. It would seem unfair that a respondent can be put to significant unrecoverable cost in responding to an adjudication application that is based on an invalid payment claim or some other jurisdictional defect. That is often down to an error by the claimant, as in this case. Although Probuild agreed to pay the adjudicator’s fees, NSW Netball has still incurred $100,000 in preparing the adjudication response that it will never recover.
  4. The SOP Act is a no costs jurisdiction. As the Court found in this case, a respondent is not required by an adjudication application to prepare an adjudication response. However, irrespective of the strength of a respondent’s jurisdictional arguments, it would be folly for respondents to elect not to rely on a fulsome adjudication response on the basis that they consider the application to be jurisdictionally flawed. It is inevitable that parties will expend significant sums on consultant and legal fees to prepare an adjudication response when the alternative is being liable for millions of dollars.

Invalid payment claims – respondents between a rock and a hard place

It is undeniable that a respondent who is served with, what it perceives to be, an invalid payment claim is placed in a no-win situation. The respondent must go to the expense of preparing a proper payment schedule and adjudication response to protect its position, with much of that work ultimately rendered irrelevant by the invalidity of a payment claim.

A respondent that is served with a payment claim that it considers is jurisdictionally flawed should carefully consider whether to seek injunctive relief upon receipt of the payment claim and seek an expedited hearing before the timetable for adjudication under the SOP Act advances.

While the Court may be reluctant to expedite the matter, the alternative is that the respondent is unfairly punished by incurring significant costs in preparing an adjudication response in respect of a payment claim that was never valid in the first place.

‘Accrual’ reminder for developers

The recent Supreme Court decision of Broadview Windows Pty Ltd v Architectural Project Specialists Pty Ltd [2015] NSWSC 955 again demonstrates the contrast between the security of payment statutory regime for the accrual of reference dates and the corresponding rights under a typical contract, and the consequences for builders and developers alike.

Broadview Windows concerned whether the claimant had made more than one payment claim in respect of the same reference date, which is prohibited under section 13(5) of the Building and Construction Industry Security of Payment Act 1999 (NSW) (Act).

Reference dates

Section 8 of the Act states that a person who has carried out construction work or supplied related goods and services is entitled to a progress payment “on and from each reference date”.

A reference date is to be determined in accordance with the contract as the date on which a progress claim can be made for work carried out or undertaken to be carried out. If the contract does not “make express provision” for a reference date, section 8 of the Act provides that the reference date is the last day of the named month in which construction work was first carried out and the last day of each subsequent month.

Typical contractual regime v statutory regime

In Broadview Windows, the contract was formed by an acceptance of a quote and, unsurprisingly, the contract did not make express provision for a reference date. The reference date was therefore, in accordance with the Act, the last day of each month.

The work under the contract was completed by the end of August 2014. The claimant made two subsequent payment claims on 24 November 2014 and 23 February 2015 and proceeded to adjudication on the second payment claim. The respondent applied to the Court for an order quashing the adjudication determination because it claimed that the second payment claim was in respect of the same reference date (as the first payment claim).

The Court dismissed the respondent’s claim and affirmed the position that, under the statutory regime, reference dates continue to accrue on a monthly basis until 12 months after the construction work to which the claim relates was last carried out (as per section 13(4) of the Act).

Unintended benefits for builders

As we have noted in recent updates, the absence of express reference dates in a construction contract can (and often unintentionally does) have benefits for builders.

  1. If a contract is terminated, reference dates continue to accrue under the statutory regime, thereby entitling a builder to make a payment claim after termination and enabling a builder to apply for adjudication if unsatisfied by the principal’s payment schedule. In contrast, contracts rarely expressly state that the accrual of reference dates survives termination and therefore the builder’s right to make further payment claims in accordance with the Act is terminated with the contract.
  2. As can be seen in Broadview Windows, the statutory regime entitles the making of a payment claim each month, even where no work has been carried out. The only limitation on this period is the 12 month period after completion of the construction work. Accordingly, a builder can continue to make payment claims (including for the same work) each month, up to a year after work has been completed. Conversely, typically a contract will limit an entitlement to make a payment claim to the months in which work under the contract is being undertaken and a final payment claim (usually at the expiration of any defects liability period).

The recent decisions of the Supreme Court exemplify the need for principals and head contractors to make express provision for reference dates in contracts. Although this usually occurs, Broadview Windows, where the contract was formed by the acceptance of a quote, demonstrates the potential adverse consequences for a principal or head contractor of lax contract documentation.

The importance of unequivocal termination of construction contracts in the eyes of Security of Payment legislation

A series of recent NSW Supreme Court decisions have highlighted just how important timing can be when it comes to constructions contracts and their termination.  The court has confirmed that where the relevant construction contract includes a reference date (as contemplated by section 8(2) of the Building and Construction Industry Security of Payment Act 1999 (NSW) (Act), reference dates do not continue to accrue under the Act after termination.

The recent Supreme Court decision in Illawarra Retirement Trust v Denham Constructions Pty Ltd [2015] NSWSC 823 is a stark reminder of the importance of unequivocally communicating the time for termination of construction contracts and the adverse consequences of failing to do so.

In Illawarra Retirement Trust, the principal sought to terminate the contract at its convenience by the issue of a notice of termination, in accordance with the contract.  There was no dispute that the principal was entitled to terminate for its convenience, however the principal’s notice of termination did not specify a time for termination, only that the notice was “with effect from Friday, 29 May 2015”.

A dispute arose as to the date that the contract was, in fact, terminated.  The date that the contract was terminated was important because the contractor had made a payment claim on 29 May 2015.  The principal asserted that the contract had been terminated on 28 May 2015 and so there was no reference date to make the payment claim on 29 May 2015.  Conversely, the contractor asserted that the contract had been terminated on 29 May 2015 and so there was a reference date to make the payment claim.

His Honour Justice Darke determined that the date of termination, objectively understood by the notice of termination, was at the conclusion of 28 May 2015.  However, his Honour also reviewed correspondence between the principal and the contractor after the issue of the notice of termination.  That correspondence concerned, amongst other things, the last of the contractor’s contract works, the contractor’s insurances and obligations as principal contractor for the site, all of which were stated to be concluded on 29 May 2015.  By this correspondence, his Honour found that there had been a subsequent agreement that the termination would occur at the conclusion of 29 May 2015.

As a result, there was a reference date to enable the contractor to make a payment claim on 29 May 2015.  The principal’s application for an injunction preventing the contractor from proceeding to adjudication on the payment claims was dismissed.

Ensuring a clear termination date

Principals can ensure that they clearly and unequivocally terminate their construction contract by:

  1. strictly following the procedure set out in the contract, including compliance with the regime for the form and service of required notices;
  2. in notices, stating a time and date that termination of the contract will take effect; and
  3. so as to avoid any inference to the contrary, adhering to the date of termination in any subsequent correspondence and requiring the contractor to act in accordance with the date of termination.

No reference dates after termination

As discussed in our previous article entitled “Contractors beware: risk of no reference dates after termination”, the Supreme Court has confirmed that, where a contract provides for reference dates, unless the clause providing for reference dates is expressed to survive termination of the contract, no reference dates will arise after termination of the contract.

This position has been reinforced in the subsequent Supreme Court decisions of Southern Han Breakfast Point Pty Limited v Lewence Constructions Pty Limited [2015] NSWSC 502 and Veer Build Pty Limited v TCA Electrical and Communication Pty Ltd [2015] NSWSC 864.  Further, in Illawarra, his Honour said: “The defendant advanced an alternative argument that, even if the contract had terminated immediately prior to 29 May 2015, s 8(2)(b) of the Act would operate to provide a further reference date on the last day of May. I think that argument faces considerable difficulties, but in view of my conclusion about the time of termination, it is not necessary to deal with it.

Accordingly, it is important for contractors, particularly in contracts with termination for convenience clauses, to include either a clause providing for reference dates to survive termination of the contract or a clause requiring the principal to give notice of its intention to terminate the contract for its convenience.

A failure to include either of these clauses may result in a contractor losing its entitlement to make a further payment claim under the Act.

The end of the road for retention moneys on large projects?

Head contractors who enter into construction contracts with subcontractors after 1 May 2015 on projects with a value of more than $20 million must hold retention money retained as security in a retention money trust account.

The introduction of retention money trust accounts arises out of the Building and Construction Industry Security of Payment Amendment (Retention Money Trust Account) Regulation 2015 (“Amending Regulation”) published in March 2015.

The Amending Regulation imposes burdensome and costly administrative obligations and reporting requirements on head contractors, which will almost certainly result in the increased use of insurance bonds and bank guarantees as security under construction contracts. Typically, insurance bonds and bank guarantees are the favoured form of security for head contractors, however the introduction of the Amending Regulation is likely to signal the death knell for retention money being used as security under contracts between head contractors and subcontractors.

Scope of the Amending Regulation

The Amending Regulation applies to retention moneys held by a head contractor under its contracts with subcontractors where the value of the contract between the principal and the head contractor exceeds $20 million, ie the “project value”.

If the project value exceeds $20 million during the course of the project, most likely pursuant to variations of the head contract, the Amending Regulation applies to contracts entered into by the head contractor after the date that the project value exceeded $20 million.

Interestingly, notwithstanding the definition of ‘head contractor’ under the Security of Payment Act, the Amending Regulation appears to contemplate that there will only be one head contractor on a construction project.

Retention Money Trust Accounts

The Amending Regulation provides that retention money must be held by the head contractor in a trust account established with an approved deposit-taking institution.

A head contractor is only entitled to withdraw from a trust account if:

  1. it is to pay money in accordance with the terms of the construction contract under which the money was retained by the head contractor;
  2. as agreed in writing by the head contractor and the subcontractor concerned; or
  3. in accordance with an order of a court or tribunal.

Importantly, from the subcontractor’s point of view, the money held in the retention trust account cannot be used to pay any debts of the head contractor and is not liable to be taken as satisfying a judgment debt owed by a head contractor, eg a garnishee order against the trust account.

Administration

The Amending Regulation requires compliance with a number of administrative obligations, by head contractors in particular, including:

  1. notifying the Chief Executive of the Office of Finance and Services (“Chief Executive”) when a trust account is opened, becomes overdrawn or is closed;
  2. retaining records in relation to a trust money account for three years after the closure of the trust money account;
  3. preparing annual account review reports and retention account statements in respect of the trust account; and
  4. paying an annual fee of $1,500 to the Chief Executive to review the account review reports and retention account statements.

A failure to comply with the administrative obligations in respect of a retention money trust account, typically, results in a maximum penalty of $22,000.

Implications and Public Policy

The introduction of the Amending Regulation is a response to the inquiry conducted by Bruce Collins QC into contractor insolvencies, which was commissioned by the NSW Government. One of the findings of the Collins Report was that some head contractors were misappropriating retention money and using the retention money, supposedly provided as security by subcontractors, to boost their cash flow.

Inevitably, this had adverse consequences for subcontractors whenever a head contractor encountered financial difficulties and subcontractors were often out of pocket in head contractor insolvencies.

Undoubtedly, with respect to larger projects, the Amending Regulation should achieve the public policy aim of preventing head contractors from misappropriating retention moneys, primarily because very few head contractors will elect to use retention moneys. The Amending Regulation will drive most head contractors to require their subcontractors to use insurance bonds or bank guarantees, thus avoiding the scope of the Amending Regulation.

To the extent that head contractors intend to use retention moneys as security, they should consider whether the Amending Regulation may apply and, if so, they should remain mindful of their obligations to avoid incurring penalties.

Contractors beware: Risk of no reference dates after termination

A payment claim may not be valid (for the purposes of the Security of Payment Act (“SOP Act”) in NSW) if it is issued after termination of a construction contract.  Whether or not a payment claim is valid will depend on whether the contract provides for a ‘reference date’ to make payment claims and, if so, whether those provisions of the contract survive termination.

In the Supreme Court decision in Patrick Stevedores Operations No. 2 Pty Ltd v McConnell Dowell Constructors (Aust) Pty Ltd, his Honour Justice Ball considered the effect of termination of a contract on a contractor’s entitlement to make a payment claim.

Here, the contract expressly provided for a ‘reference date’ under the SOP Act, meaning the default reference date under the SOP Act (which applies if a reference date is not nominated in the contract) was excluded.  His Honour said whether or not reference dates arise after termination of the contract is a matter for interpretation of the contract – in this case, one subclause in the payment clause (which granted a right of setoff to the principal) expressly survived termination.  Conversely, the contract was silent as to whether any other payment subclauses, including the subclause establishing ‘reference dates’ for payment claims, survived termination.  Accordingly, his Honour determined that these subclauses did not survive termination.

Therefore, there was no reference date after the termination of the contract and the payment claim, which was made after the contract had been terminated and not in respect of a reference date under the contract, was not a valid payment claim in accordance with the SOP Act.

Contractors should be conscious of this decision when entering into contracts, particularly contracts that allow the principal to terminate for convenience.  By ensuring that all payment terms expressly survive the termination of the contract, a contractor can preserve their entitlements under the SOP Act if the contract is terminated.

Supporting statement essential for valid service of payment claim

The Supreme Court has determined that a payment claim is not validly served in accordance with the Building and Construction Industry Security of Payment Act 1999 (NSW) (“Act”) if it is not accompanied by a supporting statement from a head contractor. The decision in Kitchen Xchange v Formacon Building Services clarifies the effect of non-compliance with one of the amendments to the Act that became operative on 21 April 2014.

A ‘supporting statement’ is essentially a declaration by a head contractor that all subcontractors have been paid all amounts that are due and payable in relation to the construction work the subject of the payment claim.

Section 13(7) of the Act says that a head contractor must not serve a payment claim on the principal unless the payment claim is accompanied by a supporting statement that indicates that it relates to the payment claim.

The Court has determined that, if a supporting statement does not accompany the payment claim, the payment claim may be valid, but, importantly, the payment claim is not validly served in accordance with the Act.

Valid service of a payment claim is an essential requirement for invoking the jurisdiction of the Act and therefore empowering an adjudicator to make a determination on an adjudication application. If a payment claim is not validly served, the adjudicator has no power to make an adjudication determination based on the payment claim and any determination by an adjudicator would be susceptible to being quashed by the Courts.

Contractors should bear this in mind before electing to expend significant time and expense in proceeding down the path of adjudication, only for a Court to render a favourable determination invalid and unenforceable.

Builders are reminded that the amendments to the Act made in April 2014, including the requirement for payment claims to be accompanied by a supporting statement, do not affect construction contracts entered into prior to 21 April 2014.

Amendments to Queensland legislation

Amendments to the Building and Construction Industry Payments Act 2004 (Qld) (BCIPA) came into force on 26 September 2014 and will have a significant impact on how payment claims are made, managed and adjudicated in Queensland.

Some of the key amendments to be aware of:

Appointment of adjudicators

One of the more interesting amendments relates to the appointment of adjudicators.  The Queensland Building and Construction Commission (QBCC) (formerly the QBSA) will now be the sole adjudication registry responsible for appointing adjudicators based on their skills, experience, areas of expertise and availability.  The establishment of a single adjudication registry is aimed at removing the common industry perception that certain nominating authorities are “claimant friendly” and to eliminate a claimant’s ability to ‘adjudicator-shop”.

Time for making claims

The time for when payment claims can be made is reduced from 12 months to six months after the construction work was last carried out or the related goods and services supplied (unless the contract provides a longer period).

Classification of claims

BCIPA now distinguishes claims as either ‘standard’ or ‘complex’.  A ‘complex payment claim’ is a claim for over $750,000 excluding GST (or a greater amount prescribed by regulation).

Respondents now have a longer time frame to serve a payment schedule in response to a ‘complex payment claim’.  The time for a respondent to provide a payment schedule is extended to 15 business days (from 10 business days). Timeframes are extended to 30 business days if the payment claim for a progress payment is served more than 90 days after the date in the contract on which a claim for progress payment may be made. Statistics suggest that only 10% of claims adjudicated under BCIPA will fall into this category.

In relation to standard claims (which are simply claims that are not complex claims), the former process for issuing payment schedules will continue, although respondents now have a longer period for adjudication responses.  The time for a respondent to provide an adjudication response is increased from five business days to 10 business days.  For ‘complex payment claims’ the adjudicator can extend the time for an adjudication response by up to an additional 15 business days.

A respondent to an adjudication application for a ‘complex payment claim’ can now include reasons in its response that were not included in the respondent’s payment schedule.  In such circumstances, the claimant may be given a right of reply to the new reasons of up to 15 business days and the claimant can apply to the adjudicator for an extension of time of up to 15 additional business days because of the complexity or volume of the new reasons.

Definition of ‘business day’

Also of relevance is the amended definition of ‘business day’, which now excludes the period between 22 December and 10 January during the industry Christmas shut down period.

Transitioning into the amended BCIPA

For construction contracts entered into before 26 September 2014, the former recovery of progress payment provisions under BCIPA (which are defined as being the sections in the unamended BCIPA dealing with the process for payment claims, payment schedules and adjudications of disputes) will continue to apply for the recovery of progress payments as if the provisions had not been amended.  However, the changes relating to the appointment of adjudicators being transferred to the registrar will apply to all construction contracts.

The amendments result in significant changes to the industry and its participants, who should familiarise themselves with the new procedures and consider what the changes mean for them in the context of their existing and future projects.  The new laws will also impact on the drafting of future contracts, which will need to reflect these changes.