Security of payment – SA

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 receive monthly progress payments. It sets out a procedure that allows a contractor to recover payments by:

• lodging a payment claim with the owner who owes money to the contractor
• the owner must then give the contractor a payment schedule
• if there is a dispute over the claim, the parties can refer the matter to a Nominating Authority who will appoint an adjudicator
• progress claim amounts will be decided by the adjudicator.

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

The Act does not apply to:

• a construction contract that forms part of a loan agreement, a guarantee or an insurance contract
• contracts for domestic building work, whether the owner currently lives or intends to live in the dwelling
• a construction contract where payment is to be calculated otherwise than by reference to the value of the work carried out
• construction work or the supply of goods or services carried out by an employee of the contractor
• a construction contract under which a party lends or borrows money; guarantees the payment or repayment of money; or provides an indemnity, for the building or construction work or the supply of related goods or services.

Building and construction work and services can be claimed under the Act, even if the contract:

• is not written
• does not provide for progress payments
• has only a single payment to be made when the work is completed; or
• is the final payment claimed.

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 and giving it to the owner. 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. 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 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, six 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 goods and services supplied (the basis of the claim under the contract).
• The amount of the payment sought.
• That the claim is made under the Act.

How must the owner respond to a payment claim?

After receiving a payment claim, the owner must respond to the claim before the end of the time period for response to progress claims set out in the contract. The owner has 15 business days, or the time set out in the contract (whatever expires earlier), to either:

1. provide a payment schedule for the full amount of the payment claim; or
2. if the owner does not agree with the amount claimed, give the contractor a payment schedule disputing the claimed amount.

Note that it is the owner who must give the payment schedule to the contractor. The owner should be given the opportunity to take into account the architect’s certification of the progress claim under the contract, in deciding to pay the whole amount claimed or to give a payment schedule to the contractor within the time limits. Therefore, at the latest, the architect should give the owner the progress certificate earlier than eight days after the payment claim is received.

If the owner does not intend to pay the whole amount of the claim but then 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'.

If the owner does give the contractor a payment schedule instead of paying the whole amount, and the contractor disagrees with the payment schedule, the contractor may apply for adjudication of the amount owed, within 15 days after the payment schedule is received.

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 and does not pay the whole amount on or before the due date for the progress payment
• 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 the earlier

If, by the 15th business day after the payment claim is given (or such other timeframe provided in the Contract), the owner does not pay the whole claim or pay in accordance with the payment schedule, the contractor may choose to:

• take action in the courts to pursue the payment as a debt; or
• refer the claim to the adjudication process under the Act and
• suspend work after first giving the appropriate notice of 2 business days.

If the contractor has given the owner a payment claim, and the owner has not given a payment schedule within the required time and by the due date for payment has not paid the claim amount, and the contractor wishes to refer the matter to adjudication, the contractor must first notify the owner within 20 business days after the payment claim was due of its intention to apply for adjudication (i.e. within 35 business days after the payment claim was issued, or 20 business days after the contract provides the payment claim was due) and then give the owner a further five days to respond. The owner then has five business days after receiving this notice to give a payment schedule to the contractor. Only if the owner fails to do so within these five business days, can the contractor make an adjudication application.

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, whichever is the greater.

Suspension of work

In addition, if the owner does not pay the payment claim by the due date or give a payment schedule by the required time, the contractor can suspend work on the site or stop supplying goods and services 2 business days after the contractor gives the owner a notice required 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 the Act are the owner's, and that they are extra-contractual obligations. The architect's role is to assist the owner in meeting those, obligations, but not to suspend or ignore its own responsibility to administer the contract according to its terms, not those of the Act, which may never be invoked, or invoked intermittently. Owners should obtain their own legal advice if faced with a claim under the Act. Architects should not advise about specific procedures under the Act where this could amount to providing legal advice.

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Adjudication of disputes

For general information, see the South Australian Consumer and Business Services website: Security of Payment.

Under the security of payment Act, adjudication is the process for the resolution of a dispute relating to the payment of a claim.

Only the contractor (including subcontractors and suppliers) can apply to Small Business Commissioner South Australia and have a payment claim adjudicated, but only where the owner:

1. does not provide the payment schedule within the required time (15 business days or shorter period prescribed under the contract) and then does not pay all of the payment claim on or before the due date according to the contract; or
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 on or before the due date according to the contract.

However, the contractor can only make an application for adjudication where '1' above applies, if:

• it notifies the owner within 20 business days immediately after the due date for payment (under the Act) that it intends to apply for adjudication; and
• after a further five business days it has still not been provided with a payment schedule (or been paid the whole amount claimed) and the contractor makes that application for adjudication within the subsequent 15 business days

The contractor can only make an application for adjudication where '2' above applies, if made within 15 business days after receiving the payment schedule.

The contractor can only make an application for adjudication where '3' above applies, if made within 20 business days after the due date for payment according to the contract.

Response to adjudication

The owner may only provide a response to adjudication if the owner has provided a payment schedule within the required time in response to the payment claim when first served, or, in response to the contractor's notice where '1' above applies, the owner provided a payment schedule within five days of receiving the notice.

In those circumstances alone, the owner may then respond to the adjudication application by making a submission to the adjudicator. A response must be made within the later of the following times:

• five business days after the owner received its copy of the adjudication application, or
• two business days after the owner received notice of the adjudicator's acceptance of the application

An adjudicator cannot consider a submission from the owner if it is made after these time limits.

The owner's submission:

• must also, at the same time, be served on the claimant
• must not include any reasons for withholding payment unless those reasons have been already included in the payment schedule
• should include full details of reasons given in the payment schedule for refusing to pay or withholding payment of any amount (attaching supporting documents)
• may contain submissions relevant to the response (attaching additional supporting documents), and
• may respond to issues raised in the adjudication application.

Adjudicator's decision

The adjudicator can ask the parties for further written submissions; call a conference of the parties (which is to be conducted informally and without lawyers being present); and inspect the site (or other relevant items) before making the decision. Also, the adjudicator can only consider:

• the provisions of the Act
• the provisions of the construction contract
• the payment claim
• the payment schedule
• the contractor's adjudication application and owner’s response
• the further written submission from a party as requested by the adjudicator, given the other party is provided with an opportunity to comment on the submission
• the results of any inspection carried out by the adjudicator
• the submissions of the parties at any conference called by the adjudicator.

The adjudicator then determines:

• the amount of the progress claim, if any, that the owner must pay the contractor
• the date on which the amount became, or becomes, payable
• the rate of interest payable on that amount, and
• the proportion of the adjudicator's fees that is to be paid by each party.

The adjudicator's decision must be in writing and include reasons.

The adjudicator must determine the application as expeditiously as possible, but in any event must give a decision before the end of either:

1. 10 business days after the adjudicator receives the owner’s response; or
2. if no response was received from the owner, 10 business days after the last date on which the owner’s response was due; or
3. if the owner did not submit a payment schedule, 10 business days after the date the owner received the adjudication application; or
4. another period agreed to by both the claimant and the respondent.

Consequences of the adjudicator's decision

Once determined, the owner must pay the contractor the determined payment claim by the due date specified in the adjudicator's determination. The due date is: five business days after the owner receives the decision, or a later date as determined by the adjudicator.

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.

If the owner does not comply with the adjudicator's determination, the contractor can then request an adjudication certificate from the authorised nominating authority. The adjudication certificate is then filed in the court as a judgement debt.

The judgement debt is then enforceable in the same way as any court judgement, without the need for the court to decide the matters in dispute. 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.

In addition, the contractor can also serve on the owner a notice under the Act to suspend work or the supply of goods or services, if such notice is served at least two business days before the suspension.

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 the adjudication process is conducted relatively cheaply and quickly.

Because the adjudication only decides the parties interim 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. This may lead to a court action. These processes are not affected by the Act (unless these dispute-resolution provisions try to 'contract-out' of the Act, in which case the Act makes these provisions void). 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).  Case law has developed clarifying that it is not the intention of the Act that the contractor would be paid more in total than the contract sum as adjusted.

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• Update: Security of Payment - SA