Security of payment – Qld

Page contents:

• Security of payment
• Adjudication of disputes

Security of payment

Understanding the definition of construction work and related goods and services is the single most important element in determining whether the Act applies to the contract. Both these terms are broadly defined under the Act and apply to a number of categories.

The Act entitles contractors to make progress claims and establishes a procedure that requires:

• the use of project trusts for particular building contracts
• contractors to make progress claims to owners
• owners to provide payment schedules to contractors
• referral of disputed or unpaid progress claims to an independent adjudicator
• recovery of amounts claimed
• enabling subcontractors to apply a statutory charge for payment of the work they do.

The Act does not apply to:

• a construction contract that forms part of a loan agreement, a guarantee or an insurance contract
• a construction contract for the carrying out of domestic building work on such part of a premises in which the owner resides or intends to reside and where the resident owner is a party to the contract
• a construction contract or for related goods and services supplied under contract where payment is to be calculated otherwise than by reference to the value of the work carried out.

The Act has introduced reforms that relate to project trust accounts to ensure money is paid to subcontractors. The new obligations are primarily imposed onto head contractors, rather than the major focus being on the principal.

Legal advice

This note provides an overview of the Act and is not a substitute for legal advice. If the owner receives a security of payment claim, it is recommended that you advise the owner to consult their legal adviser because:

• the time limits involved for compliance by the owner are tight
• the procedures are complex and certain formalities must be observed to protect the owner's rights
• developing case law will progressively clarify some uncertainties in the legislation and uncover others.

How is the Act invoked?

The Act is invoked by the contractor making a 'payment claim' on the owner. The contractor can make a payment claim at the times set out in the contract or within 6 months of the construction work being done, whichever is the latest.

The payment claim has to state the following things:

• Identify what construction work the contractor has done or the goods or services supplied to which the claim relates.
• The amount of the payment sought.
• Request payment of the claimed amount (an invoice is satisfactory).

If the head contractor is making an SOP payment claim on the owner, the claim must be accompanied by a ‘supporting statement’ that includes various declarations that must be made. 

How must the owner respond to a payment claim?

After receiving a payment claim, the owner has the time set out in the contract, or 15 business days, whichever is sooner, to give the contractor a payment schedule:

• identifying the payment claim
• stating the amount that the owner will pay (if any)

So that the owner is able to take into account the architect's certification of the claim while issuing the payment schedule to the contractor within time, the architect should give the owner the progress certificate within eight business days after receipt of a claim. The owner is responsible under the Act to serve a payment schedule to the contractor.

If the owner does not give the payment schedule to the contractor within time, the Act imposes significant penalties on the owner, discussed below under the heading 'Consequences of failure to follow the procedure'.

The owner cannot rely on a pay-when-paid provision in a contract.

Date for payment

Where the owner serves a payment schedule on the builder within time for the full amount of the payment claim, the payment claim becomes payable:

• according to the time period set out in the contract (except if it is a pay-when-paid provision); or
• if the contract does not make provision for it, within 10 business days after a payment claim is made.

The owner is liable to pay interest on late payments. The rate payable on the unpaid amount of the payment claim from the due date is the rate set out in the contract, or alternatively, if the amount is recovered by court proceedings, the rate specified by the court with jurisdiction.

Consequences of failure to follow the procedure

The Act makes the owner liable to pay all or the unpaid balance of a payment claim, if the owner:

• does not provide the payment schedule within the required time (15 business days under the Act) and does not pay the whole amount on or before the due date for the progress payment; or
• having given a payment schedule stating it intends to pay, then does not pay the amount on the payment schedule within the time set out under the contract or the Act, whichever is earlier.

The contractor can bring a court action for all of the unpaid amount of a payment claim, or suspend the work and apply for adjudication.

If the contractor brings a court action to recover the unpaid amount where the owner has not followed procedure, the amount claimed is recoverable as a debt due to the contractor. The court cannot reconsider whether the claim or the amount of the claim was justified and take into account any set off or counterclaim or other defences otherwise available to the owner under the contract. In other words, the court cannot review whether the debt was due.

In the circumstances described above, where the owner fails to comply with their obligations to pay the contract, the contractor is entitled to serve a notice of intention to suspend work. The contractor can then suspend work two business days after serving the notice, if the payment claim is not paid or not paid in full.

If the work is suspended, the contractor has up to three days after being paid by the owner to return to work without being liable for loss or damage caused by the suspension. In addition, the contractor might be entitled to an extension of time under the contract for the period of the suspension.

Project trusts

The Act determines that a project trust account be required for particular types of building contracts, including any of the following:

• A contract for 'project trust work' where the principal for the contract is the State, a State authority a local government, an individual, a private entity or a hospital and health service.
• More than 50% of the contract price is for building work within the meaning of 'project trust work'.
• The contracting party is the State or a hospital and health service and the contract price is $1m or more.
• The contracting party is not the State or a hospital and health service and the contract price is $10m or more.

A project trust account is not required for:

• a building contract for residential construction work which consists of less than 3 living units
• a building contract for maintenance work.

A project trust is a trust that is required to be set up over a number of payments that are made during the term of a building contract and includes:

• an amount paid by the head contractor to subcontractors; and
• other amounts required to be deposited under the Act.

Subcontractor claims and charges

Where a contractor indicates to a subcontractor that they have not been paid by the owner, the subcontractor may decide to lodge a charge against the owner who owes money to the contractor under the building contract. A charge is a claim over money payable by the contractor or higher contractor.

To lodge a charge, the subcontractor must:

• provide a notice of claim to the person obliged to pay money under the contract (ie a owner or developer)
• give the contractor a copy of the notice of claim
• specify the basis of the charge
• specify the particulars of the claim (ie describe the work that was carried out)
• ensure the claim is certified by a qualified person.

The subcontractor can only enforce the charge by commencing legal proceedings against the person who is obliged to pay money to a contractor.

The owner who receives a notice of claim by a subcontractor must retain a sufficient amount of the money that may become payable under the contract until a court makes an order. Failure to retain the money that may become payable means the owner will become personally liable to pay the subcontractor the amount claimed.

The architect should follow the requirements of the Act and contract in assessing and responding to each and every progress claim, irrespective of when they are received by the architect. The architect should be mindful that if progress claims are submitted at the wrong time by the contractor, this could lead to that progress claim being invalid for the purposes of the contract, the Act, or both.

The architect should not agree to accept progress claims at longer or shorter intervals than stipulated in the contract, or agree to irregular dates in any one month for submission of progress claims.

Because the Act does not remove rights under the contract, the architect could be obliged to carry out duplicated or more frequent assessments and certificates. As some contractors consider that putting the architect under pressure is to their advantage, some contractors might seek to bring this situation about.

Amendments to the Act

Amendments to the Building Industry Fairness (Security of Payment) Act 2017 commenced on 17 December 2018 and have attempted to simplify the processes under the Act. The major changes include:

• the Act no longer requires a party to make a payment claim pursuant to the Act
• every invoice may now be a payment claim pursuant to the Act
• the response time to payment claims is 15 business days
• the adjudication process has been simplified
• subcontractor charge provisions have been updated
• harsher penalties have been imposed
• retention amounts or security must be released
• a default defects liability period of 12 months applies where the contract is silent
• notice must be given by contractors when the defects liability period ends.

Building Industry Fairness (Security of Payment) and Other Legislation Amendment Act 2020

Architects should also be aware of the relevant changes made by the 2020 amending Act, which are implemented progressively. The major changes include:

• introducing a requirement for a head contractor to provide a supporting statement with a payment claim
• the introduction of a payment withholding request and statutory charge regime
• a reform of the project trust accounting requirements and application.

Conclusion

The provisions of the Act are complex and there are still questions over the procedures set down. Architects should remember that the obligations under each Act are on the owner. The architect's role is to assist the owner in meeting those obligations, but not to advise about specific procedures where this could amount to providing legal advice. Owners should obtain their own legal advice if faced with a claim under the Act.

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Adjudication of disputes

Under Security of Payment legislation adjudication is the process for the resolution of a dispute relating to the payment of a claim.

As noted above, the contractor can apply to have a payment claim adjudicated where the owner:

1. does not provide the payment schedule and pay the full amount within the required time
2. provides a payment schedule but not for the full amount of the payment claim; or
3. having given a payment schedule stating it intends to pay, then does not pay the amount on the payment schedule within the time set out under the contract.

Corresponding with the above numbering, the contractor's application has to be made within the following times in writing to an authorised adjudicator chosen by the contractor:

1. if the owner does not provide a payment schedule and pay the full amount, within 30 business days after the later of the following:
   • The last day of the due date for the progress payment.
   • The last day for the owner to give a payment schedule.
2. if the payment schedule is for a lesser amount than the payment claim, within 30 business days after receiving the schedule.
3. if the owner does not pay all of the payment schedule within time, within 20 business days after the due date for payment. 

The adjudication application must:

• be in the approved form
• identify the payment claim and payment schedule (if any) to which the application relates
• be accompanied by the fee prescribed by regulation for the application
• include the submissions relevant to the application the claimant chooses
• be served onto the owner.

When the contractor applies for adjudication, the contractor will apply directly to registrar of the Queensland Building and Construction Commission (QBCC). If the application is valid, the registrar, within four business days will then refer the adjudication application on to an adjudicator. Within four business days after receiving the adjudication application, the adjudicator must accept or reject the referral (unless they have a reasonable excuse).

The parties may be equally liable (or the adjudicator may determine that the owner is solely liable) for any fees incurred by the parties in having an adjudicator appointed and the adjudicator's costs per hour.

Response to adjudication

Once an adjudicator has been appointed, the owner has to give the adjudicator and the contractor an adjudication response in writing to the contractor's application (response). Where the payment claim is for an amount of less than $750,000 (ie a 'standard' payment claim), the response must be submitted within the later of:

• 10 business days after receiving a copy of the application
• seven business days after the adjudicator accepts the application.

Where a payment claim is for an amount more than $750,000 (ie a 'complex' payment claim'), the response must be submitted within the later of:

• 15 business days after receiving a copy of the application
• 12 business days after the adjudicator accepts the application.

Where responding to a complex payment claim, the owner may also apply for an extension of time for up to 15 additional business days.

The response must be in writing and include:

• reference to the adjudication application to which it relates
• submissions about the reasons why the owner says all or part of the payment claim is not payable.

However, the owner can only submit a response to the adjudication application when the owner has submitted a payment schedule to the contractor within time. The adjudication response cannot include any reasons for withholding payment unless they were included in the payment schedule provided.

If the owner did not submit a payment schedule within time, the contractor is entitled under the act to payment of the payment claim in full.

Adjudicator's decision

The adjudicator has to make a decision as soon as possible but cannot make a decision before the end of the period that the respondent may give an adjudication response, unless the adjudicator determines they do not have jurisdiction to adjudicate the application, or the application is frivolous or vexatious.

The adjudicator must decide an adjudication application:

• for a standard payment claim, within 10 business days after the response date; or
• for a complex payment claim, within 15 business days after the response date the adjudicator receives or should have received a response; or
• within such further time as the parties may agree.

Before making the decision the adjudicator can ask the parties for further written submissions, call a conference of the parties (without lawyers being present unless the adjudicator agrees) and inspect the site. Also, the adjudicator can consider:

• the provisions of the act and part 4A of the Queensland Building Services Act 1991
• the provisions of the construction contract
• the payment claim
• the payment schedule
• the response
• any submissions
• the results of any inspection of the site.

The adjudicator can decide the sum of a progress claim, when it should be paid and the rate of interest payable on the claim (the rate set out under the heading above 'Date for payment'). The adjudicator's decision has to be in writing and include reasons.

Consequences of the adjudicator's decision

Where an adjudicator has determined a value of construction work or related goods and services, where there is a further adjudication a subsequent adjudicator must arrive at the same valuation unless the contractor or the owner can establish that the value of the work has changed since the previous determination.

The adjudicator's decision determines the parties' interim payment entitlements and cannot be reviewed by a court unless the adjudicator has made certain reviewable errors of law

The owner has to pay the contractor the adjudicated amount within five business days after the owner receives the adjudicator's decision or by such other date that the adjudicator decides. The owner cannot give the contractor security for the adjudicated amount instead of payment. If the owner fails to pay then they may be liable for a maximum penalty of 200 penalty units which is $28,750.

As soon as practicable (but no more than five business days) after an adjudication decision is given, the registrar of the QBCC must give the contractor an adjudication certificate. The contractor can apply to enforce the adjudication certificate in a court as a judgment debt. The owner is prevented from taking a number of actions resisting the judgment debt, such as bringing cross-claims against the contractor or raising defences arising under the construction contract. The contractor can additionally serve notice of the contractor's intention to suspend the works.

Adjudication and settling disputes under the contract

Leaving aside court action, of concern to architects administering the contract is how the adjudication affects the contract's dispute resolution procedures, if at all.

A contractor is likely to favour using the adjudication process under the Act because it is conducted relatively quickly. Unfortunately the costs of adjudication are not as low as they once were.

Because the adjudication only decides the parties’ interim payment entitlements, a different final result may be achieved through final dispute resolution. Your client should obtain legal advice in relation to disputes under the contract.

However, amounts to be paid to the contractor according to adjudication are, when paid, advances toward the contract price (as adjusted). In other words, the adjudication process is not intended to undermine the bargain the parties have struck when entering into the contract. Even so, it is conceivable that the cost of variations and other adjustments may be determined by the adjudication process even though the determination differs from the architect's assessment (which must still occur under the contractual obligations between the parties).

In order to finally determine the rights of the owner and contractor, it is possible for the owner to start the dispute resolution procedures under the contract. This may lead to a court action. These processes are not affected by the Act. If the contractor has applied for an adjudication in the meantime, the contractor may arrive at court having already been paid and any ongoing court action may be resolved by the consent of both parties.

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• Update: Security of Payment - QLD