My article Rough Justice is Ready was published in the July edition of the South Australian Law Society’s Gazette.
Security of Payment – Rough Justice is Ready
By Robert Fenwick Elliott, Howard Zelling Chambers
It is notorious that litigating building disputes is typically far too expensive and far too slow. Arbitration is usually no better. If the State’s courts follow through with current proposals to create a specialist building and construction list, some improvement is likely, but even so, litigation in the courts is not an effective way for contractors and subcontractors to deal with the perennial problem of nonpayment or late payment.
In recent years, the common law world has seen a revolution in this area, with 14 jurisdictions around the world now having legislated for a statutory adjudication scheme. South Australia was a late arrival, the Building and Construction Industry Security of Payment Act 2009 applying to contracts entered into from December 2011. The Act follows what is known as the East Coast Model, and in broad terms, the essentials are as follows:
- The Act sets up a statutory right for those doing construction work, or providing related services, to regular progress payments. This new statutory right is parasitic on, but not quite the same as, the usual contractual right to interim payment.
- This new statutory right in enlivened by the claimant serving a “payment claim”. This is more or less any document which identifies what work is being claimed for, how much is being claimed, and which states that it is a claim under the Act.
- The paymaster, or respondent, then has 15 business days to serve a “payment schedule”, identifying the payment claim and saying how much, if anything, the respondent proposes to pay. If that amount is less than the claimed amount, then the respondent has to set out the reasons for the difference in the payment schedule.
- If the respondent fails to serve a payment schedule, then the claimant becomes automatically entitled to the whole of the amount claimed. The Act provides that the respondent is not entitled to rely on any defence it may have arising out of the construction contract.
- If the scheduled amount is less than the claimed amount, the claimant is entitled to commence an adjudication. The claimant chooses an authorised nominating authority, or ANA, which then appoints an adjudicator. The claimant is entitled to put in a written submission, and the respondent is entitled to a response – but the response may not include any reason for non-payment that was not identified in the payment schedule. The adjudicator then has just 10 business days to determine the matter, and although he or she has power to inspect the site, call a conference or invite further submissions, the determination is usually based on just the few documents described above.
- The claimant also has to option of pursuing the adjudication route if there is no payment schedule at all, provided the respondent is given a second chance to serve a payment schedule. In these cases, the adjudication is typically a “turkey shoot” since the respondent is prohibited from raising any defence under the contract. Claimants often take this course, since the adjudication process is typically takes less time than obtaining an appointment for as summary judgement application, or a hearing under MCR 60(4)
- Once the claimant has obtained a favourable determination, then this may quickly be certified by the ANA and registered at any court as a judgment.
The East Coast States have had a head start with this legislation, the NSW Act gating back to 1999. The experience on the East Coast has been that legislation represents a very powerful weapon in a claimant’s hands, for a number of reasons:
- It is extremely rapid – far faster than the fastest court or arbitral process.
- It is rigidly technical. A failure by a respondent to meet one of the “drop dead” dates in the Act is likely to be fatal to the respondent’s defence.
- Pay-when paid defences are banned, and the adjudicator is entitled to ignore certification provisions. The effect of the Act is thus to entirely circumvent contractual arrangement whereby the amount payable is certified by a named superintendent or other certifier.
- Any attempt to contract out of or to modify the statutory scheme is ineffective.
- Further, most appointments of adjudicators are made by for-profit ANAs, who are chosen by and thus direct their marketing towards claimants. Claimants often get a very sympathetic treatment from such adjudicators.
Take up of the opportunity in South Australia has been gathering pace, but still lags behind usage in other States. It appears that there is still a way to go before contractors and subcontractors in South Australia fully appreciate just how powerful a weapon this legislation gives them.
Are there any dark clouds in this apparently sunny sky for claimants? Yes, there are.
It is not uncommon for head contractors on the East Coast to tell their subcontractors that the first time they invoke the procedures of the Act will be the last time they are invited to tender for any future work. And indeed, the findings of the recent report on the legislation by the Society of Construction Law Australia show that an East Coast Model adjudication typically spells the end of the commercial relationship between the parties. And so, the legislation is typically used by contractors and subcontractors for whom getting a particular invoice paid is more important than an ongoing relationship with that employer.
The legislative scheme is “pay now, argue later”. In other words, the adjudicator’s determination, whilst enforceable, is not finally determinative, and in the relatively unlikely event of subsequent litigation or arbitration, any amount determined and paid is treated as merely on account.
There is no appeal from the adjudicator’s determination but it is possible to challenge a determination, typically now by way of judicial review. Grounds include want of jurisdiction, breach of natural justice (including bias) and want of good faith on the part of the adjudicator. The success rate of such challenges has been growing in recent years; the SoCLA report found that in 2013, 80 per cent of challenges led to the determination being quashed.
Most determinations are of course not challenged, not least because many of them are for small amounts. Although the legislation is sometimes used for multimillion dollar claims, it is most often used for much smaller claims, of $5000 or less.
Apart from residential-occupier cases, where this legislation does not apply, the Act thus represents a much faster, cheaper and more effective route for builders to get paid than the Workers Liens Act. The building industry in South Australia has yet to fully appreciate the potential of the legislation, and comparison with other states suggests that usage of the Act will increase considerably when equilibrium is reached.
In the longer term, it is likely that the system will be overhauled. Queensland has recently announced a reform of appointment system so as to address concerns about pro-claimant bias by for-profit ANAs and the adjudicators that they appoint. Meanwhile New South Wales is making reforms to its Act in an entirely different direction, including the abolition of the requirement for payment claims to say that they are payment claims, a move that is widely predicted to lead to chaotic uncertainty as neither paymasters nor claims know with any certainty what is or is not a payment claim. SoCLA’s report sets out a blueprint for federal legislation. Almost all stakeholders agree that a national system would be preferable to the patchwork of state legislation that presently exists, but views differ about the form that this should take. Western Australia and the Northern Territory, which operate what is known as the West Coast Model, seem largely content with the system they presently have.
So far, there have been two Supreme Court of South Australia challenges to determinations under the Act (Built Environs v Tali and Kennett v Janssen), both of which have led to the determinations in question being quashed. In Romaldi v AIL (No 2), the Court demonstrated the reluctance of the courts to allow any stays of enforcement under the Act.
Robert Fenwick Elliott is a construction law barrister; his website pages with more details of adjudication news, unreported cases and useful links is at feconslaw.com.au
 For use of this provision, see Ko Commercial v BLD Construct, AMC 19 December 2013 (unreported)
  SASC 84
 Supreme Court 30 July 2013 (unreported)
  SASCFC 124