ARCHITECTS AND SECURITY OF PAYMENT: A NEGLECTED DEBT RECOVERY TOOL
Authored by Lovegrove & Cotton – Construction and Planning Lawyers
Many Architects practising in Australia seem to be neglecting a useful tool at their disposal to ensure timely payment for architectural services, namely, the various security of payment Acts in force in several States. This is primarily due to a misconception that the security of payment laws are there to assist subcontractors or suppliers getting prompt payment from head contractor builders, when in fact the system is more wide ranging than that.
There are other factors behind this neglect also. Architects will often foster close working relationships with clients, in the hope of winning more work over a long period, and will sometimes acquiesce to ‘drip feed’ payments or delayed payment. This is at odds with the ethos of prompt payment turnarounds under security of payment laws, or ‘pay now and argue later’. Another factor is that professional associations in the construction industry have tended not to promote or educate in regard to security of payment mechanisms.
In order to come within the purview of the legislation, one only needs to be a party to a “construction contract” whereby you are supplying either construction / building work or “related goods and services”. Because the design work of an Architect comes within the definition of “related services” to a construction project, therefore this design work is subject to the Act and an Architect’s agreement to render services or “contract of retainer” is within the definition of a construction contract to which the Act applies.
While there is a slightly different manifestation of the security of payment laws in each of the various states, the general spirit and thrust of the various Acts is the same. A range of actors within the construction industry can take advantage of these laws, be they subcontractors, suppliers, builders or designers. At the same time, a construction industry participant needs to be aware of what to do when faced with a payment claim under the Act. For example, an Architect can not only make a valid payment claim under the Security of Payment Act on a head contractor / Builder, the Architect could also be in receipt of a payment claim under the Act from one of its consultants engaged on the same project.
Architects therefore would be well advised to at least be aware of the security of payment option, even if they do not actually use it regularly. It can be a fall back option for debt recovery, running parallel to and as an alternative option to suing for debt recovery under the contract of retainer.
The laws are beneficial in that they prohibit ‘pay when paid’ defences by a client, for example where the client says they will only pay you once they receive payment from the Principal on the project. It provides a speedier conduit for extracting payment for progress payments for non controversial ‘original scope’ work under a construction contract, with set off claims to be deferred for later argument
Notably the security of payment laws will sometimes, though less frequently, be used in residential or domestic building projects, and not just commercial works. For example, in Victoria a subcontractor or Builder can make use of the laws for domestic building works where the Principal for the project is a developer, in the business of having works constructed for sale (as opposed to a “mum and dad” home owner wanting work done for their private residence).
Security of Payment has 3 main applications for Architects that you need to be aware of:
- Architects chasing payment from a Client for services provided;
- Builders chasing payment under an Architect administered building contract;
- Consultants chasing payment from an Architect (as described above).
For an Architect to put themselves in a position whereby they can potentially make use of the security of payment laws, they need to be supplying “related good and services” for building works under a construction contract. As explained above, design work clearly qualifies as it is construction related and an architectural retainer would qualify as a construction contract for this reason. Further, the work of building contract administration is also related services to a building contract that would qualify.
The Architect should also make a habit of ensuring all invoices for their architectural services are valid payment claims under the security of payment laws, by stating somewhere on the invoice (usually at the bottom) that the invoice is to be regarded as a valid payment claim under the applicable Act. In Victoria, the correct wording to use is as follows: “This is a payment claim under the Building and Construction Industry Security of Payment Act 2002”
In addition, the invoice needs to state the construction contract concerned, describe the actual works or services carried out for the period that the payment claim is concerned with, and state clearly the price of the works that is payable and how it has been calculated.
The payment claim under the Act should relate to a particular “reference date” by which the payment claim can be made under the contract. For example, the reference date might be the 25th day of each month, if payments are to be invoiced on a monthly basis. Under the Victorian Act, a claimant can only lodge 1 payment claim under the Act in respect of each reference date, however if any part of earlier payment claims has not been paid, then these unpaid amounts can be included in a later payment claim.
In addition, payment claims cannot include “excluded amounts”, which are defined in the Security of Payment Act, and these include such things as delay cost claims, damages claims under the contract, claims for latent conditions, and disputed variations if they exceed a certain proportion of the overall contract sum. This is because, while some variations (even if disputed) can be claimed as part of a progress or final payment claim, generally speaking the intent of the Act is that there is protection for payment for works / services that are relatively uncontroversial and part of the original contract scope.
Care should be taken to ensure that the payment claim is served correctly in accordance with the terms of the contract. For example, if the contract does not refer to service of payment claims by email, you should ensure that the claim is also sent by fax (and a transmission report kept) or is sent by registered post.
The beauty of a payment claim under the Act is that there is then a finite time under the Act for the respondent to the claim to put in a “payment schedule” to either agree to the claim, or certify some lower amount or even “nil” in response. In Victoria the time frame is 10 business days for the payment schedule and it is a similar period of time in New South Wales (14 days).
If the respondent does not serve any payment schedule on the claimant within the deadline period, section 15 of the Victorian Act specifies that there is a presumption that the full amount of the payment claim is due and payable within the time for payment under the contract. The claimant has the option of then proceeding to Court and seeking a summary judgment for the full amount of the payment claim, on the grounds that there is no arguable defence, and the Victorian courts have ruled previously in favour of the presumption that the full amount of the payment claim is due and owing if no payment schedule was served to refute it.
If on the other hand a payment schedule is received and, as is often the case, the claimant disputes the amount certified in the payment schedule, then the claimant can opt to go to Adjudication if an application is filed for this within the requisite period (10 working days in Victoria). This is a relatively speedy and cost effective process whereby the claimant lodges an Adjudication application and submissions to support its claim, and the respondent has about 1 week to file an Adjudication response with submissions once an Adjudicator has accepted the appointment.
A timeline is then set for submissions and delivery of the Adjudicator’s decision which is usually on a constricted schedule, though the parties and the Adjudicator can agree to extend the schedule and date for a decision, the Adjudicator can request further information be supplied, and so on.
If either side disputes the Adjudicator’s decision it can be reviewed but only in narrow circumstances, for example if the amount of the decision exceeds $100,000 and on narrow grounds, such as where it is alleged that the Adjudicator wrongfully took into account excluded amounts in his/her decision.
There are other worthwhile protections or benefits for claimants who use the Act. For instance, if a respondent fails to make payment in accordance with a payment schedule previously served, the claimant is at liberty to suspend the works / services under the construction contract until payment is in fact made, and without incurring any time penalty as a result.
While Architects like to have a close and long lasting relationship with clients, it is not uncommon for relationships to turn sour over time, and if services have been rendered a long time before payment is to be received, then an Architect runs the risk of “getting burnt”. At the very least it is recommended that Architects familiarise themselves with the Security of Payment laws in their own State and consider this as an option for debt recovery, perhaps by changing their office templates for invoices to make all payment claims valid under the relevant Act.
If in any doubt about your rights in this area, you should take legal advice from experienced construction law practitioners with expertise in security of payment claims and responses.
By Justin Cotton, Lovegrove & Cotton, Construction and Planning Lawyers