A guide to the new Tasmanian security of payment law

In November 2009 the Tasmanian Parliament passed the Building and Construction Industry Security of Payment Act, which will introduce a new Security of Payment ('SoP') system for unpaid subcontractors, contractors and suppliers to recover overdue payments. The system applies to all building work, including domestic building work, and supply of building materials and services. The system aims to provide a quick and inexpensive, but interim, way of dealing with unpaid invoices in building projects. It is expected to commence in July 2010. This article summarises some key aspects of the system. Further information, including sample forms and flow-charts, can be found on the Workplace Standards website www.wst.tas.gov.au.

On the plus side, the new system will give builders the opportunity to get a legally enforceable order for payment against a non-paying owner without the need to go through the slow and expensive court process.

It is important to understand, however, that this also means that builders will be exposed to similar claims from unpaid subcontractors and suppliers.

The system does not eliminate court action. The purpose of the system is to get money flowing quickly. Although money cannot be withheld pending court action, a determination under the SoP system is only an interim decision which can be subsequently undone in court.

The system does not override written contracts. Rather, it seeks to give an effective way of enforcing contracts (although there are provisions that operate where there is no contract or there are gaps in the contract). This means that it is even more important than before for builders to ensure that they have well drafted, written contracts and subcontracts.

A gap in building dispute resolution in Tasmania
Most of the time, the parties to a building contract or subcontract do their work and pay what they owe without trouble, and any disputes are resolved without the need for external assistance. However, it is not uncommon for payment to be withheld despite work having been done. Usually, for house builders, the payment in question is the final payment.

Unlike other states, Tasmania does not have a dedicated system for resolving domestic building disputes. This means that, unless the parties can agree on arbitration (which is rare these days) or some other form of dispute resolution, the subcontractor or builder owed money has two choices:

• Go to court
• Walk away from the money.

Both of these options are costly. In the case of court action, not only is the cost high in money terms, but also in time, with building disputes sometimes dragging on for years in court.

What is security of payment?
An alternative way of dealing with payment claims is now provided under the Building and Construction Industry Security of Payment Act 2009. The concept is that a builder, subcontractor or supplier who has not been paid money that is due can apply to a private “adjudicator” (paid by the parties to the dispute). That adjudicator will make a fast decision, based only on limited written statements. The Claimant can enforce payment of the amount awarded by the adjudicator through the court, without the need for a full court hearing. The person from who payment is claimed must reply to the Claimant’s claim within a very short time: otherwise the right to respond to the claim is lost.

Outline of the new system
The key features of Security of Payment are:

• Most building and construction work covered
  The system applies to (almost) all building and construction work, including:
  • domestic building work (unlike most other states);
  • supply of building materials and other goods;
  • road construction and other infrastructure;
  • mechanical and other services.
• Subcontractors, contractors and suppliers are covered
  Anyone who performs work under a building or construction contract can make use of the system against the person for whom they perform work.
• Progress payments: per contract or monthly
  Security of Payment operates by enforcing the payment of progress payments. If the contract deals with progress payments (timing and amount), the terms of the contract are enforced by the SoP system. Where there is no contract or the contract is silent on these points, SoP gives a right to a monthly progress payment, calculated on the basis of the value of the work done to the date of the claim.
• Payment claim in prescribed form
  If a progress claim is not paid, the person claiming payment (the Claimant) can give the person for whom the work is being done (the Respondent) a payment claim. A payment claim must satisfy various requirements stated in the Act. Very importantly, it must state that it is being made under the SoP Act.
• Response to a payment claim: payment schedule or payment
  The Respondent has two choices in dealing with a payment claim under SoP: either
  • Pay the claim; or
  • Give the Claimant a “Payment Schedule” if the Respondent disagrees with the claim. The Schedule must state the amount (if any) that the Respondent says is due. The Schedule must also state reasons why the amount differs from the amount claimed, include any complaints about defective work.
  If the Respondent fails to include in the Payment Schedule any reasons why payment is being withheld or reduced, the Respondent is not allowed to raise those matters in any Adjudication that may occur in relation that claim.
• If no payment schedule is given
  If the Respondent does not give a payment schedule within the required time (20 days if a domestic building owner, 10 days otherwise), the amount of the claim becomes due. The Claimant can go to court and enforce payment as if a judgment had already been given, and the Respondent has no right to defend the action.
• Adjudication
  If the Claimant disagrees with the amount stated by the Respondent in a payment Schedule, the Claimant can apply to a Government approved “Nominating Authority” for an adjudication of the dispute. The adjudicator is to be a suitably qualified person. The SoP Act does not state what qualifications are required, although it is likely that experienced people such as suitably experienced builders and consultants and lawyers with building industry experience might be appointed.
  
  The adjudicator must consider written statements from both parties and give a decision about the amount of money due within 10 days after the Respondent gives the Adjudicator its written statement.
• Cost of the adjudication
  The adjudicator’s fees must be paid by the parties, who will generally be required to pay half each. Adjudicators’ fees are not controlled by the Act. The Nominating Authority is also permitted to charge a fee.
• Effect of adjudicator’s decision
  If the Adjudicator decides that money is due from the Respondent to the Claimant, the Respondent must pay that money within the time stated in the decision. If the Respondent fails to do so, the Claimant can enforce the decision in the court, in the same way as the claim is enforced where the Respondent has not delivered a payment schedule.
• Subsequent court action not affected
  Because the adjudication process is “short and sharp”, the Act allows either party to start again via traditional court action. However, any money due under the SoP must be paid in the meantime. If the court decides that the result should be different from the adjudicated result (or the payment claim, if no schedule was delivered), the court can order that money be repaid.
• Tight time frames must be complied with or rights are lost
  The whole point of SoP is to ensure that those who do building work or supply materials are paid promptly. Each step must, therefore, be taken in a very short time, and rights are lost if that time is not met. For example:
  oPayment schedule: 20 days (home owner) or 10 days (other building owner/principal) from delivery of claim. Money becomes due in default.
  • Adjudication application: must be made within 10 days after the Claimant receives the Payment Schedule or 20 days after payment was due
  • Respondent’s Response to adjudication application: 10 business days after Respondent receives the adjudication application
  • Adjudicator’s decision: 10 days after receiving Respondent’s response.
  If these time frames are not met, the relevant right will be lost.

Suspension

In addition to recovering money due, an unpaid party may suspend work if money is not paid in accordance with a payment claim or schedule.

Some points to watch
Timing
As indicated above, it is extremely important that a builder or owner who receives a Claim under the Act responds in time. Otherwise, payment will be due and cannot be avoided.

SoP applies at all levels and builder may be caught in the middle
A builder can make a SoP Claim against an owner. However, the builder is also exposed to claims from subcontractors and suppliers. This means that a builder could be caught in the middle. The Act allows for joint conferences to be convened by an adjudicator involving all relevant people: for example, a builder’s failure to pay a subcontractor may have resulted from the owner’s failure to pay the builder. A conference involving owner, builder and subcontractor could be called in an attempt to resolve the matter. However, the Act does not allow joint adjudications between all three parties: separate adjudications would be required. This may leave the builder facing an order to pay the subcontractor without a corresponding order against the owner, or with a time lag between the two decisions.

Contracts
As mentioned above, SoP does not override contracts, except clauses which exclude the operation of SoP.

This means that contracts should state when progress claims are due and how the amount due is to be calculated. If this is done, the parties can control their own destiny. If this is not done, the Act imposes a blanket monthly progress claim. This may not be suitable for the flow of work, nor the builder’s (or owner’s) cash-flow.

Standard form contracts are useful in this respect as they provide a framework for the necessary contract provisions to be made.

Conclusion

There is much more that could be said about SoP, which is outside the scope of this article. SoP has been in place interstate for some years and has generated a body of law of its own. How SoP will operate in Tasmania remains to be seen. But if the process is carefully managed, adequately resourced and properly used, it has the potential to improve payment practices and dispute resolution in the Tasmanian building industry.