Security of payment – ACT

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.

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 extraction (whether by underground or surface working) of minerals, including tunnelling or boring, or constructing underground works.

Main purpose of the Act

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

• 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
• payment of progress claims decided by the adjudicator.

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 insurable residential building work on such part of a premises in which the owner resides or intends to reside and is a party to the contract
• a construction contract where payment is to be calculated otherwise than by reference to the value of the work carried out
• construction work, related goods or services supplied in respect of construction work carried out outside of ACT.

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 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 12 months of the construction work being done.

The Act is not invoked merely by making a progress claim under the contract because a contractual progress claim is not, of itself, a payment claim pursuant to the Act. Conversely, a progress claim under the contract can be made to also serve as a payment claim under the Act, by endorsing the progress claim according to the terms of, and otherwise meeting the requirements of the Act.

In other words, invoking the Act is at the discretion of the contractor or not, on issue of each progress claim, or, in some circumstances without coinciding with contractual claims. For example, the contractor is entitled to make payment claims at monthly intervals, no matter what the contract provides, and can make a payment claim up to, but not later than, 12 months after the date the work was last carried out or goods or services were supplied (in that case it is likely to be a payment claim outside the terms of any contract).

The payment claim has to state the following things:

• What construction work the contractor has done or the materials supplied or the basis of the claim under the contract.
• The amount of the payment sought.
• State that the claim is made under the Act.

The specific words that should be stated on the claim for it to be made under the Act:

This claim is made under the Building and Construction Industry Security of Payment Act 2009 (ACT).

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 10 business days, whichever is sooner, to give the contractor a payment schedule:

• identifying the payment claim and that the owner will pay it; or
• identifying the payment claim and stating that the amount that the owner will pay and the reason or reasons for not paying the remainder (the disputed amount).

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, at the latest, should give the owner the progress certificate within eight business days after receipt of a claim. 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 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 greater of 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 (10 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 exercise a lien over any unfixed plant or materials owned by the owner and supplied for the construction work until payment is made.

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, the contractor is also 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.

Where a contractor suspends work or the supply of goods or services and the owner removes work from the contractor which causes loss or expense to the contractor, the contractor will be entitled to any loss or expense suffered by not being able to carry out that work or provide those goods or services.

Subcontractor claims

A subcontractor can make a claim under the Act to the contractor. The contractor can presumably include any determination of that claim under the Act in a payment claim against the owner. Unlike other jurisdictions, there is no mechanism under the Act for a subcontractor to claim directly against the owner.

The architect must also 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 that 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, 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.

Frequency of claims

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 (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.

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.

The contractor can apply to have a payment claim adjudicated where the owner:

• does not provide the payment schedule within the required time (10 business days) and then does not pay all of the payment claim on or before the due date
• provide a payment schedule but not for the full amount of the payment claim; 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.

In the first situation above, before making the adjudication application, the contractor has to give the owner a further notice within 20 business days after the due date for payment (the Further Notice). The Further Notice has to advise the owner of the contractor's intention to apply for adjudication. The contractor must then give the owner a further opportunity to prepare a payment schedule by allowing the owner five business days after receiving the Further Notice to provide the contractor with a payment schedule.

The contractor's application has to be made within the following times in writing to an authorised adjudicator chosen by the contractor:

• if there is a further notice, within 10 business days after the five-business-day period granted to the owner in the further notice or within 10 business days of a payment schedule being provided by the owner, whichever is the earlier
• if the payment schedule is for a lesser amount than the payment claim, within 10 business days after receiving the schedule
• if having provided a payment schedule, the owner does not pay all or part of the amount stated on it within time, within 20 business days after the due date for payment.

When the contractor applies for appointment of an adjudicator, the owner has no say in who the adjudicator will be.

Response to adjudication

Once an adjudicator has been appointed, the owner has to (should it wish to contest the application) give the adjudicator and the contractor an adjudication response in writing to the contractor's application (response) within the later of:

• seven business days after receiving a copy of the application; or
• five business days after the adjudicator accepts the application.

The response has to be in writing and refer to the application and include submissions about the reasons why all or part of the payment claim is not payable. Submissions in relation to reasons for withholding payment can only be related to the reasons given on the payment schedule.

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. This means the owner will not be entitled to make a response to an adjudication application if they have not submitted a payment schedule within the original time or under the further notice provisions.

Adjudicator's decision

The adjudicator has to make a decision as soon as possible but cannot make a decision before:

• the time required for the owner's response (usually seven business days)
• if the owner is entitled to give an adjudication response, 10 business days of the earlier of the date the adjudicator received the response or the response was due
• if the owner is not entitled to give an adjudication response, 10 business days after the owner receives a copy of the application
• within such further time as the parties may agree.

The adjudicator can ask the parties for further written submissions, call a conference of the parties (without lawyers being present) and inspect the site before making the decision. Also, in making a determination the adjudicator can only consider:

• the provisions of the Act
• 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 'Date for payment'). The adjudicator's decision has to be in writing and include reasons unless both parties have asked otherwise.

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 does not pay the adjudicated amount, the contractor can apply to the authorised nominating authority for an adjudication certificate. The contractor can then 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 if the owner does not pay the adjudicated amount on time. The contractor will need to give the owner at least 2 business days notice of their intention to do so.

Adjudication and settling disputes under the contract

Other than taking 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 both security of payment disputes and 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, which 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 (but being ordered to pay some of that money back).

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Related courses - Available via Online CPD

• Update: Security of Payment - ACT