How the Construction World Changed

How the Construction World Changed

Scott Pettersson[1]

Not so long ago, in the Building and Construction Industry, if the Superintendent certified an amount less than that claimed, as they often will, the claiming party tightened their belt, made a few angry phone call and got on with work. In some cases this lead to subcontractor’s being unable to pay their subcontractors or employees. In essence this was a classic example of the Golden Rule[2] in operation.

A party denied payment was faced with the following options:

• Withdraw labour – ie repudiate the contract
• Utilise the dispute mechanisms under the contract often arbitration or expert determination
• Complete the work and seek to sue under the contract
• Apply pressure to the Superior contracting party by slowing work, claiming additional variations and the like

There can be no doubt that the power rested with the superior contracting party, who incidentally was often suffering the same pressure coming down the contracting pipe-line, with the commensurate fiscal pressure controlling some of their decisions and actions. The consequence of continued non payment was often cascading insolvency.

With the passage of the Building and Construction Industry Security of Payment Act 1999, the world changed. A low cost and high speed system had been created that allowed a claimant to challenge the assessment of a superintendent and to have the value of the claim determined by an independent person. The industry and those that provide professional advice to it have taken some time to come to grips with what this means. Those that have failed to understand and adjust their processes and correspondence have found the process costly and objectionable. It is time to look at the roles of some of those involved and the consequences of the new legislative schemes[3]. For convenience I use the following roles to show the changes:

• Principal – The party that has commissioned the work, this could be a developer, business, or government entity
• Contractor - the main contractor engaged by the Principal, in many cases they are called the Builder.
• Superintendent – The person or company responsible for assessing the value of the work completed and in some cases also co-ordinating the works. This can be a quantity surveyor, project manager, architect or the like.
• Sub-contractor – One of a number of parties, usually with specialist skills engaged to complete an identified subset of the work.
• Dispute Adviser–This role has often been filled by the Superintendent or a professional legal adviser.

Principal

The Principal can now be subject to a rapid adjudication process that can deliver an enforceable finding that a payment must be made. That payment can certainly exceed the assessment of the project manager / superintendent. The Principal does not have the options of making a similar claim against another party as the Act only operates up the contracting chain[4].

Many principals now require that the subcontractor notify them in the event they receive an Adjudication Application, though there is usually no contractual downside to non provision of the information and it appears it is more likely honoured in the breach.

It is imperative that Principals administer the contract clearly and are consistent in how they deal with claims for extension of time and variations. This is the most common failing that exposes them to risk where they waive the right to apply a time guillotine on some variation claims but allow others. Principals should always ensure they issue valid and comprehensive Payment Schedules. A failure to issue a valid Payment Schedule can expose the Principal to the risk of a successful application to the courts or to adjudication.

In NSW recent changes to the legislation impose a potential obligation to withhold payment from a contractor where a subcontractor has made an Adjudication Application and issued a Payment Withholding Request (see section 26A and following of the Act[5]). A failure to comply with such direction can expose the Principal to liability where none otherwise could be considered.

Contractor

The contractor has both an obligation to provide Payment Schedules to subordinate contracting parties and also the capacity to issue Payment Claims to superior contracting parties. In relation to subcontractors they must be alive to the same issues that face the Principal. Similarly they must ensure they the contract is properly administered and claimed.

When issuing Payment Claims, they should ensure the work is sufficiently described and that is particularly in relation to variations and the like. If their practice is to maintain a Variation Register, it is useful to attach that register with each entry describing the work. It is a common pitfall that contractors do not claim for all the work that they have performed, as they may have previously invoiced work and not yet received payment. Such work should not be excluded from any current claim. The best practice is to issue each Payment Claim as a reconciliation of all work performed to date, less any sum that can be deducted for previous payment, ‘negative variations’ and retentions.

Superintendent

The Superintendent will most frequently issue the Payment Schedule on behalf of the Respondent and they may be the party that receives the Payment Claim. The Superintendent’s role is defined by the contract, frequently they will have two roles, one is to be the neutral arbiter of what is to be paid and second what time if any is allowed for delays, variations or the like. They may face differing behavioural requirements, for example some contracts state that in assessing an extension of time the Superintendent must act honestly and fairly, while others may state the Superintendent is the Agent of the Contractor or Principal.

In a recent case a Superintendent was criticised for both issuing an assessment and then defending the assessment in a subsequent Adjudication proceeding[6].

A Superintendent must also be alive to restriction that they may have to their power, for example some contracts allow the principal to make a deduction for Liquidated Damages but not the Superintendent.

Sub-contractor

Sub contractors face a raft of issues in relation to Adjudication which while they can also occur in relation to Principals and Contractors most frequently appear in relation to their claims, these include; but certainly are not limited to:

• Not understanding who the contracting parties are. Sometimes they believe they have been engaged by the Superintendent. On other occasions they press the claim against a business name, which of course is not a legal entity capable of being a respondent or entering a contract.
• Acting on the belief that by including payment terms on an invoice it overrides a contractual provision.
• Issuing multiple claims in relation to a single Reference Date[7]
• Failing to claim within the times stipulated by the contract; particularly in relation to variations and extensions of time.
• Entering contracts without clear terms and conditions, often contracting on the basis of a quotation which does not describe the work with any clarity.
• Failure to secure rights to variations by confirming verbal instructions with a quick email or facsimile.

Many subcontractors seek to proceed with pressing applications without any professional assistance and deny themselves the best opportunity to secure their entitlements. They fail to grasp the basic proposition that the courts have clearly formed the view they get one chance and if they put a matter to an Adjudicator in relation to the value of the work or the entitlement to make the claim the assessment decision of the Adjudicator will bind all future adjudicators[8].

Dispute Adviser

These folk come in a number of guises and with very varying skills, there is no formal qualification save the Legal Practice Act or similar legislation which provides that only a person holding a current practicing certificate can provide legal advice. Some people who operate as preparers come from very different backgrounds to the law, including project managers, from building professionals and the like. These folk from outside the law can be extremely skilled preparers with expert knowledge of building practices and construction contracts.

There are however, very clear deficiencies in many of the Adjudication Applications and Adjudication Responses that are received. Some lawyers without the requisite special knowledge of the area fail to understand it is a specialist area with hundreds of decided cases in multiple jurisdictions. Similarly they may not understand some peculiarities of construction contracts that have become terms of art, for example practical completion or what is a grade 2 finish in relation to form work. Equally, some of those preparers who come from outside the law do not appreciate the potential subtleties of contract formation or the use of documents marked as ‘without prejudice’.

In an area of dispute practice being rapidly shaped by decisions of the court while simultaneously being controlled by some reasonably complicated contract documents it is not an area to enter lightly. It must be understood by both the preparers and the Adjudicator’s that they are not wrestling with an abstract problem, represented by a mere set of documents defined as the Payment Claim, Payment Schedule, Adjudication Application and Adjudication Response. They are dealing with decisions which affect people’s lives, which can cause a person to lose a house or a business to collapse with the consequent unemployment and liquidation.

Conclusion

Unless there is a dramatic change in the legislative structure[9] the Act will be with us for a number of years. All players in the industry must ensure they develop and adhere to best practice in relation to how they claim and respond to claims under the Acts. To do otherwise is to deny themselves the benefits the Act can deliver.

No preparer or Adjudicator to act in either role unless they are prepared to commit time and effort to ensuring they remain across all developments. The greatest disservice that can be performed in either role is causing the parties to go to court and expend the money they were so keen on avoiding by use of the Act.

[1] The author is a qualified lawyer, who no longer practices, but rather is a dispute resolver. He is vastly experienced as an adjudicator and preparer of submissions in relation to Adjudication Disputes. Scott is also the author of the Annotated Service in relation to the legislation in Queensland and NSW in addition to providing training on Adjudication. The views expressed in the article are his own and do not constitute legal advice. He can be contacted via

[2] He who has the gold makes the rules.

[3] While the legislation commenced in 2000, it was not truly effective until a round of amendments commenced in March 2003. Legislation based in large part on that 1999 Act now operates in every State and Territory in Australia.

[4] Save in WA and NT which operates a legislative scheme more akin to the equivalent UK legislations. See the Construction Contracts Act in those jurisdictions.

[5] See attached paper:“Section 26 – $how me the Money” of May 2011, by the writer.

[6]see Walton v Illawarra[2011] NSWSC 1188 at paragraphs 72 - 74

[7] A Reference Date is the date under the contract when a claim for payment can be made, absent an express contractual provision this will be the last day of the month.

[8]Dualcorp Pty Ltd v Remo Constructions Pty Ltd [2009] NSWCA 69 and AE & E Australia Pty Ltd v Stowe Australia Pty Ltd[2010] QSC 135

[9] Change to the scheme is always possible depending on court challenges, see for example Birdon Pty Ltd v Houben Marine Pty Ltd [2011] FCAFC 126