Australia: Building and Construction Industry Security of Payment Act 1999 - Change in the Air
Building and Construction Update

After five or so years of speculation as to the fate of the review of the Building and Construction Industry Security of Payment Act 1999 (Act) the Department of Services Technology Administration (Department) (being the latest incarnation of the Department administering the Act) has settled on some reforms and sought submissions on other important issues.

Although the adjudication process under the Act already has unforgiving timelines and outside of mediation, is the most rapid form of dispute resolution, the Department is contemplating proposals to further enhance the Act's efficiency, make it fairer and perhaps more user-friendly. Details are set out in the Department's paper entitled 'NSW Building and Construction Industry Security of Payment Act 1999 & Contractors Debts Act 1997 Discussion Paper' (Discussion Paper). The paper can be viewed here.

Reforms to be implemented

The reforms notified by the discussion paper, ie those that will be implemented, are set out below.

Redevelopment of the criteria for appointment and maintenance of appointment as an Authorised Nominating Authority (ANA)

Prescribed criteria for ANAs will be developed. The aim is to ensure probity and transparency in the application evaluation and renewal processes. These will include provision of business details of the proposed ANA applicant, financial and insurance information, procedures to be implemented to manage the adjudication process, demonstrated understanding and implementation of the Act and its proposed fee structure

The development of criteria for the appointment of an adjudicator

To ensure public confidence, adjudicators will need to meet specific criteria (currently being developed by the Department) to be eligible to act as adjudicators. Such criteria will focus on the individual skills and experience of the applicant.

The publication of guidelines for adjudicators

Complex and unmanageable documentation can make the task very difficult. In response to this, the Department is developing guidelines to assist the adjudicators in dealing with all documentary and procedural aspects in difficult areas of the adjudication process. The guidelines will also touch upon complex legal issues such as section 34 of the Act and the level of detail required in a payment schedule.

Such guidelines appear to be in response to concerns as to the quality and independence of the existing stock of adjudicators. Arguably, setting a high bar for adjudicator qualification and ensuring ANAs do their homework on nominations should make such guidelines unnecessary.

Proposals and request for submissions

In addition to notifying changes the Department intends to implement, the Discussion Paper also raises a number of issues that, in the Department's view, require attention. It puts proposals as to possible (or even likely) reforms and seeks submissions from stakeholders. A brief summary of the main reforms follows.

Reference date

The Department reports that some principals or contractors are adopting unconscionable reference date periods and are thereby thwarting the objectives of the Act. To address this, the Discussion Paper proposes capping the period between the commencement of work and the reference date at 90 days. Strangely there is no mention of subsequent reference dates.

Such a provision, as well as that which follows in respect of the date for payment, would represent a fundamental change to the law in respect of construction contracts and like section 34 of the Act, will apply whether or not one calls up the Act in one's payment claim.

Payment date

The Discussion Paper cites concerns as to unconscionable payment periods. It suggests capping the time for payment of a payment claim at 30 days from the date the claim is served.

Real concerns exist as to whether financiers will be able to cope with that timeline.

Adjudication documentation

It is proposed to delay providing the adjudicator with the adjudication application until either the adjudicator can also be provided with the adjudication response or the time for the response has expired. It is suggested that this will allow adjudicators the opportunity to assess both parties' submissions prior to accepting the adjudication nomination. This is also to ensure the adjudicator is not unduly influenced by the claimant's application prior to reviewing the response, and to provide a fairer system for both parties.

Our view is that the proposed change seems to misunderstand the process and will serve to prolong the adjudication process.

The adjudicator must always first read and understand the payment claim, payment schedule and the adjudication application . The adjudication response (if any) is to be considered in light of those. There is no material issue with the adjudicator having the application first.

Further, the staged delivery of documentation assists the adjudicator, particularly when the quantity of material is large.

Amendment of payment claims and schedules

The Department reports concern that many respondents have received claims and taken no action due to their lack of understanding of the workings of the Act. In order to rectify this, it is proposed that the required form of payment claims be amended so that it alerts a respondent to the possible consequences of failing to respond to a payment claim. That seems sensible so long as any mandatory statement is brief and to the point.

There is also a suggestion that a payment schedule should identify itself as a payment schedule under the Act. That is quite unnecessary. It also begs the question as to what happens when the endorsement is omitted from a payment schedule.

Predatory claiming practices

The Act is often used in matters involving very large and complex claims. However, the timetable imposed by the Act limits the respondent's and adjudicator's ability to deal with all complex issues raised and at times, claimants' behaviour could be considered an "ambush" to overwhelm the respondent.

The Discussion Paper proposes to limit predatory claiming practices by reducing claims of excessive volume or volume of materials to prevent payments being made that are well in excess of entitlements. It proposes doing this by:

1. prohibiting amounts from claims under the Act. Prohibited amounts (such as prolongation claims, claims for damages for breach of contract, breach of legislation and claims for latent conditions) will no longer be allowed to be claimed and this may limit the amount of material than can be put to the respondent and/or adjudicator; and/or
2. prior to lodging an adjudication application, a respondent can raise an objection to claims for prohibited amounts in the payment schedule by stating that it is a prohibited amount and that payment will not be made or by making submissions to the adjudicator in the adjudication response. The adjudicator may then determine whether a component of the claim is one for prohibited amount and be able to value these claims as nil; and
3. given that the above process may take additional time and work, extending the time for respondents to respond to an adjudication application and for adjudicators to respond. This will apply to adjudications involving prohibited amounts only.

Limitation periods for claims

Currently the Act merely requires that "some" work for which payment is claimed has been performed in the 12 months prior to service of the claim. The courts have applied a broad interpretation allowing claims that include work performed years before the date of the claim. Arguably the courts have strained to avoid claims being time barred.

The Discussion Paper proposes to amend the Act so that all construction work claimed in the payment claim must have been performed within the preceding 12 month period, which seems sensible given the objectives of the Act.

Statutory right to set-off

There is no jurisdiction under the Act for a respondent to claim a set-off (in the absence of a contractual entitlement) or an overpayment consequent upon an adjudication determination. It is proposed to amend the Act so that any dispute resolution mechanism in the contract would have scope to consider claims involving overpayment of money pursuant to adjudication, such as overpayments as damages in its final determination. This seems sensible.

Interest on overpayment

If an overpayment is currently made to a claimant, the respondent is likely to suffer loss of the interest paid in relation to the money overpaid (or loss of potential earnings on the sum). The Discussion Paper proposes that interest be paid on all overpayments at a rate stated in the contract or at a fixed statutory rate included in the Act.

Making the principal responsible

The Discussion Paper proposes that subcontractor claimants be entitled to claim against a head contractor and the principal (in the event of non-payment by the head contractor). This would place an obligation on the principal to ensure subcontractors are being paid by head contractors. It is likely that the proposed recovery would only be permitted where the principal contractor has not already paid the head contractor. This proposal is, at this stage, undeveloped. It appears to us unlikely to be converted into law, at least in this round of reform.

The Discussion Paper also goes to the Contractors Debts Act 1997 and general enforcement issues. These will be addressed by us in our next construction update.

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