Security of payment – WA

Page contents:

• Security of payment
• Adjudication of disputes

Security of payment

Understanding the definition of construction work and goods and services related to construction work 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.

Conversely, it is just as important that the architect recognises that there are a number of exclusions to the definition of construction work, namely:

• the drilling for, or extraction of, oil or natural gas
• the discovery or extraction of any mineral by constructing a shaft, pit or quarry or drilling
• fabricating or assembling items of plant used for extracting or processing oil, natural gas or any derivative of natural gas, or other mineral bearing or other substance.

Main purpose of the Act

The Act is most likely to apply where a progress claim has not been paid in full by the due date. In those circumstances, a contractor can apply under the Act for adjudication of any dispute about the progress claim.

The Act also imposes default conditions into contracts where the contract does not have an equivalent provision. The default conditions cover such things as variations, progress claims and retention sums. In the case of ABIC contracts, it is unlikely to be affected by the Act, except where an owner has not paid a progress claim on time or in full.

If the contract does not provide for this, the Act establishes a procedure that requires:

• contractors to make progress claims to owners
• owners to provide notices of dispute to contractors
• referral of disputed or unpaid progress claims to an independent adjudicator
• payment of progress claims decided by the adjudicator.

For the reasons outlined below, you should be prepared for a possible claim before it arises. Your client, the owner under the building contract, also needs to understand what might be expected of them.

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 owner has to respond to a claim within 14 days of receipt
• 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 can be invoked where there is a payment dispute. A payment dispute arises when:

• a progress claim has not been paid in full, has been rejected or is wholly or partly disputed
• any retention money that is due to be paid under the contract has not been paid; or
• any security held by the owner under the contract that is due to be returned under the contract has not been returned.

Also, the relevant part of the Act can be invoked and provisions are implied if the contract does not have provisions about any of the following issues:

• variations - which must be agreed
• the amount, or a means of determining the amount, that the contractor is entitled to be paid
• whether or not the contractor is able to make a claim to the principal for a progress payment
• how a party is to make a claim to another party for payment
• when and how a party is to respond to a claim for payment
• the time by when a payment must be made – no pay-when-paid provisions and payments must be made within 28 days of a claim
• interest to be paid on any payment that is not made at the time required by the contract
• when the ownership of goods on a building site passes from the contractor
• what happens to unfixed goods if the owner becomes insolvent
• return of retention monies and security.

The contractor can invoke the Act by making a 'payment claim' on the owner. The contractor can make a payment claim at any time after the contractor has done the work. The payment claim has to be in writting and given to the owner and include:

• the name and signature of the claimant and the date of the claim
• identification of the claim to which the progress payment relates (i.e. 1, 2 or 3)
• itemised description of what construction work the contractor has done or the materials supplied
• the amount of the progress payment sought.

How must the owner respond to a payment claim?

If the owner does not dispute the payment claim, the owner has to pay it within 28 calendar days of receipt. If the owner receives a payment claim from the contractor and believes that the claim should be rejected because it has not been made in accordance with the Act, or disputes the whole or part of the claim, the owner has 14 calendar days to give the contractor a notice of dispute. The notice of dispute has to be in writing and addressed to the contractor and include:

• the name and signature of the owner and the date of the notice
• identification of the claim to which the notice relates
• if being rejected due to non-compliance with the Act - the reasons that the claim has not been made in accordance with the Act; or
• if being wholly or partly disputed - the items of the claim in dispute and the reasons for dispute (including reasons for not certifying for payment any part of the claim).

The architect, at the latest, should give the owner the progress certificate within 12 calendar days after receipt of a claim so that the owner can issue the payment schedule to the contractor within time. The owner is responsible under the Act to give the 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.

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

Date for payment

Within 28 calendar days after the owner receives a payment claim, unless it has been rejected or is wholly disputed, the owner has to:

• pay the part of the claim that is not disputed; or
• pay all of the claim.

If the owner is entitled to a retention amount of any payment, the owner can retain the retention sum but must tell the contractor accordingly. Any retention money that is held by the owner must be held on trust until either:

• the money is paid to the contractor
• the contractor agrees to give up any claim to the retention money (must be in writing)
• the money is no longer payable to the contractor under the Act
• an adjudicator, arbitrator, or other person, or a court, tribunal or other body, determines that the money ceases to be payable to the contractor.

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

Frequency of claims

The architect should be cautious about agreeing to accept progress claims at longer or shorter intervals than stipulated in the contract, or agreeing to irregular dates in any one month for submission of progress claims. A contractor might argue that a varied schedule is outside the express provisions of the contract and that they are therefore entitled to submit payment claims under the terms of the legislation.

The result might be submission of 'payment claims' (under the Act) out of synchronisation with progress claims (under the contract). Because the Act does not remove rights under the contract (unless they are inconsistent with the Act), 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.

While it is arguable that any agreement to vary the date on which claims are submitted remains part of an express provision in the contract, if and until there is a determination of the matter, architects should be cautious in agreeing to progress claim submissions on dates or at intervals other than the date or interval in a standard form contract, or at shorter or longer intervals than under the Act.

Conclusion

The Act applies where there are gaps in a construction contract over payment issues or where there are progress claims that have not been paid. Architects should remember that the obligations under the 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.

Back to top

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. See information available on the Government of Western Australia's website for an overview of the adjudication process.

The contractor and the owner can either pre-agree on a registered adjudicator for the purposes of the contract, or on a body that is an authorised appointor which will appoint an adjudicator.

One of the parties, usually the contractor, has to apply for adjudication within 90 business days after the date that the dispute arises (delivery date of the notice). The application has to include:

• the name of the registered adjudicator or authorised appointor, as applicable
• the contact details of the parties to the dispute
• details of the construction contract (including relevant extracts)
• the payment claim
• all the information, documentation and submissions on which the contractor will rely at the adjudication.

If the parties did not pre-agree on a registered adjusicator, when the contractor applies to a prescribed appointor, the prescribed appointor will appoint a registered adjudicator within five days after the aplication is being served and the owner has no say in who the adjudicator will be. There are currently eight prescribed appointors, including the Australian Institute of Architects, the Master Builders Association (MBA) and the Institute of Arbitrators and Mediators Australia. Adjudicators can come from a wide number of professional backgrounds.

Response to adjudication

Once the owner receives the contractor's adjudication application, the owner has 10 business days to prepare a written response to the application and serve it on the adjudicator and the contractor.

The response has to include:

• the name of the adjudicator
• the contact details of the parties to the dispute
• details of any rejection or dispute of the payment claim
• all the information, documentation and submissions on which the owner will rely at the adjudication.

Adjudicator's decision

The adjudicator has to make a decision within 10 business days after the date the adjudicator is or should have been served with a response.

The adjudicator has to determine the dispute as fairly, quickly, informally and inexpensively as possible. The adjudicator is not bound by the rules of evidence and can inform himself or herself in any way he or she thinks fit.

The adjudicator must either dismiss the application or determine on the balance of probabilities whether the owner is liable to the contractor and if so the amount of the liability and any interest payable.

The adjudication has to be dismissed where:

• the contract is not a construction contract as defined in the Act
• the application has not been prepared and served in accordance with the Act
• there is an order made by a court or other body dealing with the application
• the adjudicator is satisfied that it is not possible to fairly make a determination because of the complexity of the matter or there is not sufficient time

The adjudicator can:

• ask a party to make a further written submission or provide additional documentation and may set another deadline for doing so
• call a conference of the parties
• inspect the site, arrange for any test, engage an expert, unless the parties object
• extend the time for making a determination; with the consent of the parties
• adjudicate more than two disputes at the same time, with the consent of the parties
• adjudicate the payment dispute at the same time as another payment dispute, with the consent of the parties.

Each party bears their own costs of the adjudication unless the adjudicator is satisfied that one party incurred the costs because of frivolous or vexatious conduct or unfounded submissions in which case the adjudicator may find that one of the parties pays some or all of the other party's costs.

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 'Date for payment'). The adjudicator's decision has to be in writing and include reasons.

Consequences of the adjudicator's decision

The parties and any other adjudicators are bound by the decision of the adjudicator. If the application is not dismissed, the adjudicator's decision cannot be reviewed by a court and is final, unless an error of law has occurred in the adjudicator’s decision.

The owner has to pay the contractor the adjudicated amount by the date set out in the determination. Interest is payable on any unpaid portion of the determined amount after that date.

Suspension of works

If the owner does not pay the adjudicated amount, the contractor can give the owner notice of its intention to suspend the work. The notice has to be in writing and:

• state the name of the adjudicator
• state the contact details of the parties
• state the date of the determination
• state the amount to be paid to the contractor
• state the date that the owner had to pay the contractor
• state the date on which the contractor intends to suspend the works
• be given to the owner at least three business days before that date.

Adjudication and settling disputes under the contract

The main area of difficulty with the Act is that an architect may be faced with having to assist an owner in an adjudication under the Act and at the same time either engaging in a dispute resolution mechanism under the contract or in court proceedings.

A contractor is likely to favour using the adjudication process under the Act because the adjudicator's decision is final, it cannot be appealed (unless there is an error of law) and the adjudication process is conducted relatively cheaply and quickly.

The owner's only recourse, if a parallel dispute resolution process is underway at the same time that the contractor applies for adjudication, is to have that other process resolved before the adjudication or have the contractor agree to use the alternate dispute resolution process instead of adjudication.

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 end result of the contract, although it is conceivable that the cost of variations and other adjustments may be determined by the adjudication process even though the architect’s assessment, which must still occur under the contract, differs.

Back to top

Related courses - Available via Online CPD

• Update: Security of Payment - WA