Security of Payment — a Practical Guide to Sabotage

Major Ian Fenwick behind enemy lines in France

Major Ian Fenwick behind enemy lines in France

There is much to be said for the view that, in the long run, the most effective way to procure construction work is to use standard forms, and to take a reasonable approach to the allocation of contractual risks, avoiding excessively onerous provisions.  Thus, the notably successful strategy of The Olympic Delivery Authority in London was to use the NEC contract, and the World Bank now mandate the use of review boards which provide a prompt and reasonable way of preventing construction issues escalating into full blown disputes.  Experience shows that testosterone-fuelled drafting might be good for the income of construction lawyers, but does little to advance the interests of those procuring construction projects.

In any event, much of the typical onerous drafting that one sees today is entirely ineffective in jurisdictions subject to the East Coast Model of Security of Payment legislation, which drives a coach and horses through the contractual regimes.  In the face of that legislation, owners and head contractors are often thrown back onto mere bullying, threatening contractors and subcontractors that they will be blacklisted if they make use of the legislation.  Interestingly, however, contracts very rarely take any useful steps to emasculate the effect of the Security of Payment legislation, even where there is scope to do so.  Perhaps this is because the legislation itself is such an anathema to the contract draftpersons that they cannot bring themselves to read it, and work out how to best circumvent it.  With this in mind, these thoughts are offered as to how the Act might be addressed.  References are to the New South Wales Act — the Building and Construction Industry Security of Payment Act 1999.

First, the right approach is desirable.  Do not start with the thought that the legislation is unwelcome and try to dis-apply it.  Section 34 — the anti-avoidance section — is very broad in its application:

34 No contracting out

(1) The provisions of this Act have effect despite any provision to the contrary in any contract.

(2) A provision of any agreement (whether in writing or not):

(a) under which the operation of this Act is, or is purported to be, excluded, modified or restricted (or that has the effect of excluding, modifying or restricting the operation of this Act), or

(b) that may reasonably be construed as an attempt to deter a person from taking action under this Act,

is void.


Much better to focus on the weaknesses in the Act.  First, the Act does not quite know what it is doing.  It plainly sets up a parallel statutory right to so-called “progress payment” which is parasitic on the contractual right to interim payment.  But from time to time, the Act gets confused between these two.  For example, section 8 (2) provides that

In this section, “reference date”, in relation to a construction contract, means:

(a) a date determined by or in accordance with the terms of the contract as the date on which a claim for a progress payment may be made in relation to work carried out or undertaken to be carried out (or related goods and services supplied or undertaken to be supplied) under the contract, or…


and section 4 or provides that

“progress payment” means a payment to which a person is entitled under section 8, and includes (without affecting any such entitlement):

(a) the final payment for construction work carried out (or for related goods and services supplied) under a construction contract, or

(b) a single or one-off payment for carrying out construction work (or for supplying related goods and services) under a construction contract, or

(c) a payment that is based on an event or date (known in the building and construction industry as a “milestone payment”).

Literally, of course, this is a nonsense, because contracts almost never provide for when the statutory progress payment applications may be made (we are about to change all that) and so the court was obliged to find in Minister of Commerce v Contrax[1] that the expression “progress payment” in section 8 does not bear the meaning defined by section 4, but instead bears a wider meaning, so as to include contractual entitlements, otherwise section 8 would be “would be circular and vacuous”.

Secondly, although the Act purports to exclude the courts from second guessing the determinations of adjudicators, yet nevertheless adjudicators’ determinations are subject to challenge, particularly on jurisdictional grounds.  Accordingly, the task of the saboteur must be to encourage the adjudicator into jurisdictional error.

Happily for the saboteur, the Act contains numerous invitations is for the parties to agree relevant matters.  Fulsome advantage should be taken of these invitations. It can hardly be said that it offends against section 34 to agree the very matters which the Act contemplates agreement on. In any event, there is no point going about this like a bull in a china shop. Provisions saying, for example, that the contractor must lay out a deposit of $10,000 before commencing an adjudication are plainly void under section 34. One catches more flies with honey than with vinegar.  And so the saboteur should think about the applicable principles for all weasel words: one wants something as unreadable by the other party as possible, and also something that is unambiguous in the event that things end up under the legal spotlight. Think in terms of artificially-whitened teeth – barely noticeable in the daytime, but utterly compelling in the ultra-violet light of a nightclub. So two structural points:

·         Make sure that the periodic payments under the contractual regime are not called “progress payments”. Call them “interim payments”, “monthly payments”, or whatever you like other than “progress payments”. We are going to make the distinction between statutory entitlements and contractual entitlements as surely as an oyster knife slips in between the two halves of an unsuspecting mollusc.

·         Put the agreements as the Act towards the end of the contract, perhaps in the Special Conditions as Special Condition X. Obviously, we want this provision as high as possible in the contractual hierarchy, but as low as possible in the physical pile of contract documents.

So, SC X might begin something like:

Agreements as to the Building and Construction Industry Security of Payment Act 1999

The parties hereby agree the following matters pursuant to and for the purposes of the Building and Construction Industry Security of Payment Act 1999 (as amended) (the Act). For the purpose of this clause, words and expressions bear the meanings ascribed by section 4 of the Act, and the meaning of “progress payment” is limited to the strict meaning ascribed by section 8 of the Act, namely payments due by virtue of that section.

Under this heading, we can start setting up some useful agreements.

Reference Date

The first invitation in the Act is in relation to the “reference date”.  Section 8 (2) a) has been noted above.  It is open to the parties, by their contract, to determine the reference date.  Now, in doing this, the contract draftsperson will not want to interfere with the mechanism that she actually wants to operate in real life.  There need to be two contractual provisions, one dealing with the real life position as to contractual interim payment, and the other designed to sabotage the statutory progress payment.  The latter might go as follows:

SC X.1 The date on which a claim for a progress payment under the Act may be made in relation to work carried out or undertaken to be carried out (or related goods and services supplied or undertaken to be supplied) shall be 15 business days after the date for application for payment  under clause … hereof.

The later reference being to whichever clause deals with when the contractor makes his contractual applications for interim payment.

This means that the contractor’s usual contractual application for interim payment will not be effective to enliven the statutory right to a progress payment, and if an adjudicator makes a determination based on the contractor’s contractual application, then the determination will be bad for jurisdictional error.

It would be possible, of course, to seek to wreck more havoc on the statutory regime, by providing for example that the relevant period is not 15 days but some longer period, or by providing that the reference date only comes around, not once a month, but say once every three months.  However, one must not be too greedy. In Minister for Commerce v Contrax, Hodgson JA said:

For example, if a contract provided for yearly reference dates, or provided that progress payments should be calculated on the basis of 1% of the value of work done, in my opinion such provisions could be so inimical to s.3(1), s.3(2) and s.8(1) as to be avoided by s.34

Amount of progress payment

Section 9 begins:


The amount of a progress payment to which a person is entitled in respect of a construction contract is to be:

(a) the amount calculated in accordance with the terms of the contract, or

(b) if the contract makes no express provision with respect to the matter…

So, obviously, we do want to make express provision, and again, of course, we want to make sure that the entitlement to the statutory progress payment is different from and less than the contractual entitlement to interim payment. Again, to avoid the risk of a provision being found “inimical” to the objects of the Act, it is important not to be too greedy. Something like this might cause sufficient mayhem:

SC X.2 The amount of a progress payment to which the contractor is entitled is the contract price, less

(a)   if any of the work is defective or incomplete, the estimated cost to the owner of itself rectifying or completing the work, and

(b)   if the contractor is liable for liquidated damages under this agreement, the amount of such liquidated damages.

There are five aspects of this formulation worth noting. First, it is entirely alien to the way in which almost all applications are in practice made, which is “bottom up”. This is “top down” which means that any conventional calculation is likely to be entirely inapplicable, and any payment claim based on the conventional approach will be invalid.[2]

Secondly, the formulation will almost always produce a much lower amount than the conventional approach, since more or less by definition, the progress payment will be in respect of work that is incomplete, and the cost to an owner of completing incomplete work (with all the attendant cost of picking up someone else’s baton) is almost always greater than the unexpended portion of the contractor’s price.

Thirdly, the formulation picks up the methodology of section 10(1)(b)(iv) of the Act in relation to defects, and so is unlikely to be held inimical to the Act.

Fourthly, the formulation is underpinned by a commercial reality. Banks typically look at their advances for construction work on precisely this basis; it represents a commercially accepted reality as to the value to an owner of building work done (if not the commercial reality of what contractors need for their cash flow).

Fifthly, it is desirable to incorporate any liquidated damages into the calculation of the amount of the progress payment. Adjudicators frequently just ignore liquidated damages issues, and it may be hard to challenge this approach on judicial review where the issue is only one of set-off.  But a failure to take liquidated damages into account when the liquidated damages are a required part of the calculation of a progress payment is very probably going to be fatal to the validity of the determination

Valuation of Construction Work

The Act provides an opportunity to agree the valuation of construction work under section 10. We need not trouble unduly with this, since it is only relevant if there be no express provision as to progress payments under section 9(a). And we now have an express agreement under section 9(a) in our SC X.2. So there is no need for agreement under section 10.

Due Date for Payment

In New South Wales, this is not now such fertile ground, since section 11, as amended, now provides that

(1) Subject to this section and any other law, a progress payment to be made under a construction contract is payable in accordance with the applicable terms of the contract.

(1A) A progress payment to be made by a principal to a head contractor under a construction contract becomes due and payable on:

(a) the date occurring 15 business days after a payment claim is made under Part 3 in relation to the payment, except to the extent paragraph (b) applies, or

(b) an earlier date as provided in accordance with the terms of the contract.


There is similar provision for subcontracts in section 11(1B) except that the default period is there 30 business days.

In other words, express terms might advance the due date for payment of 15 business days from payment claim, but cannot retard it.

In other jurisdictions, there is more scope.  For example, the South Australian Act[3] provides at section 11 that:

(1)         A progress payment under a construction contract becomes due and payable—

(a)         on the date on which the payment becomes due and payable in accordance with the terms of the contract; or

(b)         if the contract makes no express provision with respect to the matter…

Arguably, there is a case here for a slightly different approach. Adjudicators can make determinations for money that is not yet due, but must identify the date when it is to become due. Thus, a ladder clause might well represent something of a curved ball for them, making it hard to avoid jurisdictional error:

SC X.2 The date on which a progress payment becomes due and payable is

X.2.1   240 business days after a payment claim is made, or if this subclause is void,

X.2.2   120 business days after a payment claim is made, or if this subclause is void,

X.2.3   60 business days after a payment claim is made, or if this subclause is void,

X.2.4   30 business days after a payment claim is made, or if this subclause is void,

X.2.5   20 business days after a payment claim is made.

The 240 day period might well be inimical under Minister of Commerce v Contrax principles. The 20 days is but a modest adaptation of the default period of 15 days.  It would be hard to be confident where the dividing line between them falls.

Other invitations

The Act contains other invitations, such as to agree an interest rate under section 11(2). But the Act provides that the applicable rate of interest is the default rate or the agreed rate whichever is the greater. So there is no point is reaching agreement as to these other matters. Better to rely on them as showing that the Act distinguishes between these other matters, which prevent effective agreement that is less advantageous to the claimant than the default position, and other ones where we are reaching express agreement and where the parties are evidently free to reach less advantageous agreement.


Some adjudicators are astute. Others are not the sharpest chisels in the tool shed, and these ones might well disregard our Special Condition X, assuming that they can make their determination on the basis of the contractual arrangements for interim payment. If they do so, their determinations will very probably be invalid.

That the East Coast model legislation is fundamentally flawed is evidenced by the somewhat frantic efforts to fix it by amendment, and it would no doubt be better if it were to be replaced by a national system based contractual entitlements, which we know from international experience works well. In the meantime, one might be comforted by the thought that to throw a spanner into works that are already breaking down is a good deal less reprehensible that the destruction of standard forms, and if parties are effectively prevented from destroying their commercial relationship by embarking on East Coast model adjudication, then perhaps one might say, so much the better.

[1] [2005] NSWCA 142.
[2] See Protectavale Pty Ltd v K2K Pty Ltd [2008] FCA 1248, Gantley Pty Ltd & Ors v Phoenix International Group Pty Ltd & Anor [2010] VSC 106 et al.
[3] The Building and Construction Industry Security of Payment Act 2009 (SA).

Leave a Reply