Security of payment – NT

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 to recognise that there are a number of exclusions to the definition of construction work, namely:

• drilling for the purposes of discovering or extracting oil and gas
• constructing a shaft, pit or quarry or any drilling for the purposes of discovering or extracting a mineral.

Main purpose of the Act

The Act will apply to every progress claim made unless the construction contract has equivalent provisions to the Act. If a progress claim has not been paid in full by the due date, 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, entitlement to payment, progress claims, interest on overdue payments, ownership of goods, duties about unfixed goods on insolvency and retention sums. Administration of standard form building contracts 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 otherwise apply, 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 strict timeframes
• 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
• any security held by the owner under the contract that is due to be returned under the contract has not been returned.

Also, the Act can be invoked if the contract does not have provisions about any of the following issues:

• payment of variations
• 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 the timeframe for payment must be within 30 working 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.

Payment claim under the Act

The Act also applies where the contractor makes a progress claim ('payment claim') on the owner. The contractor can make a payment claim at any time after the contractor has done the work.

The Act implies provisions where the contract is silent on the process of a progress claim which requires the contractor (claimant) to:

• ensure the payment claim is in writing and addressed to the owner (respondent)
• state the name of the claimant, the date of the claim and the amount claimed
• itemise the claim and describe the obligations that the contractor has performed with sufficient detail for the principal to assess the claim
• serve the claim on the respondent.

Date for payment

After the owner receives a payment claim, if a construction contract does not contain provisions about when and how the other party must respond, the NT Act provides that party must:

• where the party receiving the payment claim believes the claim should be rejected or disputes the whole or the part of the claim, within 10 working days give the contractor a notice of dispute and pay the part of the claim that is not disputed; or
• pay the whole amount of the claim within 20 working days.

If the owner is entitled to a retention amount of any payment, the owner must hold that money on trust for the contractor but must tell the contractor the amount retained.

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 recoverable by court proceedings, the rate specified by the court with jurisdiction.

How must the owner respond to a payment claim it disputes in whole or in part?

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 10 working days to give the contractor a notice of dispute. The notice of dispute has to be in writing, addressed to the contractor and include:

• the name and signature of the owner and the date of the notice
• identify the claim to which the notice relates
• the reasons that the claim has not been made in accordance with the Act, if applicable
• the items of the claim in dispute and the reasons for dispute.

So that the owner can issue the payment schedule to the contractor within time, the architect should give the owner the progress certificate (including reasons for not certifying) within eight days after receipt of a claim. The owner is responsible under the Act to give the payment schedule to the contractor.

Adjudication determination for not responding to a payment claim in time

If the owner does not give the payment schedule to the contractor within time (and there is a payment dispute as an amount claimed is not paid in full as at the time it is due), the Act invokes the right for the contractor to apply for adjudication.

The decision of an adjudicator is binding on the parties (in respect of their interim payment entitlements) who, at their discretion may determine that the principal must:

• pay the contractor all, part or none of the amount claimed
• pay interest on the overdue payment.

Importantly, the owner cannot rely on a pay-when-paid provision in a contract. This is a provision that imposes the payment to the contractor on a contingent event, for example the owner will pay the contractor when they are paid by another party.

Conclusion

The Act applies to every progress claim made unless the construction contract has equivalent provisions to the Act. 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.

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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 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 appointer which will appoint an adjudicator on each application.

One of the parties, usually the contractor, has to apply for adjudication within 65 working days after the date that the dispute arises (delivery date of the notice), which has to be served on the owner.

However, if an adjudication application is taken to be dismissed, the contractor can bring another adjudication application within 20 working days of the first dismissed application.

The application has to include:

• the name of the adjudicator or authorised appointer
• the contact details of the parties to the dispute
• the construction contract or the relevant extracts
• the payment claim/s which have given rise to the payment dispute
• all the information, documentation and submissions on which the contractor will rely in the adjudication.

When the contractor applies for appointment of an adjudicator, the owner has no say in who the adjudicator will be. The contractor applies to a prescribed appointer or to an adjudicator. There are a number of prescribed appointers, some include the Australian Institute of Architects, the HIA 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 15 working 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 on in the adjudication.

Adjudicator's decision

The adjudicator has to make a decision within 10 working 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
• the application has not be 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
• 10 working days (or any subsequent extension) pass from the date on which a response from the owner was served.

The adjudicator can:

• ask a party to make a further written submission or provide additional documentation
• 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 Registrar
• adjudicate more two or more payment disputes between the parties at the same time
• adjudicate the payment dispute at the same time as another payment dispute between different 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 on time, the contractor can give the owner notice of its intention to suspend the work. The notice has to be in writing, be given to the owner at least three days before that date and state the:

• name of the adjudicator
• contact details of the parties
• date and identification number of the determination
• amount to be paid to the contractor
• date that the owner had to pay the contractor
• date on which the contractor intends to suspend the works.

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 is 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 adjudication process is conducted relatively cheaply and quickly.

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).

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Related courses - Available via Online CPD

• Update: Security of Payment - NT