Security of Payment Myths 6

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Monday, June 27th, 2016
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State governments have been very active in the last 12 months carrying out their mandatory review of their Security of Payment Acts.

The federal government has also carried out its Senate Committee’s inquiry into insolvency in the construction industry, which also included a section on the various State Acts. The amazing thing to me was how these reviews included references to mythical characters in the Security of Payment landscape, that in the eyes of the policy-makers, actually exist.

But no evidence is ever produced. Yet, it seems that legislative reformers around the Act are actually taking the existence of these mythical factors for granted. I thought it might be a good time to look at these figments of the imagination and see them for what they are:

The ambush claim

This one has been around for years. This is the name given to a payment claim that is served right at the end of the claimable period (six or 12 months) that is highly detailed and leaves the respondent at a huge disadvantage having to scramble to get its documents together. So the ambush here is supposedly the unexpected nature of the claim and the assumption that the respondent has little access to relevant paperwork.

What a crock.

The fact is that the respondent is required under the contract, and regardless of the Act, to carry out a valuation of each payment claim. That valuation is required to set out proper reasons and rationale for non-payment. In other words, the Act does not demand any more from the respondent than the contract does. Even if a detailed claim is lodged after 12 months, the respondent should have easy reference to the schedules it issued throughout the work and those should contain all the information required. If there are reasons for non-payment, they ought to be there. The supporting documentation for those reasons should not be far away, either. If documentation disappears in such a short time, the issue is not a so-called ‘ambush claim’ but the respondent’s documentation system…or lack thereof.

What this complaint is really about is the respondent not having enough time to concoct reasons for non-payment that were never originally there. That is, most of the time payment schedules that purport to withhold payment offer no proper reasons and no evidence. This goes on for most of the project until by the end the claimant is underpaid and spends the next 10 months asking for payment. When a payment claim is served, the respondent now finds itself with a huge claim on its hands and a pile of old payment schedules that are useless because the reasons for non-payment were never properly detailed and supported. The respondent only has itself to blame. These are not ambush claims. They are claims for the work that have been unpaid throughout the project and for many months after completion.

And even if a respondent finds itself at a loss to defend the claim, the period of 14 days is plenty of time to get documentation together. Again, if that is not enough time, then the problem lies with the respondent’s document and project management systems, not the Act.

If anyone can talk about ambushes, it is claimants who receive payment schedules with all manner of reasons for non-payment that were never noted, never raised, and never argued for the entire intervening period.

The conflicted ANA

This myth was argued so successfully, the Queensland government actually legislated on it and ended up destroying the use of their Act. It goes like this: Authorised nominating authorities (ANAs) need to process adjudication applications in order to makes money and stay in business. To do this, they form cosy arrangements with parties that prepare applications, and of course ensure that those applications get favourable adjudication outcomes. So the allegation is that ANAs are in an inherent conflict of interest.

Again, rubbish.

The key mistake proponents of this myth make is that they totally misunderstand the relationship between the ANA and the adjudicator. Adjudicators are not employed by the ANA, and the ANA cannot tell an adjudicator what to do. The ANA does not review or assess the application. It goes straight to the adjudicator. The ANA is merely the go-between for the parties and the adjudicator, and performs the administrative functions of the Act around the determination. Therefore, it is not possible for ANAs to influence or guarantee the outcome of adjudications. Once this fact is realised, the whole basis of this theory collapses. That is, if the ANA cannot influence the adjudicator’s outcome, then it cannot offer application-preparers anything. So there can be no conflict.

Further, there are almost no full-time adjudicators. Most adjudicators are some form of consultant or professional in the construction industry, academia, or lawyers. They do not rely on applications as a sole source of income and so are not open to approaches from ANAs to influence their determinations in exchange for work. There just aren’t enough applications to create a population of full-time adjudicators who would be open to such a scheme. It just doesn’t happen.

I hasten to add that those who offer this story have not produced one case study, not one shred of evidence, not one informant from the ANA world. If this conflict really did exist, then surely across all of Australia one case would have come to light. But there is nothing. That is because adjudicators make determinations based on one thing only: evidence.

For those that still think there is a conflict, just go and review the outcomes of the decisions in Queensland since the ANAs were kicked out. Are the outcomes so different? No one has pointed to a change in outcomes, because such a change doesn’t exist. The only change in Queensland has been the 50 per cent occurrence of invalid applications. But in Queensland, adjudicators can charge a fee for not making a determination. That’s hardly a better system.

The claimant-friendly adjudicator

This is the greatest myth of all. If only there were such a thing! This myth is part of the ANA myth. A claimant can give its adjudication application to a claimant-friendly adjudicator who will give a favourable determination to the claimant.

Of course, this myth does not particularly hold up to scrutiny.

How would anyone know if a particular adjudicator was ‘claimant-friendly’? If you’re going to run this myth, then you ought to be able to answer that one. The fact is, there are no statistics to show whether one adjudicator finds more often for a claimant than another. You just can’t find that data out, so no adjudicator can be “known” to be claimant-friendly. In fact, to really know that you’d have to actually read and review many many cases to see if the adjudicator was actually finding in favour of the claimant despite the actual evidence. As far as I know  no one has undertaken that task.

Amazingly, this mythical character has made its way into government reviews and reports. More amazingly, there is no evidence that Queensland has managed to weed out its claimant-friendly adjudicators. I assume they must have attempted to do so if the state’s rationale for legislative change is to be believed. But of course no such action has occurred in Queensland at all.

Also, what believers of this myth fail to realise is that the adjudicator gets paid no matter who they find in favour of. The adjudicator doesn’t make more money if they find for or against claimants. The ANA does not research adjudicators and review the applications to see if one adjudicator is treating claimants better than others. They don’t have the time, and it makes no difference to the revenue they generate. The adjudicator and ANA get paid regardless of the outcome.

Policy makers and legislators need to be very careful to base their decisions on reality. As we know, if you repeat something often enough, people will start to believe it. Let’s hope Security of Payment doesn’t fall victim to the myth-makers.

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Discussions
6
  1. Les Williams

    Security of Payment is a myth. It is a bit like me calling myself Tom Cruise. It is good to see someone calling out this issue of ANA's and Adjudicators. In QLD the 2014 amendments to BCIPA by the Newman government attacked the statutory payment rights of subcontractors, disadvantaged their retention recovery rights by imposing a 28 day time frame from a date that is never notified and then disadvantaged their rights at adjudication by removing their advice and support network [ANA's} A bit obvious. That was the real aim. The adjudicator issue was the myth that got the job done. In QLD the review and recommendations were undertaken by an adjudicator and LNP election hopeful. The same thing is occurring in SA. There appears no statistical evidence or impact assessments carried out to support the removal of the marketplace for a government takeover of that marketplace. We say that contravened state and federal competition laws. The "myths" are perpetuated by peak industry groups who have significant experience in seeking and gaining backdoor influence over legislation. That should be investigated and exposed for the disadvantage it causes so many. The person responsible for providing 49 recommendations for the QLD amendments is now seeking election to the federal parliament in the contentious QLD seat of Fisher [ Slipper and Brough] Again we would like to see an investigation into the passage of that legislation from review to law. Keep up the good work Refer to the "Independent Australian" for their review of Fisher

  2. Tim Roberts

    Really well said.

    Let's put the myth of the adjudicator friendly claimant argument under the old ANA system to bet right away. Were ANAs genuinely shopping around for claimant friendly adjudicators, then you would expect more adjudication decisions have started going the way of respondents when ANAs were removed from Queensland in 2014. In fact, QBCC data shows that over the ten months to April, adjudication decisions were made in respect of nearly $140,000, of which almost $70,000 has been awarded to claimants – meaning that claimants have thus far been awarded nearly half of what they claimed. Compared with recent historic standards, that's actually quite high – totally the opposite of what you would expect following the removal of ANAs in that state were claims about claimant friendly bias under the ANA regime to really hold true.

    What has held true since the removal of ANAs in Queensland is that applications for adjudication are falling over like crazy as claimants are getting no support with the administrative aspects of their claim. Thus far this calendar year, 89 claims in Queensland have made it through to an adjudication whilst 109 have failed to reach this point – the vast majority of which have fallen over because of 'validation issues' (i.e. the claimant had no idea what to do, got no help from the QBCC and made a mistake). Truth is, we need ANAs to support all parties through the administrative aspects of SOP adjudication processes.

  3. Les Williams

    Speaking of ambush. The discussion paper issued prior to the amendments to QLD's BCIPA was issued on 21st December 2012.

  4. Graham Morrow

    Hi Andrew
    Ambush claims in WA also refer to claims made just prior to a holiday period, eg Christmas Eve, where a response will be due by 8 January. This can create a problem as most industry participants are on leave at this time. The best documentation system will be useless if its operator is not there to pull out the relevant information. There are also some other tricks which some parties use when serving the respondent which can cut down effective response time.
    My understanding is that Eastern States ANAs were in fact attempting to remain involved in the process after the appointment of an adjudicator. This is clearly wrong; even if only for administrative purposes, it would creates a perception of bias.
    If a party makes an application and the adjudicator has no jurisdiction, I think that is an issue for the party. It should have obtained advice and made a valid application; the adjudicator is entitled to payment of reasonable fees for making a decision either way (which will assist in remaining unbiased).
    I thing the claimant friendly ANA is a direct result of at least one ANA advertising its success rate for applicants. My understanding is that some ANAs take a substantial fee from appointed adjudicators and also get (or used to) involved in reviewing and commenting upon draft adjudicator's decisions.
    The consequence of State reviews is that the East Coast model of adjudication has become further fragmented; the difference between Queensland, NSW & Victoria is now more pronounced. I think the balance of opinion is that the WA/NT Acts offer a preferable model for standardised adjudication, although I think that this is unlikely to ever be adopted nationally.

  5. Luke

    Security of payment act has way to many loop holes and is a joke especially the review process

  6. Bill Guthrie

    Going back to 1993, when the idea of the Act was originally put forward in NSW, it was on the basis that it was almost impossible to get an account under $40,000.00 paid, unless the principal was of a mind to pay it.
    Legal fees and costs of taking an action to cover the funds was cost and time prohibitive, so the small contractor just missed out, but the principals didn’t mind at all.
    After much effort the legislation was finally sponsored to the Labour party caucus on a social justice issue for SME contractors and with almost zero support from the legal industry and firm opposition from the major players in the industry, it was to be end of an industry according to some.
    It seems the very people that the Act was meant to protect are overlook.
    With regards to the problems mentioned, the opinion that the 10 day period was a denial of justice should be put into context.
    The realities of the day to day life as a contractor is that clients are not falling over themselves to give you work, so the idea that a contractor would burn a client for the sake of it is just not part reality.
    As a contractor you submit a 30 day invoice; at 45 days you begin chasing. The reality is that the decision to try and use the Act to collect your money is in practise not taken till around the 90 day period. By that stage the principal is well and truly versed in the issues at hand.
    Experiencing both sides it is generally only from shear bloody mindlessness and arrogance that forces the issue to adjudication.
    The question is, is it a problem for the parties or is it a problem for the legal fraternity?
    The crude vernacular is that you put up or pay up.
    Claimants typically choose adjudication because the court option is out of reach .