The Governement of South Australia is reviewing the operation of the security of payment legislatioin here in the state, and I was asked by the Law Society to lob in my twopenny worth.
In doing so I tried to consuklt as widely as possiblew with other members of the Society Of Constrcxution Law Australia in the State.
This is the result, which went in today:
Review of Building and Construction Industry Security of Payments
Act 2009 (SA)
Comments by Robert Fenwick Elliott on Issues Paper of December 2014
- I am specialist construction lawyer, having been practising more or less exclusively in the area of construction, engineering and energy since 1977. I was the founding partner of what is now Fenwick Elliott LLP in London in 1980. For the past few years, I have been based in Adelaide. After having set up Fenwick Elliott Grace in Adelaide, I went to the independent bar in 2013, initially at Howard Zelling Chambers, but since November 2014 as an international member of Keating Chambers, which is based in London and probably the leading specialist construction law set in the world. I remain based in South Australia. My practice is both domestic, within Australia, and international.
- I have been closely involved with the development of adjudication around the world since the 1990s, when I was involved with the formulation of the first Act, the Housing Grants, Construction and Regeneration Act 1996 of England and Wales (it was then that I coined the expression “pay now, argue later”, which has since been adopted by courts around The world). More recently, I have assisted in the formulation of the relevant Act in the Republic of Ireland.
- As counsel, I have been involved in numerous adjudications, including court challenges, in several states in Australia. As chairman of the Society of Construction Law Australia’s Australian Legislation Reform Subcommittee, I was responsible for the society’s recent report on the reform of security of payment and adjudication legislation in Australia.
- In these comments, the passages in the issues paper upon which I comment are reproduced in grey, and my comments follow in black.
- I am a board member of the Society of Construction Law Australia. Because of this, and because the views of a consensus of informed lawyers is more valuable than the view of only one, I have consulted with my colleagues from SoCLA who practice in this State. A digest of their views appears at Attachment 1 below.
- The Building and Construction Industry Security of Payments Act 2009 (SA) was originally modelled on the then current legislation in New South Wales, typically referred to as the “East Coast Model” to distinguish it from the legislation which operates in Western Australia and the Northern Territory, which is typically referred to as the “West Coast Model”. An analysis of the difference between these models appears in the SoCLA Report; but in brief, the East Coast model is heavily reliant upon default mechanisms, whereby a claimant is effectively deemed to be entitled to payment unless and to the extent that a respondent provides a “payment schedule” in response to a “payment claim”. A further feature of the used Coast model, as originally implemented, was that it was dependent on Authorised Nominating Authorities (ANA’s) who have typically been private, for-profit companies. The East Coast model has been the subject of significant criticism, not least because it has been perceived to be subject to an inevitable institutional bias. The ANAs compete with each other for business, and the business tends to go to the ANAs who have the most pronounced “pro claimant” track record. This has led to 2 particular results:
- First, the willingness of the courts to quash adjudicators’ determinations on challenge has risen hugely. Initially, the courts demonstrated a determination to uphold the intent of the legislation by allowing adjudicators’ decisions to stand, even in cases where they are probably wrong in law or in fact. As time has gone by, and the courts have become increasingly aware of the institutional bias, the percentage of cases were an adjudicator’s determination has been quashed has risen, and in the calendar year preceding the SoCLA Report (2013) no less than 80% of challenges in the Supreme Courts of East Coast jurisdiction adjudications that led to those determinations being quashed. It remains the case that a mere error of law or fact is not sufficient to quash a determination decision; but these quashings have been the result of a breach of natural justice, bias, want of jurisdiction, want of good faith or the like. That is a truly appalling track record, which demonstrates that the East Coast model is fundamentally flawed.
- Secondly, all major states on the East C oast have now abandoned the original East Coast model. Victoria was the first state to do so, parting company from the New South Wales legislation in 2002. Those 2002 amendments have widely been regarded as a disaster, except by those who dislike the very notion of adjudication, and use of the security of payment system in Victoria has remained extremely low. Both New South Wales and Queensland have made significant amendments to the legislation over the past year.
- The New South Wales amendments up follow some but not all of the recommendations of the Collins report, and have not been widely welcomed. In particular, those amendments remove the need for a payment claim to identify itself as such, and require those parties submitting payment claims to accompany them with supporting statements as to what has been paid “down the line”. The system is not unlike the system often used by government of requiring statutory declarations to this effect – a system which has accurately been described as “a joke” and which has led to very widespread perjury. At the New South Wales amendments are likely to lead to a significant criminalisation of the ordinary business of contracting in New South Wales, and in my many discussions with those involved with the adjudication process in Australia, I have never heard anyone suggest that it would be desirable for any other state to follow this New South Wales lead.
- By contrast, the recent amendments in Queensland follow the work of the Wallace report, and have been much more widely welcomed. The main conclusion of the Wallace report, and the impact of the recent amendments, is to abolish the ANAs in Queensland. Instead, responsibility for the appointment of adjudicators has shifted to the relevant government agency.
- This current situation in South Australia, accordingly, is that the registration remains a copy of an original model of legislation which has been widely discredited, and abandoned by every other major state. With the benefit of hindsight, it would almost certainly have been better for South Australia to have followed the example of the Northern Territory, ie to adopt the West Coast model of adjudication and to take the opportunity of also repealing the Workers Liens Act 1893, which is utterly out of date and sits extremely uncomfortably with any security of payment regime.
- An appropriate response, therefore, would be not merely to “tinker” but with the existing Act, but to address its fundamental failings. Three overall approaches present themselves:
- It is unhelpful and illogical for every state and territory in Australia to have a different security of payment regime. The SoCLA Report recommends that there should be federal legislation, on the basis that experience suggests that harmonisation of state legislation has simply proved to be “too hard” in practice. Whilst ideal, this route is unlikely to be achieved in the immediate future, and in any event it is, of course, outwith the reach of any single state government.
- A more immediately achievable strategy, which would not require any extensive drafting from scratch, would simply be to repeal the existing Act and to replace it with an Act modelled on the Northern Territory legislation (essentially the same as the Western Australian legislation, but with some improvements to the key timescales). Unsurprisingly the West Coast model has been derided by the private “for-profit” ANAs – they derive no income from it – but has proved to be far more popular and successful than the East Coast model. The West Coast model therefore provides an appropriate “off-the-shelf” solution for South Australia.
- A third possibility is to amend the legislation along lines similar to the recent Queensland amendments. This would mean, in particular, abandoning the present ANA system, and replacing it with provision for government agency appointments.
- All three of these proposals necessarily involve an additional government responsibility in the appointment process. But there is no reason to suppose that this would necessarily involve any significant burden on the public purse:
- There is no reason why the government should not charge a fee for appointing an adjudicator. The existing legislation provides for such a fee (section 29 (4) ). In practice, the “for-profit” ANAs do not typically charge such a fee because they want to get business in through the door, and instead they make their money by taking a kickback of some 40% of the adjudicators’ fees. A fee sufficient to cover the cost need not be large, would be a small price for a claimant to pay to obtain the advantages of an adjudication regime, and may be recoverable from a respondent who was found liable to pay the claim.
- There is good reason to allow the parties autonomy in terms of choosing an adjudicator, or an approved nominating body, and if this route is followed (as for example in the Northern Territory) appointment by the government is no more than a fallback position.
- In order to consider the consequence of adopting suggested route b (i.e. the Northern Territory route) I have enquired of the Northern Territory Construction Registrar as to the burden that his appointments have entailed in practice. His answers, reproduced with his permission, appear at Attachment 2 below,
A total of $35,098,872.61 was claimed through adjudication mechanisms within the Act in the 2013 – 2014 financial years.
Of the amount above, the total amount awarded to claimants in the same period is $9,912,126.08.
The difference between the claimed amounts and awarded amounts totals $25,186,746.53. This difference reflects factors such as the variation of costs sought versus actual costs incurred in the estimation process, withdrawal of applications, full payment by the respondent before adjudication and settlement by the respondent etc.
The reported figures may not offer a comprehensive representation or otherwise of the adjudication process or the success or otherwise of the adjudication process.
- It is almost certain that these reported figures do not meaningfully reflect the way that the adjudication process is currently working in South Australia. The pattern that I have seen is that adjudication processes have typically been successful, unless the process is challenged in court, in which case the process is typically quashed.
Is this current definition of construction work still current?
- There have been many hundreds of cases which have gone before the courts as to the meaning and effect of the East Coast model. Occasionally, these concern issues as to whether any particular construction work falls within or without the definition in the legislation, but these cases have been relatively rare, and it is probably inevitable, wherever the dividing line is drawn, that issues as to it will occasionally arise.
- The current definition of construction work is not a matter of significant concern.
Is this current definition of related goods and services still current?
- Neither is the current definition of related goods and services a matter of significant concern.
Is further refinement of this section required to specifically include those contracts that are not afforded the protection of the Act by virtue of “technicalities”, i.e limitation of time, provision of goods/ services for owner occupier via independent builder etc?
- These are not issues which give rise to any significant problems at present.
Is the Act clear in terms of the definition of the rights to progress payments, calculations of the Amount of the progress payment and Valuation of construction work and related goods and services?
- No, the Act is not at all clear in these respects, and indeed there are very few, other than specialist construction lawyers, who understand the principles that are applicable. By way of example:
- The Act provides no express explanation as to what is the position where the contract in question itself contains a mechanism whereby the amount payable is to be ascertained, for example by way of a certificate issued by a supervising officer. The case law, however, makes it clear that these certification mechanisms are to be disregarded for the purpose of ascertaining the statutory entitlement under the security of payment legislation. Claimant are thus likely to have, in cases of contracts with this sort of provision, parallel rights which are not necessarily the same at all. The claimant’s contractual right is generally the amount that has been certified by the supervising officer. The claimant’s statutory right is to the amount calculated pursuant to the underlying provisions of the contract, regardless of what has been certified.
- Much less clear is the position where the contract contains provisions to the effect that the claimant’s right to payment is throttled or even negated if the claimant does not serve particular contractual notices, which are not infrequently expressed to be by way of condition precedent. It is thus at the very least arguable that if such a contractual notice is not served, then the notice mechanism operates to throttle or negate the contractual entitlement, but not the statutory entitlement.
- Equally unclear is the position with regard to set off. Probably, the position is that adjudicators ought to respect contractual rights of set off (although in practice they very often do not do so) but there is much more doubt as to whether the claimant’s right to a progress payment is affected by a respondent’s right to an equitable set off. The position in respect of common law set off but is also complicated and uncertain, there being a partial statutory intervention in the case of defective work by section 10 (1) (b) (iv), , but no express statutory provision in the equally common case of delayed work.
- None of this is rocket science, and other jurisdictions contain perfectly sensible and clear provisions (for example, in the UK, an adjudicator is given express power to open up review and revise certificates as to payment). These problems are symptomatic of the fact that the East Coast model legislation is, and always was, rather poorly drafted.
- In my view, the very scheme of the East Coast model, which provides for a statutory right to payment parasitic upon but different from the contractual right, is inappropriate and has led to a huge amount of needless litigation. It is far better to adopt the approach which has been adopted in other jurisdictions – where adjudication has been far more successful – whereby the statutory entitlement is the same as the contractual entitlement. There are areas where, for example, the UK legislature has intervened. Thus, as mentioned above, the adjudicator is given the power to open up, review and revise certificates for payment, and the legislation provides sensible prohibitions on pay when paid clauses and on respondents relying on any right of set-off up without having given notice of that right before the payment in question has fallen due.
Not providing this statement until after the matter becomes a dispute adds further time until the matter may be resolved through the adjudication mechanisms within the Act, as this is a specific trigger. Without this claim statement the Act cannot be utilised by the claimant. This may disadvantage the claimant.
In order to provide certainty to the industry, the Act could be modified so that an invoice or payment claim provided by a claimant would trigger the Acts Adjudication mechanisms, irrespective of whether or not the payment claim provides that it is a claim under the Act. This would result in every claim made being covered by the Act.
- A modification of the Act to remove the feature of the payment claim (that it must identify itself as such) would be extremely unwise, and despite its good intentions, would operate contrary to the interests of claimants.
- As mentioned above, this is one of the changes made in New South Wales pursuant to the Collins report, but it seems clear that the motive for the change was misconceived. Mr Collins noted, entirely correctly, that there is a widespread practice in New South Wales of head contractors making it clear to subcontractors that they will be blacklisted if they use the legislation. This blacklisting occurs because head contractors take the view that adjudicators under the East Coast model are so institutionally biased that they do not regard the process is a fair one, such that they would prefer not to deal with any subcontractor who resorts to the legislation. This is in marked contrast by the way, with the position in the UK, where adjudication enjoys a much better reputation and is generally welcomed by all sector laws of the construction industry. The error made by Mr Collins was in assuming that this blacklisting attaches to the common practice of adding the statutory notice to every invoice. In fact, where blacklisting occurs, it is triggered by the commencement of adjudication proceedings, and so the issue of whether an invoice does or does not contain the statutory notice is completely irrelevant.
- The removal of the requirement for the statutory notice on a statutory payment claim would prejudice claimants, because claimants would find that they have made payment claims under the Act without intending to do so. In fact, claimants are perfectly well able to make intelligent decisions as to whether they want to make any particular claim under the Act, or whether they would prefer simply, at any given stage, follow the contractual procedures. It is overwhelmingly likely that claimants in New South Wales will now find that when they want to make a claim under the Act, they are unable to do so, because some previous invoice has already amounted to a claim under the Act, and they will be caught by the restriction of one claim per reference period. It will also be the position that the removal of the requirement for the statutory notice will hugely increase the amount of “red tape” in that respondents will have to assume that every claim is a claim under the Act, and therefore will require a payment schedule within 10 business days (as the relevant period is in New South Wales).
- The intelligent approach to the problem of blacklisting is to be found in the saying, “When you are down a hole, stop digging”. Instead of amending the legislation to force the parties into the statutory scheme whether they like it or not, it would be much better to improve the quality of adjudications so that they are not regarded as unacceptably toxic by paymasters, whether those paymasters be principals, head contractors or subcontractors.
There have been a number of issues and complaints nationwide regarding eligibility, and transparency of adjudicators and Authorised Nominating Authorities (ANAs). This process falls outside the direct scrutiny of the Office of the Small Business Commissioner.
- These problems go beyond mere issues and complaints. In both the Supreme Court challenges as to the validity of adjudication determinations in South Australia so far, the determinations are found to be nullities for reasons which, at least in part, are founded in serious shortcomings on the part of ANAs. Thus:
- In Built Environs v Tali it was found that there was a reasonable apprehension of bias on the part of the ANA (Nominator) because its general manager, in his capacity as chief executive officer of another entity, had been advising Tali Engineering in connection with its dispute with Built Environs; the determination was thus a nullity.
- In Kennett v Janssen (Supreme Court 30 July 2013 per Blue J) the adjudicator appointed by the ANA (Adjudicate Today) was found not to meet the eligibility criteria, such that the adjudication was invalid and void.
In order to ensure compliance with the Code of Conduct and to ensure quality of service, the Small Business Commissioner could provide an adjudication panel (similar to the very successful mediation panel that already exists).
Such an initiative would also allow the Commissioner greater oversight of the dispute resolution successes and failures. If the Commissioner is able to identify failures within this system and to identify the root causes for such failures this may allow the process to be improved upon in order to remove some/all of those failures.
- Yes, given the problems which have manifested themselves in South Australia and throughout the other East Coast model states, it would probably be very sensible for an adjudication panel to be set up. Such a panel system already exists in Western Australia, the Northern Territory and now in Queensland.
- This is not to say that greater regulation is of itself necessarily a panacea. For example, in the United Kingdom, there is no government control over adjudication panels at all: any body can set itself up as an adjudication nominating body and there are no statutory restraints on who such a body may nominate. However, the climate in this respect in the United Kingdom is very different; the vast majority of ANB appointments are by professional bodies such as the Royal Institute of Chartered Surveyors (RICS), the Royal Institute of British Architects (RIBA), the Institution of Civil Engineers (ICE) and The Technology and Construction Solicitors Association (TeCSA). Counterintuitively, perhaps, the result of this apparent anarchy has been much higher standards.
Allowing greater oversight and control over the complaint process, the Commissioner would have direct access to all adjudicators within the panel. Should any complaints of perceived bias arise, the Commissioner would be able to appoint another adjudicator. This would ensure that the timeliness of the adjudication process is maintained.
- Certainly, a Commissioner’s panel system would assist in dealing with matters of apprehended bias. But it might be a shade optimistic to expect that in these cases the timeliness of the adjudication process would be maintained. I recently conducted an adjudication in the Northern Territory, replacing a previous adjudicator who had been removed as a result of apprehended bias – that issue caused a hiatus of about a month.
Whilst this process is going ahead the subcontractor may effectively “stop work” on the site with certain protections, it is unclear if these protections remain, if the Respondent appeals the matter to the courts.
- This proposal is much less wise. For a start, whilst a claimant is often a subcontractor, there are other cases where a claimant is at some other place in the contractual chain, such as head contractor or supplier. For any of these parties to stop work, or to withhold supply, is capable of creating massive problems in commercial terms, and also in terms of health and safety issues. A far better approach is for the parties to get on with the project, and for issues as to payment (including bias or other issues in an adjudication) to be resolved in parallel, and as quickly as possible.
Is the existing Code of Conduct for ANAs effective and rigorous? Should it be directly referenced in the legislation and the Code mandated by regulation – including penalties for non-compliance?
- No, the Code of Conduct for ANAs, worthy as it is, is plainly not sufficient to ensure adequate standards by the ANAs. It was not successful in preventing the problems revealed by the court cases referred to at paragraph 25 above, and it is notable that both of the ANAs at fault in those cases remain authorized to this day. This remark is not particularly intended by way of criticism of the South Australian regime; we have seen exactly the same thing in other East Coast states, and in particular, some adjudicators have repeatedly been found to have acted in breach of natural justice, or in the absence of good faith, or without jurisdiction, and yet nothing has been done to remove them from further appointments. On the contrary, it is tempting to suspect that for the for-profit ANAs it is regarded as something as a badge of honour to have been repeatedly and excessively found to have been “pro-claimant” in the adjudication determinations made under their aegis. I am not aware of a single case in Australia where any ANA, however badly behaved, has lost its authorisation. This is in circumstances where, as found by the Wallace report, there has been blatant and serious failures by those ANAs. The word “bias” occurs no less than 61 times in that report, and the report includes this:
Part of the individual consultations with the Review involved interviewing a number of adjudicators from each ANA panel. Adjudicators were chosen randomly by the Review Secretariat with the only stipulations being that I wished to interview at least two adjudicators from each ANA panel of varying experience, who preferably serve on the panels of multiple ANAs. In addition, I interviewed project managers, builders, lawyers, industry associations, mining company executives, academics, subcontractors and QBSA staff to name just a few.
During those discussions, allegations were made by stakeholders that:
- At least one adjudicator felt the “commercial tension” between the interests of the ANA and the interests of the claimant;
- There was flagrant “adjudicator shopping” occurring. Namely, claimants and/or their advisors were demanding that ANAs appoint a specific adjudicator or conversely that specific adjudicators not be appointed. These requests were being allegedly met by some ANAs;
- An employee of an ANA had directly attempted to convince an adjudicator to alter the adjudication decision before it was published to the parties;
- A more senior adjudicator who had nothing to do with the subject adjudication decision had attempted to convince the adjudicator that the adjudication decision should be amended before it was published to the parties and that the amendments were “substantive”. A similar account was recounted by a different adjudicator about his experiences with a different ANA;
- There was an informal practice whereby adjudicators who made decisions not to the liking of an ANA were “rested”; and
- An employee of an ANA asked a claims preparer which adjudicator the application should be referred to.
During the course of the Review allegations were made about a number of instances where other adjudicators (other than one deciding the application) have allegedly involved themselves in some form of unsolicited informal peer review before a decision has been published and has sought to influence adjudicators to change aspects of their decisions. If this is correct, this behavior is totally unacceptable. How the unpublished decisions came to be in the possession of other adjudicators is not known. Whilst I have no qualms in an ANA being able to offer “proof reading” advice on the decision of an adjudicator awaiting publication, that advice must not extend, in my view at least to an ANA providing the unpublished decision to another party. An ANA has no statutory function in the making of an adjudication decision, other than the appointment of the adjudicator.
Although the Review has not received any direct evidence of instances where other adjudicators who have allegedly acted to influence the decisions of adjudicators being involved in acting for one of the parties to that adjudication, I am concerned that the practice may be happening. One must ask the question, why else would another adjudicator involve themselves in such behaviour? I should note, that the allegations of influence being applied on adjudicators by either an ANA or another adjudicator on the panel of that Ana are not restricted to a particular ANA, nor a particular class of ANA. In saying that, these comments should not be misinterpreted that the Review received evidence or submissions that the alleged problem was occurring regularly. It did not. However the allegation was made more than once, against more than one ANA and by different adjudicators.
- There is no reason to suppose that the position in Queensland as it was last year is any different from the position in South Australia today – the major ANAs operate on a cross-border basis. Obviously, for adjudicators to tell Andrew Wallace, in confidence, what is really going on is one thing, and to formally present a disciplinary complaint is another – the later being commercial suicide given the huge power that the ANAs wield over adjudicators. The inescapable conclusion is that procedures such as set out in Code of Conduct are inherently ineffective to control the behaviours of ANAs. The only effective solution is to introduce a government panel system, or to drive the private ANAs from the marketplace.
Currently ANAs report on the detail or outcome of adjudications and as such the effectiveness of the legislation is based on feedback currently provided.
Should there be a legislated report back requirement?
Are the eligibility requirements in the Code of Conduct sufficient in terms of the “fit and proper” test?
- Neither the regulations nor the code of conduct set a particularly high bar.
- There is a conundrum here. For small cases, an adjudicator who is not particularly well qualified, but whose charge rate is readily affordable, will probably do a sufficient job in this “rough justice” environment. On the other hand, for larger cases, such an adjudicator is likely to be out of his or her depth, and there is a high risk that the parties will be dissatisfied with the result, and that a challenge will be made to the Supreme Court. Whilst there is plainly an intention to “keep the lawyers out of it” in the legislation, the practical reality is that, in substantial cases, an adjudicator who has both good knowledge of the law, and also lengthy experience of construction matters, is far more likely to produce a satisfactory result, and one which the parties will regard as fair.
Should there be a requirement to immediately report to the Minister where an ANA is charged with an indictable offence?
- There would be no harm in such a requirement, although in practice it is unlikely to make any difference. The problem with the ANA’s is not that they commit indictable offences, but rather that their modus operandi repeatedly leads to low standards, and bias in favour of claimants.
The Code of Conduct currently states that “An ANA must not nominate an adjudicator that has been found, by a court in Australia, to have made technical errors in performing adjudications unless the ANA is satisfied that the cause of the error has been resolved.” Does this clause unreasonably restrict the pool of ANA’s /adjudicators available and are there other reasonable remedies?
- I should confess to an interest in relation to this question; it was, I think, my suggestion that the “red card, yellow card” provisions were introduced into the Code of Conduct. But the drafting of the provisions was not mine, and I think leaves much to be desired. In particular, the code contains no explanation of how the “cause of the error” is supposed to be resolved. Perhaps by further training? There may well be cases where the only way in which the error can effectively be resolved is by removing the adjudicator from any further appointments.
- If a commissioner’s panel system is to be introduced, then the Commissioner’s task may well be eased by provision for a default system, whereby adjudicators whose decisions are repeatedly overturned by the courts should prima facie be removed from the panel. It would not be difficult to draft a suitable formula, which would allow the commissioners some discretion in appropriate cases. For example, I am, at the time of preparing these comments, involved in a case in which my clients assert that the adjudicator acted without jurisdiction, in that the claimant has operated without the license required by the Building Work Contractors Act, and is thus unable to make a valid payment claim under the Security of Payment Legislation. In this case, there was no reason for the adjudicator to know that the claimant was unlicensed, and it would be entirely unreasonable to sanction him for making a determination without jurisdiction.
- Provided that it is recognised that experienced adjudicators who determine many cases face great exposure to the risk of being found to have made technical errors than less often appointed adjudicators, and provided that there is sufficient scope for discretion, some sort of “red card, yellow card” provision would not unreasonably restrict the available pool either of ANAs (if ANAs are to be retained) or adjudicators.
- It is certainly possible to conceive that other remedies might be imposed which would not be unreasonable. For example, it would be perfectly possible to provide that an adjudicator who has failed to act in good faith should be required to refund his fees for acting in the adjudication. But care needs to be exercised in this area. The present formula is that the adjudicator is more or less immune from suit unless he or she acts particularly badly. A desirable consequence of this regime is that when an adjudicator’s determinations is challenged in the Supreme Court, the adjudicator almost always elects not to take part in the proceedings, but simply to abide the event. If the remedies available against the adjudicator were to be too Draconian, then adjudicators might well be tempted to become actively involved in the proceedings, which would considerably increase the cost and complexity of the challenge process.
Is it appropriate for the Small Business Commissioner to have investigative powers in relation to unfair tactics by unscrupulous contractors not paying sub-contractors on multiple occasions?
- This interesting question may well fall somewhat outside the review of the security of payment legislation. But it is worth noting that over the past 500 years or so, numerous guilds, partnerships and professional associations have made it an expellable offence for a member to repeatedly fail to pay its debts. A difficulty in this regard is that it is not easy to distinguish an illegitimate failure by a party to pay its debts from a perfectly legitimate challenge to an unjustified claim. In theory, adjudication might provide some sort of benchmark in this respect.
Claimants are often owed substantial monies. For many, the process may exhaust their cash reserves prior to the adjudicator’s determination. In extreme cases the claimant may be forced to close their business whilst awaiting a result.
- Personally, I have never seen a case where a claimant has been forced to close its business whilst awaiting the result of an adjudicator’s determination. Such cases will inevitably be very rare, because the adjudication process is so rapid. A much greater risk arises as a result of court challenges of adjudication processes, which take much longer. During this period, the respondent may not be required to pay at all, or may be required only to pay the money into court, where it does no good for the claimant. In practice, therefore, by far the most satisfactory response to this risk is to improve the quality of the adjudication process, such that challenges to the adjudication process become much rarer.
- In this context, it is appropriate also to note that the ball can bounce the other way. An examination of the adjudication decisions made in Queensland prior to the recent reforms demonstrates that it is relatively rare for the large, well-funded, head contractor to be the subject of adjudication claims; more often, the cases are those of “small fish bites small fish”. An unreasonable adjudication determination against a respondent who does not in fact have the money that is claimed can cause real hardship. Of course, because of the “pay now, argue later” aspects of the adjudication process, it is open for such a respondent to institute legal proceedings to recover the amount of the determination that he has to pay, but such proceedings are lengthy and expensive. Again, by far the most satisfactory answer to this problem is to improve the quality of the adjudication process and in particular by removing the inherent pro-claimant bias that is caused by the existing ANA system.
If the respondent fails to pay the adjudicated amount, the certificate must be laid before a court for enforcement as a debt owing. This process also has a a timeline, and is subject to many factors, including appeal by the respondent, which may see the recovery process balloon further from that point, compounding the distress felt by the claimant etc.
- The section 25 procedure does not in fact allow for an appeal, as such, by the respondent. On the contrary, section 25(4) contains severe restrictions on the matters which a respondent is entitled to raise in answer to enforcement proceedings.
- The comment in the issues paper may well have been motivated by the case of Romaldi v Adelaide Interior Linings. In that case, an injunction was initially granted by the District Court in April 2013 on the alleged basis that the claimant was impecunious, and would be unable to repay the determination amount in eventual court proceedings. Those proceedings continued until November 2013, when the Full Court of the Supreme Court firmly rejected the idea that payment of the adjudicator’s determination (which was not challenged in that case) should have been delayed. With the benefit of hindsight, of course, the respondent should never have obtained that relief in the first place and that was a failure – subsequently remedied – of the court system. There is nothing in the Romaldi case which suggests the need for any legislative reform.
Whilst the Act provides that the respondent must provide the adjudicated amount to the courts in order to appeal the matter, this appeal can take further time, to which the contractor may have already received a benefit from the contract, which they are not passing onto the subcontractor. If an appeal is granted it may necessitate the need to hire legal representation etc, which adds to cost and time pressures. In many cases this would be an unwinnable situation.
Is the current recovery process using adjudication certificates too lengthy?
- No, it is about as rapid as reasonably practicable.
What changes could be made to timelines to ease the burden on the claimant but at the same time respecting the rights of the respondent to act?
- If the respondent wishes to challenge an adjudication determination by means of judicial review, then it has to act very quickly. In practice, there is a 3 stage process:
- the respondent makes an ex parte application for an injunction for a couple of days or so, which, if granted, preserves the status quo, and puts the claimant on notice of the challenge
- the court then hears both parties, deciding whether the interlocutory relief should be maintained, deciding whether the claimant must pay the amount of the determination into court, and making directions as to when the challenge may be heard. Such a challenge may be dealt with on the fast track basis, recently introduced into the court procedure, such that the hearing of the challenge can, depending on the availability of the court and counsel, be heard within a couple of weeks or so
- the court then decides on the challenge.
- This process is very rapid, but it is manageable. No changes need to be made to the timelines applicable to the enforcement of adjudication certificates.
Is the Act achieving its objectives in providing the building and construction industry with an effective process to secure payment outside of legal action?
- These things are relative. Was the old practice of supplying copious amounts of brandy and the leather strap to chew on effective as an anaesthesia during surgery? Well, it was certainly better than nothing, but not nearly as good as modern anaesthetics. A similar remark might be made about this now outdated East Coast model legislation. It is better than nothing, but not nearly as effective as the legislation which operates in other jurisdictions, such as the West Coast model or the model that operates in the UK. Indeed, with the possible exception of Victoria, South Australia probably now ties with Tasmania and the ACT as having the worst system in the world.
Is the Act working in a manner which secures timely and fair outcomes?
- No, whilst the Act secures timely outcomes, it cannot be said that those outcomes are sufficiently fair. In many cases, of course, adjudication is used for the enforcement of debts which are not seriously disputed, and in those cases it works well. Indeed, anecdotal experience suggests that the mere existence of the security of payment regime improves payment practices.
- To some extent, this assessment has to be somewhat anecdotal. As mentioned above, the track record among the East Coast states of adjudicators determinations which are examined by the courts is truly appalling, with some 80% being quashed on the grounds of breach of natural justice, want of good faith, want of jurisdiction et cetera. But if there was scope for the courts also to quash determinations on the grounds that they are probably wrong in fact or in law, that quashing rate would probably be increased to something over 90%. By their nature, the cases which are challenged in the courts tend to be the larger cases, and cases where the respondent is seriously disputing its liability. If one were to disregard the cases where the respondent does not seriously dispute liability, and look only at the cases that are too small to justify challenging in court, a fair guess is that the percentage of unfair decisions would be just as high or higher, but there is really little or no actual evidence on this point one way or the other.
Is the process unduly complex? If so, could it be streamlined?
- The processes in the Act are probably about as streamlined as practicable, but there is no doubt that the processes rendered unduly complex by the unnecessary complication of setting up a statutory entitlement to payment that is different from the contractual right to payment; see above. In this sense, the process could certainly be streamlined by adopting the West Coast model approach.
Is the adjudication process effective?
- Yes, but then again the Ebola virus is effective.
If not, are there changes to the Act which can be considered?
- Yes, see above.
- The changes which are appropriate are those set out in the conclusions and recommendations of the SoCLA Report of 2014, summarised at paragraphs 254 to 255. The key recommendation at paragraph 255.1 for federalisation is obviously beyond the reach of the current review. If I was asked to put the recommendations in approximate order of importance, I would do so as follows (this ordering was not the subject of the consultation referred to at Attachment 1 below, but is a late addition to this document):
- Reform of the ANA system (paragraphs 255.9 and 255.10). There are several ways in which the subjective might be achieved. The Queensland route (replacing the ANA’s with government appointments from a panel) would be desirable. If the ANA’s are to be retained, it would be highly desirable to outlaw the current practice whereby adjudicators pay a kickback of their fees to their appointing ANA (paragraph 255.10). If a panel system is to be introduced, it would be appropriate to permit the parties, if they wish, to choose the identity of the adjudicator, to be drawn from that panel (paragraph 255.8). It would be sensible to “tighten up” the provisions in the Code of Conduct so as to be more specific about removal from the panel, or disqualification from acting, of adjudicators who have repeatedly been found to have made unacceptable errors in their determinations;
- Time limits should be adjusted, so as to allow longer periods of time for larger cases (paragraph 255.12);
- Removal of the default system, whereby a respondent is denied the right to defend the claim if it fails to meet the deadline for a payment schedule, would lead to better justice. At the very least, the Queensland solution should be adopted of removing the default mechanism in larger cases;
- Adjudicators should have greater powers to get to the real facts, rather than be constrained as they are by the present legislation. Appropriate measures would be to confer inquisitorial powers as in the UK model (paragraph 255.13), to allow lawyers to be heard in conferences in larger cases (paragraph 255.14) and to guillotine written and oral submissions (paragraph 255.15);
- The parallel statutory right to payment should be abandoned (paragraph 255.5). If the parallel right to payment is to be retained, then it would be highly beneficial to tidy up a number of areas of uncertainty, such as whether a claim may be made by a claimant who lacks the necessary building licence, whether a claim may be made by a company in liquidation, what rights of set-off are available against the statutory right to payment, and what power an adjudicator has to open up certificate and overreach notice provisions.
20 February 2015
Robert FENWICK ELLIOTT
Barrister, Keating Chambers (International Member)
90 Northgate Street, Unley Park, Adelaide, South Australia 5061
+ 61 (0) 8 8373 0695 (direct)
+ 44 (0) 20 7544 2600 (clerks)
A member of the South Australian Bar Association
Liability limited by a scheme approved under Professional Standards Legislation
Attachment 1 – Digest of view from other members of SoCLA
From Andrew Robertson 17 February 2015
Further to my email below I can confirm we have continued to canvass views of interested South Australian SOCLA members.
That review has shown a diversity of views with the majority views reflected below. Although some alternative views have been expressed the core elements identified appear to have the support of most members although as noted the individual emphasis and expression of those members may differ.
My personal views, as a director of SOCLA and Fellow of the Institute of Arbitrators and Mediators Australia (an ANA), are in support of each of the elements with significant concern around the role of ANAs and the perception of users associated with that role.
Partner | Piper Alderman
From: Andrew Robertson [mailto:ARobertson@piperalderman.com.au]
Sent: Friday, 16 January 2015 3:13 PM
Thank you for the opportunity to respond to the comment on the Issues Paper you have prepared for the review of the Building and Construction Industry Security of Payments Act 2009 (SA).
As the other, along with yourself, South Australian based director of the Society of Construction Law Australian I have called and convened a meeting for interested South Australian SOCLA members to discuss the ideas canvassed in your paper and to determine whether the views you have expressed in your draft accord, or otherwise, with the SA SOCLA membership.
In your draft paper at paragraph 11 you identify three core comments in relation to the working of the current Act and proposals for the future:
- That uniformity and harmonisation of the process across Australia, if possible, is a preferred and best case scenario to permit ease of movement between parts of Australia and a coherent and consistent knowledge base.
- That if harmonisation is not possible then simplification of the process to a more user friendly and commercially accessible process, such as that applied in the Western Australian, or preferably the similar Northern Territory legislation, is to be encouraged. For the process to be effective some of the complexities and technical legal issues need to be de-emphasised and a more appropriate timetable used which has been, largely, better achieved in the legislation referred to.
- The potentially pernicious influence of commercial bodies acting as authorised nominating authorities should be reduced, or preferably removed, from the Act. The recent Queensland amendments provide a possible blue print to enable this.
We understand that these proposals will not generally require any additional resourcing from Government and to the extent any additional activity may be required, such as in the nomination process, the costs associated should be recoverable through the imposition of an appropriate fee to users.
While the issues are complex and the views express suggest that the emphasis placed on relevant concerns may differ between individual SOCLA members the views expressed were all supportive of the core comments identified above. It is noted that less legal technicality is supported by both the legally and non-legally trained SOCLA members. Even the specialist construction lawyers feel the Act should be able to be operated in the hands of the non-legally trained and the models interstate provide a guide as to how to work towards the aim.
I understand some of the SOCLA members may give consideration to making their own separate submissions, if permissible, to the review but the comments in this note reflect the broad consensus of those SOCLA members that were able to attend the meeting or have otherwise commented on the draft issues paper.
Partner | Piper Alderman
t +61 8 8205 3442 | m +61 405 356 289 | f +61 8 8205 3300
From: colleenfullerton [mailto:firstname.lastname@example.org]
Sent: Wednesday, 14 January 2015 11:56 AM
To: Andrew Robertson; email@example.com
Subject: Re: SoP Review in SA  [PA-A.FID447055]
Hi Andrew and Robert
I agree with your comments Robert.
I believe that the states should have a uniform approach to the security of payments legislation but recognise that this may be too difficult to achieve.
However the review should recognise the problems and issues raised by Robert and implement changes that would best satisfy the various stakeholders.
I like the idea of the Government introducing a registration system with a panel of adjudicators and deleting the role of ANA’s – as QLD has done. We need to improve the quality of adjudication determinations and reduce the number of court appeals as does not achieve the purpose of the legislation, ie to “pay now and argue later”.
I recently spoke to a leader of a subcontracting association and gained the impression that subcontractors prefer the east coast model that we adopted in SA. They will have a strong voice in the review process as well as Builders. Therefore changes proposed will need to be generally acceptable to them and other stakeholders.
I support having discussions with representatives of the vested interest groups during the review process. I believe the construction law group and IAMA/LEADER should be involved in the process.
I am currently travelling in Vietnam and Thailand until end January, but would like to be involved in discussions on return to SA.
Sent from my iPad
From Dr Jeremy Coggins, who contributed to SoCLA’s 2014 Report, 16 February 2015:
I agree in principle with the points and reasons you have set out in your Issues Paper on the SA Act, advocating that adjudicator appointment by the Commissioner and, ideally, the adoption of the West Coast model legislation would be preferable, leading to better quality determination outcomes.
Having said this, however, I’d also like to add the following comments:
- The original NSW (or East Coast) model adopted by SA was intended to protect the smaller contractor within the construction industry which, of course, is a laudable and correct objective. If the East Coast model had been restricted to smaller claims, instead of having been applied to claims of all sizes (ie, a ‘one size fits all’ approach) then, most likely, we would not be seeing the quashing of adjudicators’ determinations in the courts as referred to in your paper. The provisions of the original East Coast model undoubtedly are more favourable to claimants in the event of payment disputes, generally putting disputed monies in to their hands, but this was indeed the original intent of the legislation in order to prevent the unfair financial hardship that was being experienced by smaller trade contractors and suppliers. The adjudication usage rates from NSW and Queensland demonstrate that adjudication is well used to help parties get paid for smaller claims. The quick resolution of smaller claims to assist smaller contractors is where the East Coast model has merit.
- The weakness of the original East Coast model lies in its inability to determine large payment claims and have those determinations sufficiently respected by dissatisfied respondents such that they will accept the determinations without challenging them in court. Clearly, the East Coast model adjudication scheme, with its objective of protecting the smaller contractor, was not designed to accommodate resolution of the larger payment claims. Whilst statutory adjudication is well used in NSW and Queensland for smaller payment claims, there is also evidence that a significant amount of larger payment claims go to adjudication. Of the 471 adjudications determined in Queensland in 2013/14, for example, around a quarter were for claims in excess of $100,000, and around 13% were for payment claims over $500,000. With such large sums of money at stake, it is not surprising that many parties have taken to engaging lawyers to prepare their adjudication applications and responses, and often submit copious amounts of documentation (eg, statutory declarations, contemporaneous documents, programmes, site inspections, photographs and expert witness reports) to support their cases. The timescales currently allowed in the East Coast model and SA Act’s adjudication scheme are simply not sufficient to allow respondents to properly prepare for adjudications or for adjudicators to properly consider the documents submitted for larger payment claims. Additionally, the prohibition on the respondent (under the original East Coast model) raising new reasons for withholding payment in their adjudication response, whilst understandable and justifiable in the context of smaller payment claims in order to financially protect smaller vulnerable trade contractors, contributes to the feeling of perceived lack of procedural justice which a losing respondent may feel in a large payment claim.
In light of my comments above and, picking up on the comment made by [Colin Fullerton in his] correspondence to you that any proposed changes to the Act would need to be generally acceptable to subcontractors and other stakeholders, I view that changes to the SA Act akin to the recent amendments to the Queensland legislation would result in appropriate improvements to the SA Act, in order to iron out the current weaknesses, which would be the most likely to be acceptable to all stakeholders (with the probable exception of the ANAs) . The Queensland amendments effectively introduce a dual adjudication system – one designed for smaller payment claims and the other for larger payment claims – by:
- Lengthening the timescales for larger payment claims in relation to the periods in which a respondent has to serve payment schedules and adjudication responses, as well as the time in which an adjudicator has to make their determination; and
- Allowing respondents to raise reasons for withholding payment which were not previously raised in their payment schedule subject to a claimant being allowed to respond to any new reasons during the adjudication process.
Further, the Queensland amendments introduce adjudicator appointment by the relevant government authority in order to remove the undesirable consequences of the ANA appointment system highlighted in the Wallace Report.
In conclusion, for the reasons above, I would suggest that SA should seriously consider amendments similar to the recent Queensland amendments with further consultations as to the size and nature of payment claims that should be captured by each of the adjudication schemes (‘standard’ versus ‘complex’, to use the Queensland terminology), as well as the precise adjustment as to the timescales under the adjudication scheme for larger payment claims.
Dr Jeremy Coggins
Senior Lecturer and Program Director (External Affairs), Bachelor of Construction Management & Economics, School of Natural & Built Environments, University of South Australia
And by way of PS:
Just one more thing – do you think it’s worth mentioning about protection of head contractors who build for owner/occupiers under para 20?
Attachment 2 – Email exchange with the Construction Registrar of the Northern Territory
From: Robert Fenwick Elliott [mailto:firstname.lastname@example.org]
Sent: Thursday, 8 January 2015 9:03 AM
To: Guy Riley
Subject: Security of Payment Reform in SA
I have been asked to comment on an Issues Paper as part of the review of the South Australian Security of Payments Act 2009. One of the options that I am putting to the government here is that of replacing the current legislation here with legislation modelled on the Northern Territory Act.
Budgetary issues being what they are, I suspect there might be nervousness about the cost of any government involvement in the process of appointing adjudicators.
Would you be able to give me some idea of the percentage of adjudications in which it is necessary for you, as the Adjudication Registrar, to make the appointment of the adjudicator?
With very best wishes for the New Year
Robert FENWICK ELLIOTT | Barrister, Keating Chambers (International Member)
90 Northgate Street, Unley Park, Adelaide, South Australia 5061
T: + 61 (0) 8 8373 0695 (direct)
+ 44 (0) 20 7544 2600 (clerks)
M: + 61 (0) 415 668 665
F: + 44 (0) 20 7544 2700
From: Guy Riley [mailto:Guy.Riley@nt.gov.au]
Sent: Thursday, 8 January 2015 1:17 PM
To: Robert Fenwick Elliott
Subject: RE: Security of Payment Reform in SA
I haven’t kept a record of appointments that I have made, but my guess would be about 5 or 6 since the scheme commenced and we are now up to 129 applications that I know about – I should be told about all appointments and outcomes, but there have been times when the first I knew of an appointment was when I received a copy of the determination, and in the early years, I might not have been told about an application that was withdrawn without the adjudicator making a decision. These days, adjudicators tend to produce formal dismissals (numbered as determinations) and documents recording the withdrawal of applications. So at most we are talking about 5% of applications, but it has been some time since I last had to make a default appointment. You would like to think that the appointers in Adelaide would have more staff and be better organised than their counterparts in Darwin, which should mean that once you get over the initial teething period, they will be less likely to leave an application sitting in someone’s in-tray until it is too late.
My need to make an appointment only arises when an appointer stuffs up. That happened a couple of times in the early years when the appointers didn’t know what they were doing, and has happened occasionally since either because of staff changes at an appointer or when key staff have been absent through illness of leave.
The volume will be higher in SA, but it is not a particularly onerous task – a couple of phone calls to find someone who is available and then arranging for the application to adjudicator who has pointed out that the appointment has been made out of time. In those circumstances all I do is formally appoint the same adjudicator. Having worked out that the appointment has been made out of time, it requires only one phone call and one email to resolve the problem.
The real time of a Registrar is spent on considering applications for registration by would be adjudicators, publishing records of determinations, and collecting and maintaining stats on applications and determinations.
I often end up having to redact word versions of determinations for publication, which is a time consuming exercise and not one that I would be in a rush to delegate.
Maintaining stats is also a time consuming exercise. In Queensland they have a system where the ANAs key information into the Registrar’s data base and there is a program that can slice and dice that information to produce pie charts and bar graphs. I, on the other hand, have to extract claim amounts and outcomes from the information sheets (that I inevitably have to chase adjudicators for) and enter those figures into Excel spreadsheets for calendar and financial years. Those spread sheets give me yearly totals for determinations, % recovery rates, and totals of claims dismissed. I then manually insert that information into various Word tables. I also maintain Word tables of adjudicator costs (and who pays those costs), and applications by party name and determination number. It is a task I would happily delegate if only I had someone to delegate to.
 The advice that I have given in New South Wales following the recent amendment is that subcontractors and contractors should make a habit now of endorsing every piece of paper with a standard form notice stating in terms that the document makes no claim of any entitlement to a progress payment under the legislation. This practice is designed to ensure that any contractual procedures which the parties have agreed upon may be implemented without interference from the statutory regime, and if and when the claimant wishes to invoke the legislation, then it may do so without fear of falling foul of the rule forbidding multiple claims within the same reference period.
 As it happens, I was counsel for the challenging party in both of these cases.
  SASC 84
 There was also other grounds, the adjudicator having denied natural justice to the respondent.
 See s.21(6) of the BCIPA
 ie a ‘private ANA’ or a ‘membership ANA’
 Which might perhaps be done by banning fee-sharing deals.
 Under the present section 31(1) an adjudicator is immune from anything done in good faith, and in this context the test of good faith is much more generous than that of whether the determination might be vitiated by want of good faith.
 But by no means unknown.
 As in the recent Tagara v AP&L case.
 Correction made.