"Security of Payment: Things that work and Things that don't"
Wednesday, 11 November 2009
All Australian States and Territories of Australia have either enacted or are about to enact security of payment legislation for the construction industry. New Zealand, Singapore and Malaysia have similar legislation. I refer to them as "Payments Acts". Whilst there are differences, sometimes significant, they all take a similar approach. That is to create a legislated environment for orderly, reasonable regular payment at the business to business level.
For a Payments Act to succeed it must provide for decisive, quick and efficient resolution of disputed payments. The most successful legislation, by far, is New South Wales and Queensland, where the legislation is for most purposes, identical, except where it interacts with complementary State legislation. The adoption of Payments Acts has been less successful in other jurisdictions for a variety of reasons.
Things that WorkThe Process - Security of payment legislation in Australia has changed the game from bullying, cheque-book diplomacy to an orderly, businesslike approach to payment. It is an essential foundation for a sustainable, competitive, progressive industry. First and foremost, Payments Acts establish a simple, effective process for making a progress payment claim, disputing and negotiating any differences and making a payment, all within reasonable business terms. It respects contracts where there are written terms, but bans unconscionable conduct and may creates maximum terms of payment and default terms, where there is nothing in the contract.
Speed - Payment Acts must be considered in the context that they are created around payment terms for progress payments that typically range from two weeks to one month. Some Acts, such as WA, allow longer default terms and others, milestone payments. Nonetheless, where a claimant is entitled to a monthly payment, it is reasonable that the parties should be able to claim, negotiate, process and pay a progress payment in around thirty days, even when some or all of the payment is in dispute.
Being ready - Claimants should not regard Payments Acts primarily as a dispute resolution process. The intent is to create a legislated, orderly cash management process in the construction industry. Claimants should render payment claims under payments acts as a matter of course, so that they are ready to "pull the trigger" as soon as a payment issue turns into an intractable dispute, or is delayed for no apparent reason. Remember, 18,333 companies entered administration or insolvency to date this year. You do not want to be held out for payment when it is your client who can't make the next payment.
Being ready also means that both claimants and respondents must be up to date with their contract management, including instructions, variations, extensions of time, defects etc. There is no time to back-track on contract administration when a progress payment is at issue. In effect, Payments Acts encourage good contract management practices. There is nothing wrong with that.
Adjudication - Adjudication of payment disputes gives Payments Acts "teeth". Around the world it is proving to be a swift, effective and reasonably economical method of resolving payment disputes. Properly used, it can settle minor payment issues along the way, before they become major disputes, so that contracting parties can get on with their work, without destroying good business relationships. Often adjudications are conducted by experienced industry professionals who understand contract administration and payment processes. They are more likely to arrive at well reasoned, just and correct decisions than those who may never have administered a construction contract.
Things that Don'tIgnoring the legislation - Many respondents do not make the effort to familiarise themselves with their rights and obligations under Payments Acts in jurisdictions where they work. It is important that all staff who are responsible for authorising and making payment are trained in the relevant Payments Acts and that contracts and company procedures are carefully aligned with the Act. The collateral gain is much better control over job costs and business finances.
Ignoring the process - Respondents who ignore the Payments Act process, in the hope that that it will go away, or that they may outlast or outspend the claimant, mostly pay a high price. Engaging with the process ensures that a respondent's can argue their case in the event of a disputed payment. Queensland statistics indicate that, where a payment schedule has been served, the success rate of adjudications drops to around 30% compared with over 80% where a payment schedule has not been served. Payments Acts are intended to protect everyone's entitlements, but only if the parties are prepared to make an effort to protect their own interests.
Bad records - Every contractor has a responsibility to protect its own entitlements by ensuring that it has a contract that spells out its obligations and entitlements and by ensuring that it guards those entitlements along the way with proper instructions, requests, time records, diary notes, variation requests, extension of time claims and anything else that is likely to affect the price of the work. Poor or no records makes proving a payment claim or defending a payment schedule very difficult, if not impossible.
Poor adjudication submissions - Payments Acts are typically very narrow with respect to the mattes that an adjudicator can decide. Usually an adjudicator can decide only the amount of one payment claim, the due date for payment and the rate of interest on the overdue amount. Adding volumes of information about past claims, general performance of the parties, character assassination, doubtful jurisdictional claims and the like might be cathartic, but it is not helpful to the adjudicator and will certainly add to the cost of an adjudication. Keep applications and responses simple and to the point. Remember, you are arguing about one progress payment. In most cases, it will be resolved by an experienced, practical adjudicator. Generally, a progress claim or payment schedule, or subsequent adjudication submissions, should not require volumes of carefully crafted legal argument. Adjudication should not become a forum for legal contractual disputes. Payments Acts do not generally limit parties other entitlements and remedies under a contract or at law.
Bullying and threatening tactics - Threatening tactics can be very damaging to a respondent, if a claimant decides to make a stand. Some Acts confer strong rights for an unpaid claimant to suspend work and to claim damages if subsequently dismissed. Claims for defects and back-charges must be properly made under a contract, and in some cases under complementary legislation, if they are to succeed in an adjudication.
Security of payment is an established part of the landscape of the construction industry in Australia. It is not going away; nor is it ineffective in the way that earlier initiatives have been. Every business involved in the industry has a responsibility to understand and engage with security of payment legislation in all the jurisdictions that they operate in.
Written for Reed Construction by
John Lowry LFAIQS, AIAMA, ICECA, Reg Adjudicator (Qld).
The Australian Institute of Quantity Surveyors Authorised Nominating Authority
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