Pay now, argue later – how security of payment legislation might impact you
Overdue payment is one of the biggest risks facing businesses in the construction industry.
With rising material costs, labour shortages and record levels of insolvency, contractors, subcontractors, trades and suppliers cannot afford to wait months, or even years, to recover money they are owed.
Equally, developers, investors and head contractors cannot afford to pay where there is non-compliant or defective works.
Security of payment can be a powerful tool for improving cash flow and it is important to understand security of payment legislation and how it may either assist you, or how you may manage potentially adverse impact.
What is security of payment?
In Australia, each State and Territory has security of payment legislation, where contractors, subcontractors, or suppliers under a “construction contract” are entitled to claim progress payments for work done.
Often referred to as the “pay now, argue later” scheme, security of payment legislation is designed to keep cash flowing through construction projects to contractors, subcontractors and suppliers while allowing disputes to be resolved later.
In theory, this means a contractor can claim payment (and be reliably paid) at the end of each month for work carried out during that month, unless the construction contract specifies another payment date.
In practice, it is often much more complicated than that.
The security of payment process in three steps
In simple terms, the process works like this:
- a contractor, subcontractor, supplier or other trade serves a written payment claim on the principal, developer, investor or head contractor under a construction contract;
- if the payment claim is disputed, the recipient is required to provide a payment schedule setting out the amount they are prepared to pay (and, if disputing, why); and
- if there is a dispute as to the amount in the payment schedule, the parties may seek to refer the matter to adjudication for a binding determination as to whether and what amount should be paid (which can sometimes be further contested at Courts through judicial review).
This is a simplification of the process, but the process also involves:
- adhering to strict timeframes, including, but not limited to when that process may be commenced; and
- assessing criteria in relation to the content of the payment claims, payment schedules and when adjudication is available.
The adjudication process can also be costly, which should be considered before commencing action.
If ordered by an adjudicator, how quickly must an amount be paid?
While costly, the main benefit of going through an adjudication is that, if a claimant is successful through adjudication, the default position is that an adjudicated amount becomes due 5 business days after the determination is served. This is much quicker and generally more cost effective than Court action.
Further, where it is found clear that an amount was due and payable, often the adjudicator’s costs are also claimable from the other side. However, often parties are required to pay an adjudicator’s fees up-front in equal shares first before receiving that decision and then claiming back any amount paid.
What happens if that amount is not paid?
If payment is not made after adjudication, then the claimant can seek an adjudication certificate, which can be filed and enforced as a judgment in Court. The claimant may also have a statutory option to serve a notice of intention to suspend work, or to exercise a lien over any unfixed plant or materials.
Not happy with a decision made by an adjudicator?
In most cases, an adjudicator’s decision is final. In fact, security of payment legislation deliberately does not provide a right of appeal. This is why it is important when, if served with a payment claim that you dispute, you respond appropriately to ensure all defences as to why payment may not be made is raised in a payment schedule. If not raised in a payment schedule, it cannot later be raised for an adjudicator to consider.
The High Court has previously confirmed that an adjudicator’s decision cannot be overturned simply because the adjudicator made an ordinary error of law. In other words, even if the adjudicator misinterpreted the law or made a mistake of fact, the decision will usually still stand.
That said, an adjudicator’s decision is not beyond review in every circumstance. There are situations where a determination can be set aside. An adjudicator is not free to decide a dispute on any basis they choose. Instead, they must determine the dispute that the parties have put before them.
How Can PGC Legal Assist?
An adjudicator’s decision may be challenged where he or she committed a jurisdictional error or act of procedural unfairness such that it can be found that the adjudicator exceeded the legal limits of their authority. However, the scope to challenge an adjudicator’s decision is limited and it is important to get the process right from the start, especially due to the strict requirements and short timeframes involved.
If you are unsure whether you are eligible to make a payment claim, need help responding to a claim, need assistance with any adjudication process, or would like any of your contractual or related documents reviewed with security of payment in mind, please contact Peter Charatsis, Partner, Brenton Priestley, Partner, or Clairissa Hewitt, Special Counsel for more information.
This article is general in nature and does not constitute legal advice.
