Amid ongoing controversy surrounding insolvency levels within the building sector, ways in which security of payment (SOP) legislation could be reformed to facilitate freer cash flow throughout the construction industry supply chain have been the subject of debate.

Last December, for instance, the federal government announced a review into SOP legislation across states and territories – although the terms of reference for that review stopped short of enabling consideration of what many would like to see in terms of a singular SOP regime to be administered at a federal level.

As this goes on, it is important that all significant players within the industry understand how the legislation works, any myths or misconceptions surrounding the legislation, common areas where mistakes are made and important strategies which are required to achieve optimal outcomes.

Security of payment legislation applies throughout each state and territory and specifies that anyone who performs building work on a construction contract is entitled to progress payments as various stages of the work are completed. Whilst specifics vary across states/territories, the legislation broadly applies to work which is performed by head contractors, subcontractors, consultants (architects, engineers, certifiers and so on) and suppliers (building material, labour hire, equipment hire and so on).

It applies to all contracts across residential, commercial and civil construction except for those made directly between a builder or building supplier and a residential home owner. It involves a claimant (head contractor, subcontractor, subcontractor, consultant or supplier) who performs the work in question and a respondent (typically a principal or head contractor) upon whom claims for progress payments are served.

Whilst specifics vary across jurisdictions, basic processes are as follows:

As they carry out work under their contract, claimants will claim progress payments by serving a payment claim upon the respondent. Similar in nature to a regular invoice, this must across eastern states outline the goods and services which have been performed, the amount claimed to be due and a statement that it is a payment claim being made under the relevant SOP legislation within the state/territory concerned (no longer necessary in NSW for contracts entered into after August 21, 2014). Additional details as prescribed by the relevant contract are required in Western Australia and the Northern Territory.

Upon receiving a claim, a respondent will forward a payment schedule which states how much they intend to pay and any reasons why this differs from the amount claimed. Where the respondent does not do this (or does not do so within required time frames), they can lose their right to dispute the claim and must pay the claim in full by the due date.

Where the claimant is not satisfied, they can either launch court action or (more commonly) apply for adjudication. They do this in most states by contacting an authorised nominating authority (ANA), whose role it is to appoint an adjudicator and to assist the respective parties with the administrative aspects of the adjudication process. Courtesy of reforms enacted in Queensland throughout 2014, claimants in that state instead have to contact the Queensland Building and Construction Commission, which acts as the sole ANA within that state.

Upon receipt of an adjudication application, the respondent is able to provide an adjudication response, after which time the adjudicator makes a determination.  Where a respondent still does not pay the relevant amount, the claimant can have the determination enforced through the courts, and may have rights to suspend work under the contract.

Courtesy of strict time frames which apply for each stage, this process enables payment to occur faster than would be the case were the claimant instead to go through the court system. In the case of New South Wales, for example, a claimant would typically receive payment for any amounts owed within 40 business days of lodging their claim even where the case proceeds to adjudication.

According to infrastructure and construction lawyers Troy Lewis and Stephen Burton, partners in the Brisbane office of national law firm Holding Redlich, misconceptions about the process exist across a number of areas.

First, Lewis said, there is a misconception about the process being an entirely hassle-free way in which to obtain payments. Whilst SOP procedures are faster and less onerous compared with the court system, he stresses that it remains a defined process involving steps which need to be carefully followed. Where claimants have not done this, he says, unfavourable outcomes have resulted.

In addition, Lewis says there is a misunderstanding surrounding ideas that the legislation is failing to deliver its intended outcome of delivering prompt payment. Whilst some payment disputes do indeed drag on for multiple years, Lewis says these now tend to be concentrated among larger claims and that the portion of smaller payment disputes which had ended up in court has decreased significantly since SOP legislation was introduced.

Third, Burton says there is a misconception surrounding ideas that security of payment is not appropriate for larger claims because of the limited time frames allowed for in each step of the process. In fact, he says, the SOP process delivers an early staging point for negotiation between the parties. Where SOP is not followed, he says cases can drag on for months or years before the parties have a mediation or settlement conference. By contrast, the shorter SOP process provides a convenient pre-litigation staging point from which the parties are able to launch commercial negotiations in respect of the dispute.

When dealing with security of payments, Burton and Lewis say it is important to appreciate a number of concepts.

First, time frames for each stage are critical and must be strictly followed. Where a respondent is even a day late in providing their adjudication response, for example, the adjudicator simply proceeds and makes a determination without this – the respondent having missed their opportunity to put up a defence.

Second, it is important to be aware of differences in procedures which apply across jurisdictions. When served with an adjudication application, for instance, the time frame in which respondents will need to provide an adjudication response is five business days in New South Wales but either 10 or 15 business days (or perhaps longer in the case of complex claims if an extension is granted) in Queensland. Whereas it is no longer necessary (for contracts entered into after April 21, 2014) for claimants to include a statement confirming that their claim is being made under the Security of Payment Act in NSW, this is still essential in Queensland, Victoria, South Australia and the ACT.

Third, there are no second chances and it is important to get all your information correct the first time. For claimants, there are no opportunities to amend the payment claim after it has been submitted, and thus it is imperative to clearly understand what you are claiming for and the basis upon which your claim is being made prior to submission of the payment claim. Where a claimant inadvertently describes what is in reality a latent condition as a variation, for example, they have no opportunity to alter this in the adjudication application and must either run the claim as a variation or simply drop the claim altogether and run it correctly as a latent condition the following month.

Similarly, when forwarding your adjudication application, the entire decision is based upon what is written on the paper, and it is important to include all of your evidence and supporting statutory declarations in your submissions and documents. Where you make a claim for $400,000, for example, you would need to demonstrate the contractual and/or legal basis upon which you were claiming that amount and provide detailed evidence to support the quantum claimed  within your application. If not, Burton and Lewis say, the adjudicator will typically adopt a sceptical attitude toward your claim.

It is also important to appreciate the amount of time required for the process and to be prepared. In New South Wales, for example, time frames in which respondents have to prepare an adjudication response (five business days) are tight. For this reason, when first served with a claim, it is a good idea to be aware about any matters which may proceed to adjudication when preparing your payment schedule and to be especially vigilant about these.

This is important not only because you are unable to introduce new reasons for not paying the full amount in your adjudication response (except in Queensland), but also because a carefully prepared schedule may deter claimants from proceeding to adjudication and place the respondent in a stronger position from which to obtain a more favourable commercial settlement of the claim prior to adjudication.

Finally, Lewis and Burton said that it is important  for building industry participants to learn about how the Act works in each of the jurisdictions in which they operate and to ensure they are aware of the strategies which they can employ in order to derive the best possible outcome.

Speaking predominately of larger claims, Minter Ellison partner Andrew Orford said the Act is often being used as a leverage tool rather than the reason for which it was intended in terms of generating cash flow down the construction chain. Moreover, given the fact that the process is quite involved, he says there is an imbalance between some of the smaller players with limited legal support and the larger head contractors and principals who may use external lawyer or even their own in-house legal team.

In terms of concepts about which those in the industry need to be aware, Orford agrees about the need to understand the differences which occur across jurisdictions – an issue he says often impacts mid-sized contractors who operate in multiple states along with larger contractors. This is especially critical in the areas of time frames, whereby a failure to provide a payment schedule on time, for instance, could lead to being liable to pay the entire amount of the claim.

Another error commonly made on the part of respondents revolves around a failure to specify reasons for not paying claimed amounts within the payment schedule. In a number of jurisdictions, he said it is not possible to state any new reasons for not paying the full claimed amount within the adjudication response.

In terms of strategies, Orford agrees about the importance of allowing adequate amounts of time to complete the tasks involved with the process and says he has yet to see a successful outcome for either a claimant or a respondent where payment claims or responses were hurriedly prepared.

For claimants, he said, it is also important to think about the timing of their claim, as submitting claims too early strains relationships but waiting too long creates cash flow issues. Especially late in the project when a higher volume of claims were being made, he advises clients to prioritise higher value claims.

Finally, Orford said it is important to put your best foot forward when making claims and responses.

“From a strategy perspective, whether you are a claimant or respondent, you’ve got to put your best evidence forward,” he said. “You’ve got to put contemporaneous documents, witness statements, expert reports – the best evidence you can muster up in whatever limited timeframe you have.

“You see people trying to get a bit cute with it. From my perspective, throw the kitchen sink at it. That’s going to be the best way to maximise recovery or mitigate the risk, dep[ending on which side of the fence you sit.”

Security of payment laws exist to help participants within the construction chain to access prompt payment for work performed.

With sensible strategies, they can derive optimal outcomes for their business.