Jurisdiction - Australia
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Australia – Security Of Payment Report Calls For A Single System To Eliminate “Toxic” Construction Claims.

28 September, 2014

 

Legal News & Analysis – Asia Pacific – Australia – Construction & Real Estate

 

The Society of Construction Law (Australia) has released a report on the states’ “security of payment” legislation which calls for a system of national uniformity and which identifies frequent bias and breaches of natural justice.

 

Background

 

Between 1999 and 2009 the Australian states and territories enacted security of payment legislation. The enactment of the laws was aimed at avoiding costly construction project delays, to ensure the flow of progress payments down the contractual chain and to stop some principals and contractors holding-up or reducing payments owed, in order to inflate their positive cash flow.

 

In recent times, the respective security of payment laws enacted throughout Australia have come under increasing scrutiny. In 2012, the NSW Government established the Inquiry into Construction Industry Insolvency in NSW, otherwise known as the Collins Inquiry, after the collapse of a number of well-known construction companies, following which a number of amendments were made to the NSW security of payment laws.

 

In late 2012, the Queensland Government announced a review of its own security of payments laws. In light of the findings of the review, a number of wide-ranging reforms were proposed. A bill introducing these reforms was introduced into the Queensland Parliament on 21 May 2014.
More recently, the Society of Construction Law (Australia) (SoCLA) has released a report which provides a national outlook on the security for payment landscape. The SoCLA report is released ahead of the recently announced Western Australian Department of Commerce review of theConstruction Contracts Act 2004 (WA) (CCA) and may provide insight into the potential findings of the Department of Commerce review.

 

Application Of Security Of Payment Laws

 

Security of payment laws apply to “construction contracts”. “Construction contract” is a term similarly (though distinctly) defined under each respective act.

 

Under the CCA, a “construction contract” is a contract which concerns “construction work”, which includes:

 

(a)       earthworks;
(b)       work associated with plant and machinery involved in earthworks;
(c)       construction of civil works, buildings or structures, that form or will form, part of land or the sea bed;
(d)       the fixing or installation of certain things in relation to buildings or structures; and
(e)       work carried out in respect to buildings and structures.

 

Security of payment legislation allows those who carry out “construction work” to claim regular progress payments. The legislation implements a process for the resolution of payment disputes between principals and contractors, or head contractors and subcontractors (on an interim, though binding, basis).

 

Released 2 July 2014, the SoCLA Report on Security of Payment and Adjudication in the Australian Construction Industry calls for a system of national uniformity and identifies a number of shortcomings in the national security of payment legislative landscape.

 

According to Chairman of SoCLA, Phillip Greenham, the current lack of national uniformity in security of payment legislation results in a range of unnecessary costs that outweigh any commensurate benefits. SoCLA research suggests that there is broad support for a single national system.

 

The Eastern states’ experimental implementation of a security of payment system run substantially by for-profit companies is singled out as causing significant issues. Mr Greenham says the system “operates largely on a default basis”, and frequently gives rise to cases of bias and breaches of natural justice (always in favour of the claimant). Unsurprisingly, the report found that claimants are likely to choose an adjudication organisation with a track record of determinations in favour of claimants.

 

The report has also found that determinations are not trusted as reliable by the construction industry. Mr Greenham says that “in cases where the respondents are willing and able to put up the significant legal cost of challenging the determination, the courts are increasingly finding that determinations are fundamentally flawed.” Remarkably, “last year (2013), 80% of determinations that were challenged in court were quashed.”

 

Also identified are flaws fundamental to the purpose and operation of the security of payments laws. The report found that major contractors avoid the operation of the legislation by making it clear that they will not place contracts with subcontractors who use the legislation. Further, whilst adjudication was designed to be an accessible, inexpensive and timely mechanism to resolve payments disputes, and to minimise bottlenecks in the flow of money down the contractual chain, it now typically spells the end of the commercial relationship between the parties. “Instead of mending fences, the toxicity of the process is prejudicial to any prospect of the claimant ever working with the respondent again”, Mr Greenham said.

 

The report does, however, identify some positives, particularly the evaluative system that is adopted internationally and in Western Australia (via the CCA) and the Northern Territory, which is considered to just as effectively protect cash flow in the construction industry, without the so called “toxic” disadvantages. For example, the CCA allows for an adjudicator to take an evaluative approach to an adjudication, where they are not bound by the rules of evidence and may inform himself or herself in any way he or she thinks fit.

 

SoCLA Recommendations

 

The SoCLA report provides the following recommendations (amongst others):

 

  • adoption of a nationally uniform security of payment regime;
  • improvement in the quality of adjudicators;
  • removal of institutional bias (including quality control measures for adjudication organisations);
  • allowance for agreement as to identity of adjudicator;
  • provision of more power to adjudicators to look at the real mertis of a claim (enhanced inquisitorial powers); and
  • implementation of a more flexible system, so that smaller claims can be determined quicker than large complex claims.

 

Clyde & Co’s projects and construction team has extensive experience acting for both principals and contractors in respect to payment disputes under security of payment legislation enacted in Australia and internationally.

 

We will provide a further update when the findings of Western Australian Department of Commerce review of the CCA are published.

 

Clyde & Co

 

For further information, please contact:

 

Beth Cubitt, Partner, Clyde & Co
beth.cubitt@clydeco.com

 

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