An Adjudicator’s Opinion of the Changes Made to the Security of Payment Act in New South Wales

The purpose of this article is to summarise the main changes introduced by Building and Construction Industry Security of Payment Amendment Act 2018 (‘the 2018 Amendment Act’ or ‘2018 amendments’) that alter the existing adjudication procedures. An adjudicator’s view of some of the changes is also offered.

The 2018 amendments apply to construction contracts entered on and from 21 October 2019. Current contracts entered before this date are untouched by the 2018 amendments.

A comparison between the changes brought about by the 2018 Amendment Act and those originally introduced by the Building and Construction Industry Security of Payment Amendment Act 2013 (‘the 2013 Amendment Act’ or ‘2013 amendments’) is undertaken, where applicable.

For those wanting a refresher on the 2013 amendments, a full analysis is given in: Davenport P, Brand M C & Kim J (2015) 'Adjudication in Australia: A study of the Building and Construction Industry Security of Payment Amendment Act 2013' in Proceedings of 20th Annual Asian Real Estate Society (AsRES) Conference 2015, Washington DC, USA, 6-9 July.

1. Removal of reference dates

The most notable provision brought about by the 2018 Amendment Act is the removal of the ‘reference date’ provision. It is replaced with a simple statutory entitlement, which allows claimants to make progress claims monthly, or more often if the contract allows.

Under the 2018 Amendment Act, there are: (a) two provisions that apply to contracts that are not terminated; (b) and one provision that applies to contracts that are terminated.

In cases where the contract has not been terminated, the Act allows the Claimant to make a progress claim on and from the last day of the named month in which the work was first carried out (or goods or services were first supplied), and thereafter on and from the last day of each subsequent named month. However, if the parties have agreed that the Claimant can make a progress claim earlier than the last day of the named month (commonly the 25th day of each named month), then the Act allows the Claimant to do so in place of the last day of the named month {see ss. 13(1A)-(1B)}.

The effect of the 2018 amendments is to give any person who has undertaken to perform work under a construction contract an entitlement to receive progress payments that cannot be controlled by the contract. So, for example, where the Claimant’s entitlement to receive progress payments is not scheduled by time, but by the occurrence of some event (e.g., a building milestone or practical completion), then the 2018 amendments step in to make those contractual provisions ineffectual.

In cases where it can be established that the contract has been terminated, the Act gives the Claimant a right to make a payment claim on and from the date of termination {see s. 13(1C)}.¹ This amendment seeks to counter the Court’s prevailing view that reference dates are extinguished by termination.²

2. Withdrawal of adjudication application

Perhaps the most interesting of the procedural changes is the Claimant’s right to withdraw an adjudication application and the Respondent’s right to object to the withdrawal.

The Claimant may withdraw the application at any time: (a) before the Adjudicator is appointed to determine an application; or (b) if the Adjudicator has been appointed,³ then before the application is determined, by serving written notice of the withdrawal on the Respondent and on the ANA or the Adjudicator, if any {see s. 17A}.

The Act also provides that, in the case where the Adjudicator has been appointed, any withdrawal of the application does not have effect if: (a) any other party to the construction contract objects to the withdrawal [i.e., the Respondent(s)]; and (b) in the opinion of the Adjudicator, it is in the interests of justice to uphold the objection.

The term ‘in the interests of justice’ is not explicitly defined by the Act. Consequently, its interpretation is likely to be guided by the ordinary meaning of the words in the light of their context and the object of the Act.

The Act does not require the Claimant to give any reasons for making a withdrawal. Presumably, the withdrawal arises because the matter has settled, or the application has been found wanting in some respect. In any event, so long as the Claimant duly serves the written notice of the withdrawal as required by the Act, the reasons for the withdrawal are immaterial.

Where the Respondent objects to the withdrawal, the Act does not require the Respondent to say why the Respondent objects. Nor does the Act require the Respondent to issue a written notice of the objection; it seems any contact from the Respondent advising the Adjudicator of the Respondent’s objection is sufficient.

The Adjudicator is not being called upon by s. 17A to make a determination, but to give an opinion on a single issue that falls outside the parties’ dispute. The Act does not explicitly define the term ‘opinion’. Consequently, its interpretation is likely to be guided by the ordinary meaning of the words in the light of their context and the object of the Act. In ordinary language, an ‘opinion’ generally denotes a view or belief formed about something, not necessarily based on fact or knowledge.

There is no provision in the Act giving the Adjudicator the power to call for further submissions, to set deadlines or to call a conference of the parties for the purpose of giving an opinion. Nevertheless, the Adjudicator might come to the view that the rules of natural justice apply, so the Claimant must be given a chance to respond to any reasons given for the objection.

The statutory language suggests that it is not the intention of the Act that the Adjudicator labour excessively in arriving at an opinion. It seems adjudicators are given sufficient latitude to promptly arrive at a genuine opinion on the question of justice in any given situation, not necessarily based on the views advocated by either party.

Interestingly, the withdrawal process under the Act follows a similar path as the discontinuance process in NSW courts. It is common practice in NSW courts to allow a plaintiff to choose to end the case against a defendant at any time before judgment. This is called ‘discontinuing a case’. The plaintiff can do this by filing a form called a ‘notice of discontinuance’ with the court. No reasons are required to be given in a notice of discontinuance. In a similar vein, s. 17A of the Act allows the Claimant to withdraw an adjudication application at any time before the application is determined, by serving written notice of the withdrawal on the Adjudicator (and the Respondent). Again, the Act does not require the Claimant to give any reasons in the notice of withdrawal.

In the case of a Court, if the defendant has not filed a defence after being served with a statement of claim, the plaintiff is permitted to discontinue the case without the consent of the defendant. However, if the plaintiff wants to discontinue the case after the defendant has filed a defence, the plaintiff must obtain the defendant’s consent, or the Court’s consent, to have the case discontinued.

Similarly, if the Respondent has not lodged an adjudication response (where the Act allows the Respondent to lodge a response), after being served with an adjudication application, and the Respondent objects to the withdrawal, then the Adjudicator could hold the opinion that, in the circumstance, it is not in the interests of justice to uphold the objection.

However, if the Claimant wants to withdraw the application where the Respondent duly lodges an adjudication response, then the Adjudicator may hold the opinion that it is in the interests of justice to uphold the objection. In that case, the Adjudicator might form the opinion that it would be wrong in the circumstances to allow the Claimant to take advantage of the Respondent, or be seen to be taking advantage of the Respondent, by withdrawing the application only after the Claimant had received the benefit of reading the adjudication response, particularly where the Respondent has incurred significant costs composing the response.

In practice, adjudicators are likely to experience many more withdrawals than objections, with a high proportion of the objections likely to be concentrated around the heavily defended ‘big-value’ claims. In any case, this could make for an interesting topic of study of the 2018 amendments in the future.

3. Payment period for progress payments

Section 4 of the Act defines the terms ‘Head Contractor’, ‘Principal’ and ‘Subcontractor’. These terms were introduced by the 2013 amendments. In so doing, it created three distinct categories of claimant, namely:

1. A Head Contractor; and
2. Two types of Subcontractor:
1. the first being where the construction contract is not an exempt residential construction contract and not connected with an exempt residential construction contract; and
2. the second being where the construction contract is connected with an exempt residential construction contract.

The 2018 Amendment Act changed s. 11 of the Act by reducing the maximum period for making progress payments from 30 to 20 business days for the first type of Subcontractor. All other payment periods are unchanged. The maximum period for making progress payments under the Act are:

1. by the Principal to the Head Contractor – 15 business days {s. 11(1A)};
2. by the Principal or Head Contractor to the first type of Subcontractor – 20 business days {s. 11(1B)}; and
3. by the Head Contractor to the second type of Subcontractor – 10 business days or such longer period as is provided in the contract {(s. 11(1C)}.

The Act does not prescribe a maximum period for making progress payments in respect of the second type of Subcontractor.

With the removal of s. 7(2)(b) from the Act, the meaning of an ‘exempt residential construction contract’ has been redefined by the 2018 amendments to mean a construction contract that is connected with an owner occupier construction contract.⁴ The term ‘owner occupier construction contract’, is a new term introduced by the 2018 amendments, which means:

…a construction contract for the carrying out of residential building work within the meaning of the Home Building Act 1989 on such part of any premises as the party for whom the work is carried out resides or proposes to reside in” {see s. 4(1)}.

For the purposes of s. 7(5) of the Act, owner occupier construction contracts are prescribed as a class of construction contracts to which the Act does not apply.⁵

4. Time to make a determination

Following other jurisdictions, the 2018 amendments modify the period within which the Adjudicator is required to determine an adjudication application where the Respondent is entitled to lodge an adjudication response.

Prior to the 2018 amendments, the Adjudicator was required to determine the application within 10 business days after the date on which the Adjudicator notified the Claimant and the Respondent of the Adjudicator’s acceptance of the application.

Commencing the period for making a determination from the time both parties are notified of the Adjudicator’s acceptance of the application was an uncomplicated matter where no adjudication response was due. However, it could be problematic where a response was due. This is due, in part, to s. 20(1) the Act, which gives the Respondent 5 business days after receiving a copy of the application, or 2 business days after receiving notice of the Adjudicator’s acceptance of the application (whichever time expires later), to lodge the response with the Adjudicator. Consequently, the Adjudicator never got the full 10 business days to determine the application with all the documents (i.e., the application and the response). At best, the Adjudicator got 8 business days.

Worse still, if the Claimant served the application on the Respondent such that the time for lodging a response went beyond the 2 business-day period after the Respondent received notice of the Adjudicator’s acceptance, then this further reduced the time the Adjudicator had to determine the application with all the documents.⁶ In such circumstances, the Adjudicator could request additional time to make the determination, but there was always a risk that one party would not consent to the Adjudicator’s request.

To remedy the situation, the Act now requires the Adjudicator to determine the application within 10 business days after the adjudication response is lodged,⁷ rather than within 10 business days after the Adjudicator notifies the parties of the Adjudicator’s acceptance of the application {s. 21(3)(a)}. Consequently, the Adjudicator gets the full 10 business days to determine the application with all the documents.

While this change may not necessarily be appreciated by the parties, it is an important enhancement to the adjudication procedure where adjudicators already operate within a strict timeframe.

5. Jurisdictional error in determinations

The 2018 amendments provide that the Supreme Court may identify the part of the Adjudicator's determination affected by jurisdictional error and set aside that part only, while confirming the part of the determination that is not affected by jurisdictional error {s. 32A}.

This amendment seeks to counter the Court’s prevailing view that jurisdictional error invalidates the whole of an adjudicator's determination.⁸

The Court sometimes finds that the Adjudicator is in jurisdictional error by, for example, failing to consider a document or submission when arriving at the adjudicated amount. Prior to the 2018 amendments, the Adjudicator’s jurisdictional error needed only to affect a trivial portion of the determination for the Court to invalidate the whole determination. This approach is inefficient. The 2018 amendments give the Court power to invalidate only that part of the Adjudicator’s determination tainted by jurisdictional error while preserving the remainder of the determination.

6. Corporations in liquidation

Section 32B of the Act now explicitly prohibits a corporation in liquidation from serving a payment claim or taking action to enforce a payment claim (including by making an application for adjudication of the claim) or an adjudication determination. The Act also provides that if a corporation in liquidation has made an adjudication application that is not finally determined immediately before the day on which it commenced to be in liquidation, the application is taken to have been withdrawn on that day.

This amendment seeks to counter the Court’s prevailing view that the Act does, in fact, apply to companies in liquidation.⁹

This amendment creates a new source of potential challenge to an adjudicator’s jurisdiction to determine an application. While the Act explicitly prohibits a corporation in liquidation from advancing progress claims under the Act, it does not seem to preclude companies in voluntary administration from doing so.

7. Endorsement of payment claims

Before the commencement of the 2013 Amendment Act (i.e., 21 April 2014) a payment claim was required to stated that it was being made under the Act for it to be validly made under the Act.

Under the 2013 amendments, a Claimant was only required to endorse a payment claim as being made under the Act if the construction contract was connected with an exempt residential construction contract. Unsurprisingly, this blurred the line between claims being made under the contract and claims being made under the Act.

So, once again, in all cases, a payment claim must state that it is made under the Act to be validity made under the Act {s. 13(2)(c)}.

¹ Limited by the of 12-month period for service of progress claims stated in s. 13(4)(b).
² See Primelime (NSW) Pty Ltd v B.A.E.C. Contracting Pty Ltd [2018] NSWSC 372.
³ On accepting an adjudication application, the Adjudicator is taken to have been appointed to determine the application {see s. 19(2)}.
⁴ Or any other type of construction contract for the carrying out of residential building work that is prescribed by the regulations.
⁵ See Reg 3A Building and Construction Industry Security of Payment Regulation 2008 NSW.
⁶ The Adjudicator cannot rely on both parties agreeing to give the Adjudicator more time to determine the application.
⁷ Or, if a response is not lodged, the end of the period within which the Respondent is entitled to lodge a response.
⁸ See Multiplex Constructions Pty Ltd v Luikens & Anor [2003] NSWSC 1140.
⁹ See Seymour Whyte Constructions Pty Ltd v Ostwald Bros Pty Ltd (In liquidation) [2019] NSWCA 11; cf. Facade Treatment Engineering Pty Ltd (in liq) v Brookfield Multiplex Constructions Pty Ltd [2016] VSCA 247.