Australia: Using the SOP Act to ensure your cash flow remains constant: Part 3 - options available to unpaid claimants

Introduction

Whilst the Australian economy is technically out of recession, there remain many businesses struggling to manage cash flow. For those in the construction industry, the Building and Construction Industry Security of Payment Act (1999) NSW (SOP Act) is a powerful piece of legislation that creates rights and obligations, in addition to those created under the construction contract, to provide a quick, low cost payment claim recovery regime.

The SOP Act is designed to provide payment to any person who undertakes to carry out construction work or related goods and services under a construction contract.

Previously in Part 1 and Part 2, Bartier Perry considered both:

1. a claimant's entitlement to make a payment claim under the SOP Act and the need to ensure that the progress claim complies with the requirements of the SOP Act; and
2. a respondent's right to dispute a payment claim by issuing a payment schedule indicating:
1. a lesser amount (if any) that it intended to pay; and
2. the reasons why it was withholding payment (in full or in part); and
3. the significant consequences of failing to issue a payment schedule.

In the final part of this three-part series, Bartier Perry will now look at the options available to a claimant who has not received the amount claimed (either in full or in part) in its payment claim by the due date.

The options available

Assuming that a claimant has:

1. issued a valid payment claim;
2. not received payment by the due date of:
1. the entire amount claimed (Claimed Amount) in the payment claim in circumstances where a payment schedule was not issued by the respondent; or
2. the lesser amount identified by the respondent in its payment schedule as the amount of the payment it proposes to make (Scheduled Amount) to be paid; and

the claimant has an important decision to make.

As previously discussed in Part 2, the SOP Act sets out the avenues available to a claimant to recover the unpaid portion of an amount claimed in a payment claim.

Commence court proceedings

A claimant can recover in court the unpaid portion of either:

1. the Claimed Amount where the respondent did not provide a payment schedule; or
2. the Scheduled Amount where the respondent provided a payment schedule indicating that it proposed to make payment of a lesser amount.

The SOP Act provides that the unpaid portion of a Claimed Amount or the unpaid portion of a Scheduled Amount can be recovered in court as a debt due to the claimant, ie as a statutory debt.

The claimant can commence court proceedings to recover these unpaid amounts by preparing and filing a statement of claim with the relevant court. The relevant court is determined by the dollar amount of the unpaid Claimed Amount or Scheduled Amount.

From the date the statement of claim is served, the respondent has the usual 28 days to file a defence.

However, the real power of the SOP Act for the claimant to recover a statutory debt through the court is that a respondent who did not pay either the Claimed Amount or the Scheduled Amount by the due date is prohibited by the SOP Act:

This provides a claimant with a significant advantage and should provide an easier path to judgment.

Any defence that the respondent might raise is heavily limited by operation of the SOP Act as is generally on the basis of challenging the validity of the payment claim ie. on the basis that the payment claim was not a valid SOP Act payment claim because it does not comply with the requirements of the SOP Act and therefore does not fall within the jurisdiction of the SOP Act.  

Once judgment is obtained, the claimant is in a much stronger position to recover its payment claim.

Adjudication application

Alternatively, the claimant can proceed to adjudication of the payment claim particularly where the respondent has indicated in a payment schedule that it disputes part or all of a claimant's payment claim.

NSW Fair Trading reported that in the quarter ending 30 September 2019, 256 adjudication applications were lodged for a total value of Claimed Amounts of $112.7 million.

The SOP Act entitles a claimant to apply for adjudication of its payment claim, if:

1. the respondent has provided a payment schedule, but:
1. the Scheduled Amount indicated in the payment schedule is less than the Claimed Amount indicated in the payment claim; or
2. has failed to pay the Scheduled Amount (either in full or in part) by the due date, or
2. the respondent has failed to provide a payment schedule within 10 business days of the payment claim being served, and the due date for payment has now passed without payment having been made.

It is important to note that in the case where no payment schedule has been received within the 10 business days, the claimant must give the respondent a ‘2^nd chance' to provide a payment schedule.

The ‘2^nd chance' is given by the claimant to the respondent by:

Making an adjudication application

A claimant's adjudication application:

1. must be in writing; and
2. must be made to an authorised nominating authority chosen by the claimant; and
3. where the respondent:
1. has provided a payment schedule nominating a lesser amount to pay, must be made within 10 business days after the claimant receives the payment schedule; or
2. has provided a payment schedule but failed to pay the Scheduled Amount by the due date, must be made within 20 business days after the due date for payment; and
3. has failed to provide a payment schedule and failed to pay the Claimed Amount within the 20 business days, must be made within 10 business days after the end of the further 5 business day '2^nd chance' period referred to above; and
4. must identify the payment claim and the payment schedule (if any) to which the application relates; and
5. may contain such submissions relevant to the application as the claimant chooses to include.

Responding to an adjudication application

Only a respondent who has issued a payment schedule is entitled under the SOP Act to provide a response to the claimant's adjudication application.

The adjudication response is the respondent's opportunity to make detailed submissions to the adjudicator in support of its decision to withhold payment. An adjudication response will often include expert reports and statutory declarations from project managers or superintendents.

However, a respondent cannot include in the adjudication response, any reasons for withholding payment unless those reasons have already been included in the payment schedule provided to the claimant.

This places the respondent who failed to issue a payment schedule (or failed to set out in the payment schedule all the relevant reasons for withholding payment) at a significant disadvantage and emphasises the importance of issuing a full and considered payment schedule if part or all of the amount claimed in payment claim is disputed and payment withheld.

An adjudication response must be submitted within:

1. 5 business days after the respondent has receive the adjudication notice; or
2. 2 business days after the adjudicator has accepted the appointment,

whichever occurs latest.

This is a tight time frame in which to prepare an adjudication response and it cannot be extended by the adjudicator or by agreement of the parties. The adjudicator is expressly prohibited by the provisions of the SOP Act from considering any response submitted by the respondent outside of the above time limits.

Where a respondent did not provide a payment schedule, an adjudication response is limited to jurisdictional issues only.

Adjudication determination

The adjudicator must make his or her determination in writing within 10 business days of the date by when the respondent was to submit its adjudication response.

This means that the dispute will be determined very quickly and, in most cases, much quicker than if the matter proceeded through the formal court process.

In determining the adjudication, the adjudicator considers the following matters only -

1. the provisions of the SOP Act,
2. the provisions of the construction contract from which the application arose,
3. the payment claim to which the application relates, together with all submissions (including relevant documentation) that have been duly made by the claimant in support of the claim,
4. the payment schedule (if any) to which the application relates, together with all submissions (including relevant documentation) that have been duly made by the respondent in support of the schedule,
5. the results of any inspection carried out by the adjudicator of any matter to which the claim relates.

NSW Fair Trading reported that in the quarter ending 30 September 2019, the average Claimed Amount was $440,444 and the average Adjudicated Amount from determinations released was $222,124. 

Adjudicator's fees

The SOP Act provides that the claimant and the respondent are jointly and severally liable to pay the costs of the adjudicator.

However, the SOP Act does allow the adjudicator to determine the proportion of his or other fees to be paid by each party.

A party who is wholly successful in the adjudication process can usually expect that the unsuccessful party will be ordered to pay the adjudicator's fees.

The table below sets out the adjudication fees as reported by NSW Fair Trading for the quarter ending 30 September 2019 by certain selected claimed amounts.

Post determination procedure

If a determination is made by an adjudicator, and the respondent fails to pay the adjudicated amount, then the claimant may request the authorised nominating authority to whom the adjudication application was made, to provide an adjudication certificate.

The adjudication certificate can then be filed as a judgement for a debt in any court of competent jurisdiction and is enforceable accordingly.

The SOP Act runs concurrently with the terms of the construction contract. The SOP Act does not diminish or erode a parties' contractual rights under the construction contract. Any subsequent determination of a court or tribunal made under the construction contract must allow and make adjustment for amounts paid under the SOP Act.

Case Study

Bartier Perry recently acted for a civil contractor who had served a valid payment claim on a builder.

The builder did not issue a payment schedule within the requisite 10 business days.

The civil contractor then issued the ‘2^nd chance' notice advising the builder of its intention to make an adjudication application.

Still no payment schedule or payment was received.

Our client, the civil contractor, made an adjudication application.

The builder was not entitled to submit an adjudication response because it had not issued a payment schedule.

Result: a determination for the full amount of the payment claim within 10 business days of making the adjudication claim achieved a reasonable cost.

The adjudicator's fees were $3,800 all of which were apportioned by the adjudicator to the builder to pay.

A good example of efficient and effective use of the SOP Act to recover a debt particularly if no payment schedule is issued.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.