Security of Payment Guide

Throughout the later part of the twentieth century, builders and their Subcontractors suffered increasing cash flow troubles caused by the hierarchical cascading nature of the construction industry’s cash flow modelling.

Increasingly prevalent in both head contracts and subcontracts were provisions designed to avoid regular payment, with terms often drafted to allow only for payment on completion of the contract.

Disputes between builders and Subcontractors were common, with unfounded backcharging for defects and delays becoming widespread as justification by builders for non-payment.

The Building and Construction Industry Security of Payment Act 1999 (NSW) (in this Guide referred to as “the Act”) (and interstate equivalents) was introduced to address security of payments problems for participants in the building and construction industry and improve cash flow.

The Act gave all participants in the industry a statutory right to:

• Claim payment on a monthly basis for work done;
• Rely upon legally enforceable maximum Due Dates for payment;
• Be rapidly notified when a claim is disputed;
• Access a cheap, fast and informal system of Adjudication to settle payment disputes;
• Suspend work for non-payment without fear of legal or contractual penalties; and
• Obtain Judgment for payment of outstanding Payment Claims from Courts without the need for lengthy contested hearings.

The Act continues to evolve, with significant amendments made in 2002, 2010, 2013 and 2018 as well as ongoing government review in conjunction with representatives from interested construction industry and Adjudication body participants.

The provisions of the Act have effect despite the terms of any Construction Contract. Any term of a contract purporting to exclude its operation is void.
In a nutshell, the Act provides:

• A statutory right for those involved in the construction industry to make Payment Claims at regular intervals;
• A procedure for recovering progress payments; and
• An independent and speedy resolution process for disputes about payment.

Additionally, there are also some lesser-known benefits bestowed by the Act, which we will cover later in this Guide, including:

• The prohibition of “pay when paid” provisions (see page 36);
• The ability for Subcontractor Claimants in an Adjudication to make Payment Withholding Requests to the person or company by whom an Adjudication Respondent builder was engaged (see page 28); and
• The requirement for Retention Money held by Head Contractors for projects valued over $20 million to be held in a Trust Account with strict reporting requirements and rules which significantly restrict circumstances in which builders can access retention (see page 35).

We’ll be taking a closer look at the above provisions throughout this Guide.

Payment Claims can be made for construction work involving the construction, alteration, repair, restoration, maintenance, extension, demolition or dismantling of any works forming, or to form, part of land in New South Wales. Whilst not exhaustive, that work includes:

• commercial buildings, including office buildings, retail shops, shopping centres and industrial sheds
• almost all residential building work
• roadworks
• power lines
• telecommunication apparatus
• aircraft runways
• docks and harbours
• railways
• inland waterways
• pipelines
• reservoirs
• water mains
• wells
• sewers
• industrial plant and installations for purposes of land drainage or coast protection
• installation of services
• preparatory site clearance, earth-moving, excavation, tunnelling and boring
• the laying of foundations
• the erection, maintenance or dismantling of scaffolding
• the prefabrication of components to form part of any building, structure or works, whether carried out on-site or off-site
• site restoration
• landscaping
• access works such as roadways
• painting or decorating

Works that are specifically excluded include work for the extraction of minerals, oil or gas, including tunnelling or boring and the construction of underground works for that purpose.

Payment Claims can also be made for the provision of goods and services related to construction work including:

1. Materials and components to form part of any building, structure or work arising from construction work;
2. Plant or materials (whether supplied by sale, hire or otherwise) for use in connection with the carrying out of construction work;
3. The provision of labour to carry out construction work; and
4. The provision of services, including architectural, engineering and landscape design, surveying or quantity surveying, interior design, drafting and drawing and project management done in relation to construction work.

How the Act impacts you will depend primarily on whether you are most likely to become a Claimant or Respondent.

Commercial and residential property owners and property developers are Respondents, needing to be ever vigilant for Payment Claims made under the Act.

Failing to respond appropriately within the relatively short time frames set out by the Act can lead to an outcome whereby the whole of the amount claimed in the Payment Claim will become an uncontestable statutory debt for which you will become liable. Similarly, anyone acting as agents or contract superintendents on behalf of property owners or developers will have a duty to their client to ensure compliance with the Act to avoid statutory debt.

Commercial and residential builders may be both a Claimant and Respondent.

The Act can be effectively used advantageously to claim and recover payment from property owners and Respondents. Vigilance for claims for payment made by Subcontractors is required to ensure:

1. An uncontestable statutory debt does not arise where you intend to dispute the claim; and
2. The grounds for the dispute can be properly pressed in any Adjudication under the Act.

Whilst commercial and residential building Subcontractors are most usually Claimants, they often unwittingly expose themselves as Respondents when invoices for materials or plant and equipment (hire or sales) are served as Payment Claims and they wish to dispute.

Suppliers of materials, services, plant and equipment to the commercial and residential construction industry will almost always be Claimants that can use the power of the Act to great advantage.

All significant rights under the Act flow from the service of a valid Payment Claim. If a Payment Claim does not meet the requirements of the Act it is not valid and is simply a piece of paper. An invalid Payment Claim means back to square one and the need to start from scratch.

Surprisingly, the often overlooked triggering event for the making of a valid Payment Claim is the carrying out of construction work or the provision of related goods and services.

A Payment Claim can then be made on or from the earlier of either:

1. The date(s) prescribed by the relevant contract; or
2. The last day of the month in which construction work was first done or materials and services provided, and on or from the last day of each subsequent month.

A Payment Claim can also be made on and from the date of termination of a Construction Contract.

Lastly, unless otherwise provided by the contract, a Payment Claim can only be made within 12 months of the carrying out of the work or the provision of materials or services to which it relates.

At a minimum, a Payment Claim must;

1. Identify the construction work (or related goods and services) to which the progress payment relates;
2. Indicate the claimed amount; and
3. State that it is made under the Act.

The identification of the construction work need not be overly precise.

The NSW Court of Appeal has held that a Payment Claim should be read in light of the understanding the parties have about the contract and the work.

So long as the detail of identification provided by the Claimant is sufficient for the Recipient to understand the work for which the claim is being made, the requirement for identification is met. Minor defects such as an incorrect contract number or errors or abbreviations of Claimant and Recipient names will not render a Payment Claim invalid unless it is capable of creating genuine confusion by the Recipient.

The indication of the claimed amount requires scant elaboration, but providing a breakdown of the claimed amount might turn out to be useful for an Adjudicator in the event that the claim is eventually adjudicated.

The requirement that a Payment Claim must state that it is made under the Act need not be interpreted with undue technicality. Again, if the words used in the endorsement are sufficiently clear to put the Recipient on notice that the Claimant intends to rely upon the Act, the following words are sufficient: “This is a Payment Claim made under the Building and Construction Industry Security of Payment Act 1999 (NSW)”

A Payment Claim can be comprised of a series of past Payment Claims under a cover letter bearing the endorsement and fresh claim date.

Lastly, an important but often discounted step in making an effective Payment Claim is ensuring effective service of the claim. That is, ensuring that your Payment Claim arrives in the hands of the Recipient. Service of the claim is sufficiently important that it gets its own heading and is dealt with below at page 14.

Tip #1

A common mistake made by Claimants is to claim for work commenced in a given calendar month before the end of that calendar month.

For example, a small civil works Subcontractor might be given a job by a builder to clear a site for housing. The Subcontractor gives the builder a verbal quote in early October which is immediately accepted, and so the Subcontractor promptly attends site between 14 October and 17 October with his machine to clear the site.

After the completion of the work on 17 October, the Subcontractor invoices the builder the same day. That invoice cannot be a valid Payment Claim within the meaning of the Act, as:

1. The contract was verbal only and did not make provision for an earlier date for the serving of a Payment Claim in any month, and
2. The Payment Claim was not served on or from the last day of the month in which the work was first carried out, it was claimed before that day on 17 October.

Tip #2

Another common mistake made by Claimants is to make more than one Payment Claim in any given month.

Unless specifically allowed by the relevant contract, only one Payment Claim can be made per month. The result of which is that any subsequent claims made in the same months will not be valid Payment Claims under the Act.

Tip #3

For quite some time it was considered uncertain whether a failure to include a Supporting Statement invalidated a Payment Claim.

In 2021 the Court of Appeal ended that uncertainty, ruling that a non-compliant or non-existent Supporting Statement given by a Head Contractor will not invalidate the Payment Claim itself. The reasoning behind that decision was that there are pecuniary penalties within the Act for both a failure to include Supporting Statements and making false Supporting Statements, and therefore, legislators’ intention was to fine Claimants for failure or fraud of Supporting Statements rather than invalidating Payment Claim.

Watch out for those fines too; $22,000 for an individual or $110,000 for a corporation!

Tip #4

A Payment Claim can be both a Payment Claim under the Act and a Payment Claim under the contract.

Tip #5

A Payment Claim should be read in light of the understanding the parties have about the contract and the work and is to be interpreted with common sense in a practical way.

Whilst it is true that the Act requires the Payment Claim to identify the construction work to which it relates, the true test of whether it does identify the work to which it relates is not to be found in the words used, but rather in the understanding of the Recipient of the Payment Claim of what is being claimed.

For example, a Payment Claim for residential building work addressed to the homeowner which merely states that it is “Payment Claim 5” is likely to sufficiently identify the construction work to which it relates as the homeowner will have little doubt that the Payment Claim made is for work done by the builder on the homeowner’s house.

Tip #6

The requirements as to form and content should not be interpreted in an unduly technically way, and minor defects are not fatal such as an incorrect contract number or abbreviation of the title of the legislation

For example, a mistake made in the name of the Act appearing in the endorsement will not invalidate the Payment Claim so long as it is sufficiently clear to the Recipient that the Claimant intends to rely upon the Act if necessary.

Tip #7

A Payment Claim can be comprised of a series of past Payment Claims under a cover letter bearing the correct endorsement.

Where a Payment Claim is served upon a person or company who is not themselves engaged by another to carry out the construction work, a “supporting statement” is required to be included with any Payment Claim served.

To put this more simply, if there is no one above the Recipient of the claim in the contracting chain a Supporting Statement is required. Most commonly, these will be claims made by a Head Contractor to a property owner or developer.

The Supporting Statement must be in the form approved by the Secretary (Commissioner for Fair Trading, Department of Finance, Services and Innovation). The easiest way to find the currently approved form for a Supporting Statement is to visit the NSW Government Fair Trading website and enter the words “Supporting Statement” into the search box. Residential builders working for home owners should take note that Supporting Statements for those works are in a slightly different format to normal. The differing proformas for both commercial and residential are readily downloadable from the Fair Trading site.

In the Supporting Statement, the Head Contractor must declare that all Subcontractors (including suppliers) have been paid all amounts that have become due and payable in relation to the construction work (or related goods or services) that is the subject of the Payment Claim.

Take note that it is an offence under the Act for a Head Contractor to serve a Payment Claim accompanied by a supporting statement knowing that statement is false or misleading in a material particular. The maximum penalty is currently $110,000 for corporations, or $22,000 and/or 3 months imprisonment for individuals.

A Payment Claim is not worth anything to anyone if service of the Payment Claim is not affected properly. Moreover, the method of service can be determinative of the presumed time of service. This of critical importance as the calculation of dates for service of Payment Schedules, suspension of works under the Act and times by which Adjudication Applications must be made all commence on the date of service of the Payment Claim.

That importance was highlighted by the case of MGW Engineering Pty Ltd t/a Forefront Services v CMOC Mining Pty Ltd. In that case, the issue of whether valid service was affected on a particular date or the next business day following that date, was determinative of whether Forefront was entitled to be paid $6.1 million. If not, then their only entitlement was to a little over $180,000, with the further possibility of a claim being made against them for suspending work other than in accordance with the contract.

The Act provides Payment Claims may be served in the following ways:

1. By delivering it personally;
2. By lodging it during normal office hours at the person’s ordinary place of business;
3. By sending it by post to the person’s ordinary place of business;
4. By sending it to an email address specified by the Recipient for service of documents of that kind; or
5. In the manner provided for under the Construction Contract.

Tip #1

“Delivering it personally” means that the Payment Claim must come to the attention of the relevant person at the Recipient business who has authority to deal with the claim.

Tip #2

“Normal office hours” depend not on the hours the business operates, but the normal working hours of clerical staff at the business.

Importantly, this can be determinative of the date of service. If served after “normal office hours” on any business day, the date of service will ordinarily not be the date of delivery, but rather the following business day.

Tip #3

Service by email when that method is not proscribed by the contract may still be good service.

Tip #4

The true test of whether there was good service of a Payment Claim is whether the Payment Claim was actually received or not. If service has been consistently occurring by email during the duration of the contracted works, a challenge by a Respondent to service by email is unlikely to succeed.

Tip #5

The time at which a Payment Claim is served when a third party application is used such as Dropbox will not be the time of sending, but the time the Recipient actually downloads and opens the Payment Claim.

Tip #6

If the Recipient got it, that’s good service. The only questions then remaining will be the time of service, and whether you can prove service. In most circumstances where the contract is silent on service, email is good service, and email is, practically speaking, almost instantaneous service.

The Act provides default Due Dates for payment of amounts claimed in Payment Claims which may only be displaced by the inclusion of earlier dates for payment in the contract. That is, a contract may prescribe an earlier date for payment than the Act but any later date prescribed will be ineffective.

The Due Dates for payment set by the Act are as follows:

• Payment by a Principal (for example a land owner or developer) to a Head Contractor – 15 business days;
• Payment by a Head Contractor to a Subcontractor – 20 business days; and
• Payment by a home owner who will reside in the home being built once completed – 10 business days.

If a progress payment is not paid by the Due Date then, in addition to payment of the amount, the Claimant is entitled to interest on the unpaid amount at the greater of the rate prescribed under Section 101 of the Civil Procedure Act 2005, and the rate specified in the Construction Contract, if any.

The rate prescribed under Section 101 of the Civil Procedure Act 2005 is the rate of interest payable after judgment, which can be readily ascertained by accessing the URL shown below.

https://www.netlaw.com.au/interest-rate/nsw/court-post-judgment-rate

A Payment Claim should never be left without a response, unless the Recipient intends to pay the whole amount claimed.

A Payment Claim should be responded to by:

1. Providing a valid Payment Schedule to the Claimant within 10 business days of receiving the Payment Claim (or such shorter period as may be allowed in the contract), and paying the scheduled amount by the Due Date for payment; or
2. Paying the full amount claimed by the Due Date for payment.

Failing to take one of those two courses of action will leave a Respondent liable to pay the full amount claimed, less any amount of the claim subsequently paid. In those circumstances it is open to the Claimant to apply to have the claim adjudicated, but more commonly, the Claimant will take steps to recover the full amount claimed as a statutory debt through the Courts.

Significantly, in any Court proceedings to recover a statutory debt, the Respondent will be prohibited from running any contractual defence or making any cross claims.

Additionally, in some circumstances, the failure to respond to a Payment Claim in one of the above ways will give the Claimant a statutory right to suspend work on site without risk of penalty.

A Payment Schedule may only be served by the earlier of:

• The time allowed by the relevant Construction Contract; and
• 10 business days of the date of service of a Payment Claim.

A late Payment Schedule is no Payment Schedule at all.

The one exception to the above is where the Claimant gives a notice (Section 17(2) notice), within 20 business days of the Due Date for payment, of the Claimant’s intention to apply for Adjudication of the Payment Claim if the full amount claimed is not paid. The Respondent will have a further opportunity to provide a Payment Schedule within 5 business days of receipt of that notice.

A Payment Schedule must:

• Identify the Payment Claim to which it relates;
• Indicate the amount of payment that the Respondent proposes to make (“the scheduled amount”); and
• If the scheduled amount is less than the claimed amount, the reasons for the difference in payment must be included.

When drafting a Payment Schedule it is important to be mindful that if the Claimant is dissatisfied with the scheduled amount, and elects to have the ensuing payment dispute adjudicated under the Act, the Adjudicator will be prohibited from considering any reason for the difference between the payment amounts claimed and scheduled that were not given by the Respondent in the Payment Schedule.

It is prohibited because the purpose of the Payment Schedule is to give the Claimant sufficient information to consider their prospects of success in a subsequent Adjudication and, therefore, any reason for short payment given by the Respondent during the Adjudication process cannot be a “surprise reason”.

It is, therefore, vitally important to articulate clear and easily understood reasons in the Payment Schedule for refusing to pay any part of an amount claimed in the Payment Claim to which it relates.

Tip #1

There is no formality for the form which a Payment Schedule should take. Therefore, a Payment Schedule can be anything in writing, including emails and even text messages, so long as that writing identifies the Payment Claim, specifies either an amount for payment or makes it sufficiently clear no payment at all will be made and gives reasons for any intended short payment.

Tip #2

Most contractors are unaware that the time for providing a Payment Schedule may be reduced by the terms of the Construction Contract. Don’t be the contractor that gets caught out by this.

If you contract or subcontract work to others and are responsible for administering contracts and assessing Payment Claims, it is vital that you have adequate systems in place to ensure that all Construction Contracts (including quotes, purchase orders or other contract documents) are reviewed to identify any limitation on the period for providing a Payment Schedule.

Tip #3

It is unnecessary to specify an amount in the Payment Schedule if it is made clear that the whole of the Payment Claim is disputed, and the amount of payment proposed to be made is nothing. “Nothing” is an “amount”.

The primary advantage of Adjudication under the Act is that it is both cost effective and fast.

The maximum time between Application and determination is usually 15 business days, however, this may be extended by agreement between the parties.

Adjudication is relatively inexpensive compared to litigation.

There is no need for parties to agree upon an Adjudicator, one will be nominated for you by the Authorised Nominating Authority.

Once adjudicated, payment will usually be due no later than 5 business days following determination.

Adjudicators have a statutory power to temporarily determine amounts payable in relation to a Payment Claim and require Respondents to make progress payments to Claimants. The power exists whether or not a Payment Schedule is provided in relation to a Payment Claim.

The system has been referred to by the Courts as a “pay now argue later” system and “rough and ready justice”. It has become widely used to great effect to keep cash flowing within the construction industry.

In keeping with that purpose, an Adjudicator’s determination cannot be appealed, and there are only very few grounds in which their decision can be quashed. An Adjudicator’s decision, for example, cannot even be quashed if the Adjudicator makes an error of law.

Generally speaking, the only mistake an Adjudicator can make in the eyes of the Court is what is called a “jurisdictional error”. That is, the Adjudicator has to have made a mistake about whether he or she has the power to determine the Adjudication Application put before them.

Instances of Adjudicators making jurisdictional errors are becoming increasingly rare as the growing volume of Court Judgments continues to add to the knowledge of informed Adjudicators. Suffice to say that if you are of the view that a particular Adjudication Determination can be quashed for jurisdictional error, you should seek the advice of a Lawyer specialising in Security of Payment Laws without delay.

It is important to understand that the determination of an Adjudicator made under the Act does not affect the final rights that either party may have under the Construction Contract. Therefore, a party aggrieved by an Adjudicators’ Determination might eventually recover the disputed money by suing the other party for payment or damages through the Courts. Those proceedings will not be proceedings to “overturn” the Adjudicators Determination, but rather, will be separate proceedings for breach of contract or otherwise.

The Adjudication process can be broken down into the following steps, each of which will be expanded on later in this Guide.

1. Claimant prepares an Adjudication Application.
2. Claimant makes an Adjudication Application to an Authorised Nominating Authority chosen by the Claimant.
3. The Claimant serves a copy of the Adjudication Application on the Respondent.
4. If the Respondent has previously served a valid Payment Schedule in relation to the Payment Claim the subject of the Adjudication, the Respondent has a right to provide an Adjudication Response. That Response must be prepared and served within 5 days from receipt of the Adjudication Application from the Claimant or 2 business days after receiving notice of the Adjudicator’s acceptance of the Application, whichever is the later.
5. In cases where the Respondent is entitled to provide an Adjudication Response, the Adjudicator then has 10 business days from the date of receipt of the Adjudication Response to determine the Application or if no Adjudication Response is provided, 10 business days from the date on which the Adjudication Response was due.
6. In cases where the Respondent is not entitled to provide an Adjudication Response, the Adjudicator then has 10 business days to determine the Application from the date the Claimant and Recipient received the Adjudicator’s notice of acceptance of the Adjudication Application.
7. The times in 5 and 6 above can be extended by the agreement of all parties.
8. The Respondent must pay the adjudicated amount within 5 business days of service of the determination upon the Respondent or by the Due Date for Payment, whichever is the later.
9. If the Respondent does not pay the adjudicated amount before the later of 5 business days of service of the determination or the Due Date for Payment, the Claimant may suspend work on two days written notice and apply for and obtain an Adjudication Certificate from the Authorised Nominating Authority.
10. The Adjudication Certificate can then be taken to the Registry of the Court, and entered as a Judgment of the Court.

The Act can create a right for a Claimant to elect to refer a payment dispute to an independent Adjudicator whose determination will be binding upon both parties, and which once determined can then be enforceable by the Courts.

Many of the steps required to enliven a Claimant’s right to have a dispute Adjudicated require the Claimant to calculate the Due Date for payment. Whilst Due Dates for payment were discussed previously in this Guide, they are worth repeating here because of their importance in calculating dates on which events prerequisite to the creation of a Claimant’s right to apply for Adjudication must occur.

The Act provides default Due Dates for payment of amounts claimed in Payment Claims which may only be displaced by the inclusion of earlier dates for payment in the contract. That is, a contract may prescribe an earlier date for payment than the Act, but any later date prescribed will be ineffective.

The Due Dates for payment set by the Act are as follows:

Claimants should pay the utmost attention to the time frames given in this Guide, as they are of critical importance. If you get them wrong, the right to have a claim Adjudicated may well be missed.

Conditions meeting any of the following three criteria will give rise to a Claimant’s right to apply for Adjudication under the Act.

1. When a Payment Schedule was provided that is disputed by the Claimant.

When a Claimant disputes the amount scheduled for payment by a Respondent in a Payment Schedule and wishes to have the disputed claim adjudicated under the Act, the Claimant must make an Adjudication Application to an Authorised Nominating Authority within 10 business days of receipt of the Payment Schedule.

2. When a Payment Schedule was provided but the full amount scheduled was not paid by the Due Date for payment.

When a Payment Schedule has been provided but the whole of the scheduled amount has not been paid and the Claimant wishes to have the claim Adjudicated, the Claimant may, within 20 business days of the Due Date for payment, make an Adjudication Application. The Claimant can also suspend work on two days written notice following the Due Date for Payment.

However, if you are a Claimant in those circumstances you will also be entitled to claim the unpaid amount of the claim as a statutory debt in Court with only very limited right of challenge for a Respondent, so you should obtain legal advice from a Specialist Building and Construction Lawyer before proceeding to Adjudication.

When a Payment Schedule was provided but the full amount scheduled was not paid by the Due Date for payment and the Claimant wishes to have the claim adjudicated under the Act, the Claimant must make an Adjudication Application to an Authorised Nominating Authority within 20 business days of receipt of the Payment Schedule.

3. When a Payment Schedule was not provided and the full amount claimed was not paid by the Due Date for Payment.

In circumstances where no Payment Schedule has been provided and the full amount claimed was not paid by the Due Date for Payment and the Claimant wishes to have the claim Adjudicated the Claimant may, within 20 business days of the Due Date for payment of the Payment Claim, notify the Recipient that it will be proceeding to Adjudication and give the Respondent a further 5 business days to provide a Payment Schedule. The Claimant can also suspend work on two days written notice following the Due Date for Payment.

If a Payment Schedule is not then received in reply within 5 days, then an Adjudication Application in relation to the Payment Claim may be made within 10 days of the expiry of the further 5 day period, and the Claimant may also make a Payment Withholding Request on the Principal Contractor. If a Payment Schedule is received in reply within 5 days, then an Adjudication Application in relation to the Payment Claim may be made within 10 days of receipt of that Payment Schedule.

However, just like when a Payment Schedule is issued and the scheduled amount has not been paid, Claimants are also entitled to claim the unpaid amount of the claim as a statutory debt in Court with only a very limited right of challenge for a Respondent, so if you are a Claimant in that situation you should obtain legal advice from a Specialist Building and Construction Lawyer before proceeding to Adjudication.

When a Payment Schedule was not provided and the full amount claimed was not paid by the Due Date for Payment and the Claimant wishes to have the claim adjudicated under the Act, the Claimant must make an Adjudication Application to an Authorised Nominating Authority within 20 business days of the Due Date for Payment.

If one of the three criteria above are met, then a Claimant will be eligible to apply to an Authorised Nominating Authority to refer the payment dispute to Adjudication under the Act.

The Adjudicator’s powers are triggered by their acceptance of an Adjudication Application from an Authorised Nominating Authority. The Adjudicator’s function is then to determine:

1. The amount of the progress payment, if any, which the Respondent must pay the Claimant;
2. The date on which the amount became or becomes payable;
3. The rate of interest payable on such amount; and
4. The proportion of Adjudication fees payable by each party.

The Adjudicator is required to provide a written, reasoned determination of the Application for Adjudication having regard to;

1. The provisions of the Act;
2. The provisions of the Construction Contract relating to the claim;
3. The Payment Claim to which the Application relates, together with all submissions that have been duly made by the Claimant in support of the claim;
4. Any Payment Schedule to which the Application relates, together with all submissions that have been duly made by the Respondent in support of the schedule; and
5. The results of any inspection carried out by the Adjudicator of any matter to which the claim relates.

Adjudication Applications must be in writing, must identify the Payment Claim to which they relate and may contain written submissions by the Claimant that the Claimant considers relevant to the Application.

Some Authorised Nominating Authorities (see next section) have downloadable forms which require a Claimant to provide specific information relating to the Payment Claim, the Payment Schedule and the Application. These are very useful because they will prompt you for all of the information required to make a valid Adjudication Application under the Act.

The first step should be to find an Authorised Nominating Authority that utilises such forms, download them and complete them. Some Authorised Nominating Authorities even automate the entire Application process through their website for you.

Always include a copy of the Payment Claim and any Payment Schedule in the Application.

If there is a written contract for the work, include it.

In addition to the standard information required by the Authorised Nominating Authorities’ forms, Claimants can also (and normally should) make written submissions to the Adjudicator. Those submissions should include reasons why the Adjudicator should allow payment of the claimed amounts and reasons why the Adjudicator should disregard any of the unfavourable reasons relied upon by the Respondent in the Payment Schedule for short payment.

Your submissions should demonstrate an entitlement to payment of the claimed amount, how the value of the claimed amount was calculated with any necessary reference to the contract, and importantly, that the work claimed for was actually done.

If the Payment Schedule includes reasons for short payment which are highly contractual or legalistic in nature, or if the Respondent denies liability at all, strongly consider talking to a Specialist Building and Construction Lawyer about your Adjudication Application submissions before you draft them.

As entitlement to payment, and particularly entitlement to payment for variations, is often a matter of contractual interpretation, there can be great benefits in having a Lawyer who specialises in Building and Construction Law prepare the Adjudication Application and supporting submissions on your behalf. A good Lawyer can prepare persuasive contractual arguments that will get an Adjudicator wanting to find in your favour.

Tip #1

Keep written submissions short, and on point.

Tip #2

If the Payment Claim is itemised make written separate submissions for each item claimed.
For example, if a number of variations are individually claimed within the Payment Claim, consider making written submissions for each variation.

Tip #3

Don’t forget to include submissions on why the Respondent’s reasons for short payment within the Payment Claim are invalid.

Tip #4

The inclusion of plans, specifications, diagrams and photographs can be helpful to give the Adjudicator a better understanding of a disputed item.

Tip #5

It is a common misconception that an Affidavit or Statutory Declaration is required to be included in the Adjudication Application. There is no such requirement and a simple statement as to what has occurred will usually suffice.

Tip #6

Avoid submissions to the Adjudicator about the statutory framework and case law governing their task as an Adjudicator. It is quite safe to assume that the Adjudicator is well versed in what they can and cannot consider and will be annoyed by submissions explaining how their job is to be done.

Tip #7

Specifically address any backcharges for defects, rectification or delay damages which you say the Respondent is not entitled to, giving reasons.

Tip #8

Provide a reconciliation between the contract amounts for the various items of contract work, Payment Claims made to date for those items or stages, scheduled payment amounts for those items or stages and payments received.

This is actually the first task that many Adjudicators will do in their deliberation process, as it provides a cross check that they have not missed any part of the claim, and also helps to quickly identify particular contract items within Payment Claims that are in dispute. If you’ve already done that task for them in a transparent and easily cross checkable way, you will definitely be on the front foot in presenting your claim. See the example over page.

In New South Wales, Adjudication Applications cannot be made directly to an Adjudicator. Instead, an Application must be made to an Authorised Nominating Authority (“ANA”), that will then refer the dispute to an Adjudicator. If an ANA determines that an Application fee is to be payable on Application, the Adjudication Application must also be accompanied by that fee.

The website of the NSW Government lists contact details for (at the time of writing) the seven ANAs in NSW. Each of the ANAs have their own websites which contain information about how to lodge an Adjudication Application, and their contact details can be obtained by accessing the URL below.

https://www.fairtrading.nsw.gov.au/trades-and-businesses/construction-and-trade-essentials/security-of-payment/authorised-nominating-authorities

Any delay in serving the Respondent with a copy of the Application will result in a delay in determination, and therefore, a delay in you getting paid.

The best ways to serve an Adjudication Application on a Respondent is to serve it in a way that generates written proof of service.

Tip #1

Use a courier service for which the Respondent must provide signature on receipt. This will minimise delivery time and provide proof of service.

Tip #2

If you’re inclined to use Australia Post, use Express Post as it is a tracked service which will also create proof of service.

Tip #3

NEVER use Registered Post. When an item sent Registered Post arrives at a Post Office, the intended Recipient is notified that the item must be collected from that Post Office by the intended Recipient, and that the intended Recipient will have to acknowledge receipt by signature. If the intended Recipient anticipates the contents of that Registered Post item and chooses not to collect it, the intended Recipient can rely upon this to argue that service of that item was never effected.

The Act provides that a Claimant, who has made an Adjudication Application, can require a Principal, Head Contractor or Subcontractor next up the contracting ladder (referred to in the Act as a “Principal Contractor”) to withhold payments owing to a Respondent in that Adjudication Application, by serving a Payment Withholding Request.

A Principal Contractor who receives a Payment Withholding Request must retain, out of money owed to the Respondent, the amount of money to which the Payment Claim relates (or the amount owed by the Principal Contractor to the Respondent, if that amount is less than the amount to which the Payment Claim relates).
The obligation to retain money in accordance with a Payment Withholding Request remains in force until the earliest of the following:

1. Withdrawal of the Adjudication Application;
2. Payment of the Claimed Amount by the Respondent;
3. Service by the Subcontractor of a Notice of Claim on the Principal Contractor under the Contractors Debts Act 1997; and
4. Lapsing of a period of 20 business days after a copy of the Adjudicator’s Determination of the Adjudication Application is served on the Principal Contractor.

The Act does not impose any obligation on the Principal Contractor to pay any retained money to a Subcontractor directly. That obligation instead arises under the Contractors Debts Act 1997.

Under the Contractors Debts Act 1997 a Subcontractor, who files an Adjudication Certificate with a Court, is entitled to be issued with a Debt Certificate in respect of the debt. The Subcontractor is then entitled to serve a Notice of Claim under the Contractors Debts Act 1997 on the Principal Contractor in relation to the debt. Service of the Notice of Claim operates as an assignment to the Subcontractor of the right to payment from the Principal Contractor of money owed to the Head Contractor or superior Subcontractor, as the case may be. Upon receipt of a Notice of Claim the Principal Contractor must pay the money then owed to the Respondent instead to the Subcontractor.

A Claimant may also withdraw an Adjudication Application at any time:

1. Before an Adjudicator is appointed to determine the Application; or
2. If the Adjudicator has been appointed, before the Application is determined by serving written notice of the withdrawal on the Respondent and either the ANA or the Adjudicator.

However, where an Adjudicator has been appointed; the withdrawal will not have effect if:

1. Any other party to the Construction Contract objects to the withdrawal; and
2. In the opinion of the Adjudicator, it is in the interests of justice to uphold the objection.

If a Claimant fails to receive an Adjudicator’s notice of acceptance of an Adjudication Application within 4 business days after the Application is made, or an Adjudicator who accepts an Adjudication Application fails to determine the Application within the time allowed by the Act, the Claimant may;

1. Withdraw the Application, by notice in writing served on the Adjudicator or ANA to whom the Application was made; and
2. Make a new Adjudication Application.

However, a new Adjudication Application may only be made within 5 business days after the Claimant becomes entitled to withdraw the previous Adjudication Application.

A Respondent will usually first become aware that a Claimant has made an Adjudication Application upon receipt of service of either a copy of the Application from the Claimant, or an Adjudicator’s notice of acceptance of appointment.

The first consideration for Respondents to an Adjudication Application is whether or not there is an entitlement to make an Adjudication Response at all. If you have not served a Payment Schedule within the time frame allowed by the Act, there is no entitlement to submit an Adjudication Response and if you do, the Adjudicator will not consider it.

If you have served a Payment Schedule and intend to prepare an Adjudication Response, time is absolutely critical. An Adjudication Response must be submitted to the Adjudicator no later than 5 business days after receipt of a copy of the Application or 2 business days after receiving notice of an Adjudicator’s acceptance of the Application, whichever is later.

An expert Building and Construction Lawyer can be of great benefit in drafting Adjudication Responses by making well crafted contractual and factual arguments supporting the Respondent’s scheduled amounts.

The golden rule for Adjudication Responses is that you cannot include a reason for non-payment in an Adjudication Response that was not included within the Payment Schedule. To put this another way, the only submissions concerning short payment of a Payment Claim allowed in an Adjudication Response are submissions supporting reasons already given.

There is a commonly tripped on hazard here which should be discussed. The Adjudication Response is not an opportunity to add precision to a broad reason for short payment that is not clear in the Payment Schedule.

For example, if a Payment Schedule states that a Payment Claim for a stage of work is scheduled at $0.00 because the work is defective, an expert report dated after the date of the Payment Schedule detailing great numbers of individual defects as breaches of various codes and standards will be considered by many Adjudicators to be an attempt at new reasons. This is because the individual defects will be a surprise to the Claimant.

Lastly on this point, the judgment call on whether the reasons are new reasons is entirely the Adjudicators. In John Holland Pty Ltd v Roads and Traffic Authority of New South Wales the Court of Appeal held that:

“…the false premise is that the scope of the payment schedule and the identification of submissions “duly made” by the Respondent in support of the schedule are matters to be objectively determined by this Court. In my view they are not: they are matters to be determined by the adjudicator.”

So long as it is part of the function of the Adjudicator to determine such matters and so long as it is within the power of the Adjudicator to act in accordance with their own determination, even if a Court might have reached a different conclusion, there is no basis for saying that the Adjudication was invalid.

The takeaway here is; don’t assume that an Adjudicator agrees that the reasons included in an Adjudication Response are reasons supporting the Payment Schedule. You should always put some work into persuading the Adjudicator that this is the case.

One way to defeat an Adjudication Application is to demonstrate that the Adjudicator does not have any jurisdiction in the circumstance. That is, that they do not have any statutory authority under the Act to make a determination for one reason or another.

Submissions about jurisdiction are made in the hope of persuading the Adjudicator to decline to determine the Application, thus possibly leaving the Claimant without recourse to payment under the Act.

Why would an Adjudicator be persuaded by such a submission? It’s because an Adjudicator’s Determination is reviewable by the Court on the basis of jurisdictional error and put simply; Adjudicators are human and most don’t like being seen as having made an error on such a fundamental issue.

To better understand this, we need to consider the concepts of jurisdiction and jurisdictional error.

Jurisdiction, in the sense in which it is relevant to Adjudication Applications made under the Act, refers to the scope of the authority that is conferred on the Adjudicator by the Act to make a decision of a kind to which the Act then attaches legal consequences. The jurisdiction of an Adjudicator is enlivened only when all of the preconditions within the Act exist in order for a valid Adjudication Application to be made.

Jurisdictional error refers to a failure by the Adjudicator to ensure compliance with one or more of the required preconditions that must exist in order for a valid Adjudication Application to be made and determined.

The most common underlying sources of Respondents’ assertions of jurisdictional error are:

• That the Payment Claim was somehow invalid;
• That the Adjudication Application was somehow invalid; or
• More recently, since the commencement of the Building and Construction Industry Security of Payment Regulation 2020 which sets minimum qualifications for Adjudicators, Respondents have began raising issues of an Adjudicator’s eligibility to adjudicate.

Jurisdictional arguments included in Adjudication Responses are sometimes thought of as an exception to the rule that new reasons to those in the Payment Schedule cannot be raised. Strictly speaking that is not true. Nevertheless, it is sufficient to say here that; fresh submissions on jurisdiction may be included in an Adjudication Response. Appropriately, those submissions often rely on highly technical legal argument referencing complicated case law; and the drafting of submissions on jurisdiction should usually be left to a Specialist Building and Construction Lawyer.

A copy of the Adjudication Determination will be served upon the Respondent by the Adjudicator or more commonly by the ANA acting on the Adjudicator’s behalf.

The date for payment of any amount adjudicated to be payable will, in the vast majority of cases, be within 5 business days of the service of the Adjudication Determination. Less commonly, payment of the adjudicated amount may be due at some later date determined by the Adjudicator.

To enforce an Adjudication Determination, the Claimant must apply to the Authorised Nominating Authority for an Adjudication Certificate after the payment date of the adjudicated amount became due, if it has not then been paid.

The Adjudication Certificate may then be filed in the Registry of the Court. Which Court the Certificate should go to depends on the adjudicated amount.

• If the amount is less than $100,000, the Certificate should be filed in the Registry of the Local Court;
• If the amount is more than $100,000 but less than $750,000 the Certificate should be filed in the Registry of the District Court; and
• If the amount exceeds $750,000, the Certificate should be filed in the Registry of the Supreme Court in excess of $750,000.

The filing of the Adjudication Certificate in the Registry requires an application to be made including a sworn Affidavit of Debt. As these are important documents to get right for the Court, you should consult a Solicitor to ensure that the documents are properly prepared. The Court will then enter the Adjudication Determination as though it were a Judgment of the Court. The knowledge and experience of the solicitor that you engage to obtain Judgment will also be of great value to you in the situation that the Respondent does not pay and Judgment has then to be enforced.

It is important to remember that the payment regimes created by the Security of Payment Act are intended only to facilitate cash flow for contractors by facilitating the prompt payment of progress payments. A Statutory Right to Payment or an Adjudication Determination is not a final determination of a party’s rights in relation to a matter.

The Act specifically provides that a right to payment arising under the Act does not affect any right that a party to a Construction Contract:

1. may have under the Construction Contract,
2. may have under Part 2 of the Act (Due Dates, Interest etc), or
3. may have in respect of anything done or omitted to be done under the contract.

The Act provides that in certain circumstances, an entitlement arises for a Claimant to claim any unpaid amount of a Payment Claim from a Respondent, as a debt due to the Claimant in Court.

Those circumstances are if:

1. a Claimant serves a Payment Claim on a Respondent; and
2. the Respondent does not provide a Payment Schedule within the earlier of the time required by the relevant Construction Contract or within 10 business days after the Payment Claim is served; and
3. the Due Date for payment has passed.

Claims to recover statutory debts are usually commenced by filing a Statement of Claim in either the Local or District Courts. Claims for amounts larger than $750,000 will usually be commenced by Summons in the Supreme Court.

Significantly, Respondents are barred from raising any Cross-Claim or Defence in relation to matters arising under the contract. For example, defences to payment such as offset for defects or delay damages are prohibited.

Tip #1

Just because the Act prohibits contractual defences or the bringing of cross-claims does not mean the Respondent will not try to put on a Defence or run a Cross-Claim. It is quite common for Lawyers who are unfamiliar with the Act to try to do so, and this can complicate matters somewhat.

However, if you are bringing a claim in Court to recover a statutory debt and the Respondent tries to defend or cross-claim in that way, you will win, and you will almost always end up getting the legal costs incurred by you in dealing with the attempted defence awarded.

Notwithstanding the above, Judgment in favour of a Claimant can often be obtained from the Court without the need for any contested hearing or Court appearance at all. Nevertheless, the process can become quite complicated, and your interests will be best protected by retaining a Specialist Lawyer who is experienced in the use of the Act to pursue a statutory claim and deal with the common traps and hurdles that often present themselves along the way.

Tip #2

In most instances, where a statutory debt has arisen a well drafted legal letter of demand will quickly get a Respondent’s attention and result in payment and/or a significantly improved bargaining position for resolving any underlying dispute without the need for Court proceedings.

The letter of demand should reference the relevant provisions of the Act, the circumstances in which the statutory debt has arisen and the prohibition on a Respondent bring any Cross-Claim or raising any Defence under the Contract if Court proceedings are necessary, and threatening the commencement of Court proceedings if the debt is not paid.

Again, these demands can be complicated and its best for them to be prepared by an experienced Building and Construction Lawyer to avoid responses challenging the existence of the statutory debt and causing further delays in payment.

A very powerful but often under appreciated tool at the Claimant’s disposal is the right created under the Act for the Claimant to suspend work under a contract. So long as a Claimant has properly suspended work under the contract in accordance with the Act, the Claimant will not be liable for any back charges, damages or other recourse flowing from the suspension.

There are 3 circumstances in which work may be suspended in accordance with the Act:

1. When a Payment Schedule has been issued but the Respondent has failed to pay the scheduled amount by the Due Date for payment;
2. When a Payment Schedule has not been issued and the Respondent has failed to pay the claimed amount by the Due Date for payment; and
3. An adjudicated amount is not paid by the later of 5 business days or the date for payment determined by the Adjudicator.

In the circumstances, however, 2 business days’ notice of the intention to suspend work must first be given in writing. When counting days, the day on which the notice was given is not counted. For example, if notice is given on a Monday, Tuesday and Wednesday will count as 2 days, and work may then cease on the Thursday.

Once paid, work must be recommenced in 3 business days, and again, the payment day will not be counted. If you are paid on a Monday, Tuesday, Wednesday and Thursday will count as 3 days, and work must then resume on the Friday.

Retention money is money usually retained by a Head Contractor from the progress payments to Subcontractors as a contingency for delay and defect damages.

On projects where the head contract (aka Main Contract) is for works with a total value exceeding $20,000,000, retention money must be held in a Trust Account with an authorised deposit taking institution. Head Contractors can only withdraw funds from the Trust Account in accordance with the contract, or as otherwise agreed with the Subcontractor in writing.

There are strict rules and accountability provisions applicable to the opening and maintenance of Retention Money Trust Accounts, and Head Contractors should seek specialist legal advice in situations where the value of work mandates the use of a Trust Account.

The rules also apply where the value of a contract exceeds $20,000,000 as a result of a contract variation.

Any clause in a subcontract that purports to make payment of any progress payment or retention release to the Subcontractor contingent on an event or milestone achieved in the head contract is unenforceable.

These are called “pay when paid provisions” and the most common example of such a clause is one that purports to make the release of the Subcontractor’s retention contingent on the expiry of the defects liability period under the head contract.

The Courts have interpreted the provision of the Act which invalidates pay when pay provisions very broadly and will consider just about any provision of a subcontract where something can only occur when triggered by the occurrence of some situation or state of affairs caused by the contract between the Head Contractor and the Principal to be captured.

A Claimant that is a corporation in liquidation can not:

• serve a Payment Claim;
• make an Adjudication Application;
• enforce a statutory debt under the Act; or
• enforce an Adjudication Determination.

Additionally, if a corporation has made an Adjudication Application that is not finally determined before the day on which it commenced to be in liquidation, that Application is taken to have been withdrawn on that day.

Authorised Nominating Authority
“Authorised Nominating Authority” means a person or company authorised by the Minister to nominate persons to determine Adjudication Applications.

Business Days
“Business Day” under the Act means any day other than:

1. a Saturday, Sunday or public holiday, or
2. 27, 28, 29, 30 or 31 December.

Claimant
“Claimant” means a person by whom a Payment Claim is served.

Construction Contract
“Construction Contract” is a contract or other arrangement under which one party undertakes to carry out construction work, or to supply related goods and services, for another party.
Significantly, the words “other arrangement” extend the reach of the Security of Payment Act beyond contracts in the purest form.

Construction Work
Means any of the following:

1. the construction, alteration, repair, restoration, maintenance, extension, demolition or dismantling of:
   1. buildings or structures forming, or to form, part of land (including temporary buildings and structures),
   2. walls, roadworks, powerlines, telecommunications apparatus, pipelines, water mains, sewers and industrial plant and installations for the purposes of land drainage,
2. the installation in any building, structure or works of fittings including heating, lighting, air conditioning, ventilation, power supply, drainage, water supply, fire protection, security and communications systems,
3. the external or internal cleaning of buildings, structures or works, so far as it is carried out in the course of their construction, alteration, repair, restoration, maintenance or extension,
4. the painting or decorating of the internal or external surfaces of any building, structure or works,
5. any operation which forms an integral part, or is preparatory to or is for rendering complete, works referred to in paragraphs 1 and 2 above, including:
   1. site clearance, earthmoving, excavation, tunnelling and boring,
   2. the laying of foundations,
   3. the erection, maintenance or dismantling of scaffolding,
   4. the prefabrication of components to form part of any building, structure or works (wherever carried out), and
   5. site restoration, landscaping and the provision of roadways and other access works.

However, “construction work” does not include any of the following work:

1. the drilling for, or extraction of, oil or natural gas,
2. the extraction (whether by underground or surface working) of minerals, including tunnelling or boring, or constructing underground works, for that purpose,
3. any other work of a kind prescribed by the Regulations.

Head Contractor
“Head Contractor” means the person (or company):

1. who is to carry out construction work or supply related goods and services for the Principal under a Construction Contract (“the Main Contract”), and
2. for whom construction work is to be carried out or related goods and services supplied under a Construction Contract as part of or incidental to the work or goods and services carried out or supplied under the Main Contract.

Note: There is no Head Contractor when the Principal contracts directly with Subcontractors.

Main Contract
The “Main Contract” is the Construction Contract between the Principal and the Head Contractor.

Principal
“Principal” means the person (or company):

1. for whom construction work is to be carried out or related goods and services supplied under a Construction Contract (“the Main Contract”), and
2. who is not themselves engaged under a Construction Contract to carry out construction work or supply related goods and services as part of or incidental to the work or goods and services carried out or supplied under the Main Contract.

Principal Contractor
“Principal Contractor” is a name used to describe the party on whom a Payment Withholding Request may be served in the event that an Adjudication Application has been lodged. Section 26A(4) of the Act defines “Principal Contractor” as the person (or company) by whom money is or becomes payable to the Respondent party to the Adjudication Application for work carried out or materials supplied by the Respondent to the person as part of or incidental to the work or materials that the Respondent engaged the Claimant party to the Adjudication Application to carry out or supply.

Subcontractor
“Subcontractor” means a person (or company) who is to carry out construction work or supply related goods and services under a Construction Contract other than as Head Contractor.

Supporting Statement
“Supporting Statement” means a statement that is in the form prescribed under the Building and Construction Industry Security of Payment Regulations 2008 and (without limitation) includes a declaration to the effect that all Subcontractors, if any, have been paid all amounts that have become due and payable in relation to the Construction Contact concerned.

Ned Mortensen is a specialist Building and Construction Lawyer and Accredited Adjudicator under the Building and Construction Industry Security of Payment Act 1999 (NSW) with both Adjudicate Today and ABC Dispute Resolution Service. He holds dual qualifications in Law and Construction Management.

Ned has specialist knowledge of the building and construction industry, having come to the legal profession after 20 years of working in construction as a project manager and expert witness. He was a licensed builder and is also an Accredited Certifier.

His experience in the construction industry ranges from residential housing in his early career, through to engineering and senior project management roles for some of Australia’s top tier contractors. He has project managed contracts for the construction of commercial and infrastructure projects with individual contract values exceeding $200 million.

Ned has also worked extensively in client-side project management, where he routinely handled disputes concerning the quality, timeliness, compliance and value of works. He is an experienced building consultant and has appeared as an expert witness in building litigation matters.

His unique mix of legal skills and practical construction industry experience allow him a clear insight into the often very technical issues that are at the heart of many building disputes. His legal expertise and construction industry experience give him an edge that puts him at ease in any construction industry matter and ensures a sound and practical understanding of the technical issues at play.

He is highly experienced and particularly adept at dealing with security of payment Adjudications and claims involving defective work and/or delays.

“Ned speaks and understands the language of our industry.”

“We are absolutely thrilled with the result Roberts [Crosbie Mortensen Lawyers] achieved for our company! After a long battle over a very large sum of money, Ned achieved the best possible outcome for us. He was incredibly professional, while at the same time extremely patient and easy to talk to. We could not fault our experience with Roberts [Crosbie Mortensen] and would recommend them without hesitation.”

“Ned handled our matter as if it was his own. His prompt assistance and excellent advice were very much appreciated.”

Ned heads our Building and Construction Law team which also includes three Law Society Accredited Specialists in Commercial Litigation, making the team one of the most highly recognised in New South Wales.

The team is experienced in dealing with commercial, infrastructure and residential building disputes both large and small, and have appeared for developers, builders, contractors and home owners in building disputes in all relevant jurisdictions from the Technology and Construction List of the Supreme Court of NSW to the Home Building List of the NSW Civil and Administrative Tribunal.

Our Specialist Lawyers can help you make better contracts, utilise Security of Payment laws, avoid foreseeable problems and resolve disputes cost effectively.