Security of payment – Tas

Page contents:

• Security of payment
• Adjudication of disputes

Security of payment

Understanding the definition of building work or construction work and building or construction-related goods and services are the single most important elements 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 sets out a procedure that allows a claimant (for example, a contractor) to recover progress payments by:

1. lodging a payment claim with the owner who owes money to the contractor
2. the owner must then give the contractor a payment schedule
3. if there is a dispute over the claim, or the claim is not paid in full, the contractor can refer the matter to a Nominating Authority who will appoint an adjudicator
4. progress claim amounts will be 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 where payment is to be calculated otherwise than by reference to the value of the work carried out
• a construction contract to the extent that the contractor is an employee of the owner
• 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.

The Act does apply to contracts for domestic/residential building work, as it relates to a residential structure which is a building or structure which is a class 1 or a 10 building or structure within the meaning of the Building Code of Australia (National Construction Code).

Progress payments for 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; or
• has only a single payment to be made when the work is completed.

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 contractor 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.

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 set out in the contract. If no time period is set out in the contract, the owner has 10 business days (or 20 business days for residential contracts where the respondent is the owner and is not a building practitioner) to either:

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

The owner should issue a payment schedule even if it agrees with and pays the full amount claimed.

Note that it is the owner who must give the payment schedule to the contractor stating:

• the payment claim to which the schedule relates
• the amount the owner intends to pay
• if the proposed payment is less than the amount claimed, the reasons why the amount is less
• if the owner is withholding payment for any other reason, state those reasons.

If the owner only disputes a partial amount of the claimed amount, then they should ensure that they pay for the undisputed amount, otherwise the owner becomes liable to pay the full amount claimed.

The owner should be given the opportunity to take into account the architect's certification of the claim before deciding to pay or give the 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 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 and the contractor disagrees with the amount stated in the payment schedule, the contractor may apply for adjudication of the amount owed. The contractor has 10 days after receiving the payment schedule to do this.

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

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; 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.

If, by the 10th business day (20th business day, in the case of residential building contracts) after the payment claim is given, the owner does not pay the amount stated on the payment schedule, or gives a payment schedule the contractor does not agree with, 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.

If the owner does not pay the claim by the due date and does not provide a payment schedule, the contractor must then notify the owner within the 20 business days after the due date for the payment claim, stating that the payment schedule is overdue and that the contractor intends to make an adjudication application. The owner then has a further five business days after this notice, to give a payment schedule to the contractor. Only if the owner fails to do so within these five days, can the contractor then make an adjudication application.

In addition, if the owner does not pay the claim by the due date, or give a payment schedule after this time, the contractor can then suspend work on the site two business days after the contractor gives the owner a notice required under the Act, to suspend work or stop supplying goods and services.

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 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.

For more general information, see the Tasmanian Building and Consumer Regulator website at: Resolving a Building Dispute.

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Adjudication of disputes

Under the security of payment Act, adjudication is the process for the resolution of a dispute relating to the payment of a claim. See information available on the Tasmanian Building and Consumer Regulator website for an overview of the adjudication process.

Only the contractor who has undertaken to carry out building work or supply building-related goods and services can apply to have a payment claim adjudicated, and only where:

1. the owner has not given a payment schedule or full payment within 10 business days after making a claim (20 business days for residential contracts) AND the contractor has, within 20 business days after the payment schedule is received or the payment was due, notified the owner of its intention to apply for adjudication and given the owner a further five business days to give a payment schedule; or
2. the owner has not paid the full amount of the payment schedule, within 20 business days after the due date of the payment; or
3. the contractor disagrees with the payment schedule given, within 10 business days after receiving that payment schedule. 

Response to adjudication

The owner may respond to the adjudication application by making a submission to the adjudicator in writing. A response cannot be made unless the owner submitted a payment schedule. A response must be made within the later of the following times:

• 10 business days after the owner (as the respondent) received a copy of the adjudication application; or
• five 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. 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 (if any).

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 soon as practicable, but in any event must give a decision before the end of either:

1. if the owner has not given a payment schedule, 10 business days after the adjudicator has notified the claimant and respondent of acceptance of the application; or
2. if the owner has given a payment schedule, 10 business days after the last date the owner is allowed to give an adjudication response; or
3. 10 business days after the adjudicator receives the owner’s response; or
4. another period agreed to by both the claimant and the respondent.

Consequences of the adjudicator's decision

Once determined by the adjudicator, 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 determination, or a later date as determined by the adjudicator.

Where an adjudicator has determined a value of building or construction work or building or construction-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 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. 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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Related courses - Available via Online CPD

• Update: Security of Payment - TAS