Proposal for a “Dual Scheme” model of statutory adjudication for the Australian building and construction industry

• Author: Michael C. Brand
• Position: Faculty of the Built Environment, The University of New South Wales, Sydney, Australia

1 Introduction

Over the past decade, the construction industry in Australia has experienced the incremental introduction of eight separate pieces of security of payment legislation. As at the end of 2009, all Australian jurisdictions had passed security of payment legislation in one form or another. The degree to which each successfully addresses the security of payment problem varies as does the disparity in their drafting and approach to adjudication. The disparity is perhaps no more evident than as between the Building and Construction Industry Security of Payment Act 1999 (NSW) (“the NSW Act”) and Construction Contracts Act 2004 (WA).

All Australian jurisdictions (other than the Western Australia and the Northern Territory) have modelled their security of payment legislation on the NSW Act. Nevertheless, the degree of disparity amongst the NSW-based security of payment legislation varies with the Building and Construction Industry Security of Payment Act 2002 (VIC) perhaps being the most far removed from the NSW Act than all other NSW-based security of payment legislation.

As a consequence of the varying disparity of security of payment legislation in Australia, many local commentators now argue that harmonisation of security of payment legislation is urgently required. The authors agree that if there is no good reason for a lack of uniformity of security of payment legislation between the Australian jurisdictions then it is most unfortunate and wasteful.

Notable discussions dealing with the issues of national uniformity and harmonisation of security of payment legislation in Australia are provided by Bell and Vella (2010) , Zhang (2009) , and in Coggins et al. (2010) and the rejoinder to that paper by Davenport (2010a) . A general discussion of harmonising construction regulation in Australia, including an in depth account of the mechanisms for achieving regulatory harmonisation under the Australian federal governmental system, is given by Brown and Furneaux (2007) . At the time of writing, there have been little if any formal attempts by governments or industry to resolve the uniformity issue in Australia.

The purpose of this paper is to outline a possible solution to the harmonisation issue in Australia via the “Dual Scheme” of statutory adjudication. The Dual Scheme concept was pioneered by Davenport (2007) , and has since been developed further by the authors. The Dual Scheme as proposed seeks to utilise the principles of both the “Defined Scheme” and the “Non-specific Scheme” of adjudication as adopted in NSW and Western Australia, respectively. It is hoped that the Dual Scheme proposal will serve as a suitable approach to the harmonisation problem and a catalyst for further debate of this contentious issue.

The following sections of this paper deal with the security of payment problem in the Australian construction industry and the legislative response to the problem in New South Wales (NSW) and elsewhere more generally. The proposed Dual Scheme is then explained in detail.

A number of examples of how the Dual Scheme would work in practice are provided in Brand and Davenport (2010) .

2 Background to the security of payment problem and legislative response

2. 1 Sub-contracting in the construction industry

The Australian building and construction industry is a project-based industry and consists of a large number of small private firms ( ABS, 2004 ). Project-based industries like the building and construction industry typically require head contractors to purchase “sub-projects” and expertise from a large number of external trade suppliers. Consequently, head contractors in the construction industry often act as “systems integrators” and take responsibility for actively coordinating a network of sub-contractors ( Martinsuo and Ahola, 2010 ).

According to Harris and McCaffer (2001) , the practice by head contractors of sub-contracting the works under the head contract has been on the rise in Australia since the 1980s. However, Uher and Davenport (2009) place the shift to sub-contracting as early as the late 1960s, which was about the time when most Western economies began to experience periodic economic downturns when head contractors' economic capacity as direct employers of trades people began to diminish. Harris and McCaffer (2001) and Uher and Davenport (2009) agree that sub-contracting has now become widespread in the construction industry and is an essential component of the project procurement structure and delivery process.

To appreciate how prolific sub-contracting in the construction industry is in Australian, the National Electrical and Communications Association in Australia indicates that about “95 per cent of the labour content” on construction projects, and “75 per cent of the total project value”, is undertaken by sub-contractors ( Cole, 2003a ). As at the end of June 2003, there were about 340,000 construction businesses operating in Australia with employment of just over 700,000 people. Trade service businesses accounted for about 270,000 (or about 80 per cent) of all construction businesses and employed just over 500,000 people, which represents about 75 per cent of the total construction employment. The majority of trade service businesses (about 70 per cent) were earning an annual income of less than $100,000 ( ABS, 2004 ).

The reasons for the widespread use of sub-contracting in the construction industry are many. However, according to Goldfayl (1999) , one notable advantage to head contractors of sub-contracting is the ability of head contractors to divest to sub-contractors much of the financial risk of delivery of the works under the head contract; sub-contractors effectively provide up-front financing of the bulk of the project, thereby improving the head contractors' cash flow ( Maqsood et al., 2003 ). The head contractors' need for interim borrowings is reduced which reduces head contractors' project costs, which in turn makes good commercial sense both for head contractors and their clients. However, sub-contracting is open to abuse. Head contractors can enhance their own financial position by wrongfully delaying and devaluing payments which are rightfully due to sub-contractors under the sub-contract. The systematic abuse of sub-contracting arguably appreciably contributes to the security of payment problem in the construction industry. Of course, head contractors are also susceptible to this type of practice by their clients ( Uher and Brand, 2005 ).

2. 2 Security of payment in the construction industry

In August 2001, the Honourable Terence Cole was appointed a federal royal commissioner to inquire into a range of matters relating to the Australian building and construction industry. This Royal Commission (often simply referred to as “the Cole Royal Commission”) was the first national review of the conduct and practices in the Australian construction industry ( Cole, 2003b ). One of the issues before the Commissioner was “security of payment” in the Australian construction industry. The commissioner considered the security of payment issue to be one of national relevance.

The term “security of payment” is a generic term used to describe ( NSW Government, 1996, p. 41 ):

[T]he entitlement of contractors, subcontractors, consultants or suppliers in the contractual chain to receive payment due under the terms of their contract from the party higher in the chain.

Accordingly, the “security of payment problem” is ( Commonwealth of Australia, 2002, p. 7 ):

[The] 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.

In general, the security of payment problem relates to the arbitrary devaluation, late payment and/or non-payment of progress claims. The tactic of clients and head contractors of unduly delaying payments or arbitrarily reducing the value of payments is designed to enhance their positive cash flow at the expense of those lower in the contractual chain ( Brand and Uher, 2010 ).

The security of payment issue has been recognised as a persistent problem for those who perform construction work, or supply goods and services, in the construction industry, particularly for sub-contractors. In the second reading speech of the “Building and construction industry security of payment bill” (NSW) (“the NSW Bill”), the then NSW Minister for Public Works and Services, Hon. Morris Iemma stated ( Iemma, 1999, p. 103 ):

With regard to the background to this bill I remind the House that on 15 February the Premier announced the Governments intention to stamp out the un-Australian practice of not paying contractors for work they undertake on construction. It is all too frequently the case that small subcontractors, such as bricklayers, carpenters, electricians and plumbers, do not get paid for their work. Many of them cannot survive financially when that occurs, with severe consequences to themselves and their families […] The Government is determined to rid the construction industry of such totally unacceptable practices.

To recover payments, sub-contractors have generally relied on one or more traditional dispute resolution...