Adjudication in Australia

AuthorMichael C. Brand
PositionFaculty of the Built Environment, University of New South Wales, Sydney, Australia
1 Introduction

In September 2010, the New South Wales Government1 released a discussion paper for consideration by stakeholders in the NSW construction industry on the operation of the Building and Construction Industry Security of Payment Act 1999 (NSW) (“the NSW Act”). The discussion paper, inter alia, pointed to the apparent difficulties being experienced by “claimants”2 (“subcontractor-claimants”, in particular) in securing payment from “respondents”3 after adjudication ( NSW Government, 2010 ).

At the time of writing, the cause and extent of the problem of securing payment after adjudication had not been measured empirically. However, a discussion paper released by the Queensland Building Services Authority in 2010 suggests that a significant minority (about 17 per cent) of claimants who had adjudication applications decided in their favour (between 1 July 2008 and 31 December 2008) did not receive payment of the adjudicated amount because either they, or the respondent, proceeded into some form of insolvency before payment could be obtained ( Queensland Government, 2010 ). Given that adjudication under the Building and Construction Industry Payments Act 2004 (Qld) closely follows that under the NSW Act, the extent of the problem experienced by “subcontractor-claimants” in NSW may be at a similar to that reported in Queensland.

As a consequence of the comments made by industry stakeholders in reply to the New South Wales Government's discussion paper, the Building and Construction Industry Security of Payment Amendment Act 2010 (NSW) (“the 2010 Amendment Act”) was passed. The 2010 Amendment Act was assented to on 29 November 2010 and commenced on 28 February 2011. The 2010 Amendment Act inserts Sections 26A to 26F, Section 34A and Schedule 2, Part 4 into the NSW Act. The amendments apply to existing and future construction contracts, and to current and future adjudication applications made under the NSW Act.

The most notable provision brought about by the 2010 Amendment Act is a claimant's ability to “freeze” monies in the hands of the “principal contractor”, via a new payment withholding request procedure, pending the outcome of adjudication. If, under this new procedure, the principal contractor fails to “freeze” the monies, the principal contractor shall itself be liable (along with the respondent) for the amount owed to the claimant.

The term “principal contractor” is a new term inserted into the NSW Act by the 2010 Amendment Act4. Under the 2010 Amendment Act, the person with whom the respondent contracts to provide construction work (or related goods and services) is called the “principal contractor”. For the purposes of the NSW Act, the “principal contractor” is the respondent's principal (i.e. the person, if any, one step up the contractual chain from the respondent). For example, if the head-contractor to an owner or developer is the respondent in an adjudication application, then the owner or the developer is the “principal contractor” (within the meaning of the NSW Act). Similarly, if the subcontractor to the head-contractor is the respondent in an adjudication application, then the head-contractor is the “principal contractor”. To avoid confusion, and for the purposes of this paper, the term “principal” will be used instead of “principal contractor”.

The purpose of this paper is threefold – first, to give a background to the security of payment problem in the NSW construction industry and to the particular problem giving rise to the 2010 Amendment Act; and second, to provide an analysis of the operation of the 2010 Amendment Act; and finally, to address the main implications of the amendments for the three parties involved – the claimant, the respondent and the principal.

2 Background
2. 1 Building and Construction Industry Security of Payment Act 1999

Following the introduction of the Housing Grants, Construction and Regeneration Act 1996 (UK), the Building and Construction Industry Security of Payment Act 1999 (NSW) (“the NSW Act”) was enacted by the NSW Government in an attempt to counter the “security of payment problem” in the NSW construction industry. The security of payment refers to:

[…] consistent failure in the building and construction industry to ensure that participants are paid in full and on time for the work they have done, even though they have a contractual right to be paid ( Commonwealth of Australia, 2002, p. 7 ).

An extensive discussion of the causes and extent of the security of payment problem in the Australian construction industry is provided by the NSW Government (1996) and Commonwealth of Australia (2002) .

The NSW Act was assented to on 5 October 1999 and commenced on 26 March 2000. New South Wales was the first Australian jurisdiction to introduce this type of legislation5. The NSW Act introduced new statutory rights for claimants, such as: a right to progress payments6; a right to interest on late payments7; a right to suspend work8; and a right of lien9. The NSW Act also renders void “pay-when-paid” clauses in construction contracts10. The parties cannot contract out of the NSW Act11. The NSW Act also introduced a unique form of “rapid adjudication” to deal with disputes over the amount of progress payments due, whereby an independent adjudicator makes an interim determination as to the amount of progress payment to be paid to a claimant by a respondent. Only a claimant can initiate the adjudication process, however, both parties are entitled to make submissions to the adjudicator (subject to s. 20(2B) of the NSW Act). An adjudicator can only be appointed by an Authorised Nominating Authority (ANA) chosen by the claimant12. An examination of the NSW Act and comparable legislation operating in Australia is provided by Davenport (2010) and Jacobs (2007) .

2. 2 Overview of the problem giving rise to the 2010 Amendment Act

It is generally acknowledged that building and construction projects are characterised by a “multi-tiered hierarchy of principals, agents, contractors, subcontractors and suppliers with cascading payment obligations” ( Commonwealth of Australia, 2002, p. 8 ). The “multi-tiered hierarchy” is referred to in the paper as the “contractual chain”, wherein money flows from top to bottom. While money flows smoothly down the contractual chain, all is well. However, often a party in the contractual chain will stifle the flow of money at the expense of those downstream. For example, if the head-contractor wants to reduce its overdraft, or is short of money, there is a temptation to wrongfully delay or withhold payments to a party down the contractual chain. Sometimes, instead of passing money down the chain, the head-contractor uses the money to pay its other creditors. The ability to withhold payments unjustly is very tempting to a cash-strapped head-contractor. In the extreme case, the head-contractor may become insolvent and unable pay its subcontractors. Sub-contracting in the construction industry is discussed by Brand and Davenport (2011) , Uher and Davenport (2009) and Harris and McCaffer (2001) .

Whilst the adjudication process under the NSW Act speeds up the passing of money down the contractual chain, it does not remove the ability of the respondent to use money owed to the claimant for the respondent's own purposes while an adjudication application is being determined by the adjudicator. It is this behaviour by respondents that is seen to contribute significantly to difficulties being experienced by claimants in securing payment after adjudication ( NSW Government, 2010 ). This behaviour has the effect of defeating the object of the Act13. In speaking to the Building and Construction Industry Security of Payment Bill 2010, the NSW Minister for Commerce, the Hon. Paul Lynch, stated ( Lynch, 2010, p. 1 ):

The current Building and Construction Industry Security of Payment Act [1999] has been widely utilised by subcontractors to gain adjudication determinations for disputed payment claims. But one of the problems facing subcontractors is ensuring that the respondent – the contractor owing money – makes the payments outlined in the adjudication determination. The Government is of the view that increasing awareness of payment problems in the contractual chain can help to protect subcontractors and further improve payment performance in the building industry. That is what this bill intends to do.

The philosophy behind the 2010 Amendment Act is that if the respondent's ability to use money received from the principal on account of the claimant's work is removed then the incentive to wrongfully delay or withhold payment is diminished and the chance of recovery of the adjudicated amount is increased.

2. 3 Contractors' Debts Act 1997

The problem of those higher in the contractual chain wrongfully delaying or withholding payment is not new. More than 100 years ago the NSW Government enacted the Contractors Debts Act 1897 (“the 1897 Act”) ( Brand and Davenport, 2011 ). The 1897 Act has been replaced by the Contractors Debts Act 1997 (NSW), but the replacement Act does not materially alter the scheme under the 1897 Act.

According to Davenport (2010) , the Contractors Debts Act 1997 (NSW) contains two key features. The first is the “attachment of...

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