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In a range of building and construction transactions, there is substantial bargaining disparity between the parties transacting. This is, of course, fairly self-evident. The disparities arise due to the respective positions of the parties transacting, along with the respective commercial sophistication of the respective parties.

In the residential sphere, bargaining disparities are addressed by certain consumer protections. For many years, and still to this day, commercial building and construction transactions remained comparatively unregulated, at least in respect of addressing what have become very clear repeated trends of bargaining disparity.

One of the key regulatory interventions in respect of commercial building and construction transactions across Australia has been the introduction of the varying Security of Payment laws. In Victoria, there is the Building and Construction Industry Security of Payment Act 2002 (Vic); in NSW there is the Building and Construction Industry Security of Payment Act 1999 (NSW); in South Australia, there is the Building and Construction Industry Security of Payment Act 2009 (SA); and in Western Australia, there is now the Building and Construction Industry (Security of Payment) Act 2021 (WA). The ACT, Tasmania, Queensland and NT each have coordinate equivalents. Irritatingly, these various renditions of Security of Payment laws are by no means uniform, and one needs to be very careful when contracting across jurisdictions.

Fundamentally, the purpose of these pieces of legislation is to address the bargaining disparity between the “paymaster” and contractors further down the contractual and payment “chain”. In essence, the legislation protects payees from payors, by flipping the onus of payment by almost giving rise to a prima facie entitlement to payment in the event the processes of the respective Security of Payment laws are followed. These schemes do not derogate from the right of the payor to sue the payee for contractual damages or such other remedy in a court of law, despite payment under the relevant Security of Payment legislation. Security of Payment legislation therefore does not give rise to a final right of payment, but rather an interim right. The amounts can be thought of being “on account”.

This article discusses two key benefits for claimants that claimants and respondents under the SoP schemes across Australia should be mindful of when transacting under contracts affected by a State or Territory’s SoP regime. Each are general benefits consistent across the various SoP schemes.

Inconsistent Contract Terms Void & Unenforceable

One key protection conferred by the respective Security of Payment schemes (hereafter referred to as “SoP”) is that they each contain provisions preventing “contracting out”. These are: section 34 of the NSW SoP; section 48 of the Victorian SoP; section 33 of the SA SoP; section 200 of the QLD SoP; section 11 of the TAS SoP; section 10 of the NT SoP; section 111 of the WA SoP; and section 42 of the ACT SoP.

These provisions can have very substantial ramifications for contracts for the provision of construction work (as defined) and/or the supply of related goods or services (as defined). Each of the above-referred provisions renders clauses of such contracts that purport to [to use the Vic language] “exclude, modify or restrict, or that has the effect of excluding, modifying or restricting the operation” of the SoP to be “void” or “of no effect” (precise language depending on the respective jurisdiction).

Notwithstanding this, time and time again, it is observed that construction contracts purport to do exactly that. This is very dangerous for the party attempting to rely on such clauses, as they are void and of no effect. They are effectively read-out of the contract.

The breadth of the above-mentioned SoP provisions has been read broadly by Courts. One clear example of where a clause in a contract will contravene the no-contracting out sections of the SoP Acts is where the contract imposes some contrary time-bar or notice requirement, above those required under the relevant SoP Act, that restricts entitlement to a progress payment or final payment.[1]

There are more interesting examples as well: such as a choice of jurisdiction clause in a contract, which purported to shut out the operation of the NSW SoP Act, notwithstanding work being carried out in that Australian state (giving the NSW SoP jurisdiction over the matter per Section 7 of that Act). Clause 27.2 of the contract in question read as follows:

This contract is governed by and is to be determined in accordance with the law of England. The courts of England shall have the exclusive jurisdiction to determine any disputes between the parties, enforcement of which determination may be through the courts of any appropriate jurisdiction.

The clause therefore limited the operation of the SoP Act and was considered void by the NSW Supreme Court.[2] Specifically, to the extent it was relied on to expunge the SoP Act, this was inconsistent with Section 7(1) of the NSW scheme.

The breadth of the “No Contracting Out” clauses were noted by McDougall J in Proactive v MacKenzie Keck wherein at [23] his Honour stated:

“Although that section is headed “No contracting out” it seems to me to go somewhat further than traditional “no contracting out” provisions in legislation.”

Repeatedly, I have had “home-grown” contracts come to me where rights to progress payments are fettered in a manner inconsistent with SoP schemes. This can have a deleterious effect on a party relying on the clause, given they transacted on the basis of a presumed allocation of risk under the contract which has now proven to be an incorrect presumption. It’s usually a great thing for the other party, however.

A Right to Payment (on account) and Expedited Adjudication of Disputes

The SoP schemes in Australia give rise to a statutory right to payment, an interim entitlement to payment of a statutory debt, which, if there is a claim against the contractor by the paymaster, may be claimed back in full or part in subsequent court proceedings under the relevant contract.

The key benefit in this regard, is that the SoP schemes expunge certain considerations or claims that may be considered in broader contractual disputes in a Court of competent jurisdiction. A process available for the determination of SoP disputes under the relevant schemes is “adjudication”, a far more efficient and quick process than the torturously long and expensive process of conventional building litigation.

In an adjudication under Security of Payment legislation, the adjudicator will only consider key matters. In Victoria these matters are confined by Section 23(2); in NSW, Section 22(2); in South Australia, Section 22(2); in Queensland, Section 88(2); in Tasmania, Section 25(2); in the NT, Section 34(1)(a); in WA, Section 38(2); and in the ACT, Section 24(2).

A common feature of all of the above-mentioned provisions, bar the NT regime (which one imagines is implied), is that the adjudicator must consider the provisions of the SoPA Act when making their determination. Under SoP schemes, when it comes to the valuation of construction work and/or related goods and services, this is to occur by reference to the contract, any variations and any defects.[3]

Accordingly, when respondents start to get creative and throw in large extraneous “deductions” for set-off amounts other than for defects or contractual entitlements creating a contractual set-off, adjudicators in the past have been reluctant to allow such counter claims. Save for a claim that there are defects or a claim pursuant to an express contractual provision conferring set-off against payment, it will be quite hard to mount a response to an adjudication claim and “whittle down” the claimed amount on the basis of, say, common law damages for delay, or consequential losses (i.e. for lost rent, loss to the respondent due to liquidated damages under other contracts etc).

Even then, by operation of the “no contracting out” clauses, any contractual set-off claimed in an adjudication response is fettered by the requirement that it be reasonable and rational.

There is no “carte blanche” for a respondent to evade payment to a claimant by conjuring up gigantic cross or counter claims in an adjudication proceeding, therefore.

The same cannot really be said about a court action, where there is a broader range of contractual damages claims and set offs that can be assessed and determined.

Conclusion

It follows that the SoP schemes in Australia set up a very beneficial “pay now and argue later” regime for claimants. Claimants should not be afraid to contact their construction lawyers to ensure they are making the best of whichever SoP scheme is relevant to their construction contract. On the other hand, respondents need to be more than aware of the onerous requirements of the SoP schemes, and need to ensure their contracts remain consistent with the schemes.

Disclaimer

This article is not legal advice and discusses it’s topic in only general terms. Should you be in need of legal advice, please contact construction law firm. Lovegrove & Cotton Lawyers and our experienced lawyers will assist you based on the facts and circumstances of your case.

Lovegrove & Cotton Lawyers to the building industry

For thirty years, Lovegrove & Cotton have represented property owners, builders, building surveyors, and building practitioners in Melbourne, Canberra, Sydney and Queensland. Lovegrove & Cotton can help property owners and building practitioners resolve any type of building dispute. If you wish to engage the firm, feel free to contact us via our website, by emailing enquiries@lclawyers.com.au, or via phone at (03) 9600 4077.

References:

[1] See eg. J Hutchinson v Glavcom [2016] NSWSC 126, where a clause required a payment claim to be accompanied by a statutory declaration.

[2] See Proactive v MacKenzie Keck [2013] NSWSC 1500.

[3] See eg. s 11 in Victoria; s 10 in NSW; s 10 in SA; and s 72 in QLD.

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^{By Jordan Davies, Former Lawyer at Lovegrove & Cotton – Construction and Planning Lawyers}