Chapter 15 Security of Payment Legislation Western Australia
The security of payment legislation in WA is:
- Building and Construction Industry (Security of Payment) Act 2021 (SOP Act)
- Construction Contracts Act 2004 (WA) (CCA)
The SOP Act commences in three stages:
- 1 August 2022
New security of payment laws commenced (the majority of the Act, including payment terms, payment schedules and the new adjudication process).
- 1 February 2023
Retention trust scheme (phase 1) for contracts over $1 million; and matters relating to security (including a requirement to give 5 business days written notice to call on security).
- 1 February 2024
Retention trust scheme (phase 2) and fairer contracting practices provisions for contracts over $20,000.
The SOP Act applies to construction contracts entered into after 1 August 2022 and the CCA will continue to apply to all construction contracts entered into before 1 August 2022.
Contracts entered into on or after 1 August 2022
When does the SOP Act apply?
The SOP Act will apply to construction contracts where one party agrees to carry out construction work, or to supply related goods and services, for another party. The definition of what constitutes ‘construction work’ is broad and includes:
- construction of buildings, structures or civil works;
- installation of any fittings in or on those buildings, structures or civil works; and
- repair, maintenance or demolition of those buildings, structures or civil works.
Broadly, ‘related goods’ are materials, plant or components used in construction work, and ‘related services’ refers to the provision of labour and professional services, including surveying, testing, architectural, design, engineering, quantity surveying and project management.
When does the SOP Act not apply?
Similar to the CCA, the SOP Act contains a ‘mining exclusion’, however, this has been narrowed to the following activities:
- drilling for the purposes of discovering or extracting oil or natural gas, whether on land or not; or
- constructing a shaft, pit or quarry, or drilling, for the purposes of discovering or extracting any mineral or other substance.
The SOP Act also does not apply to certain home building work, constructing or fitting out the whole or any part of a watercraft and to construction work carried out outside of Western Australia.
How to make a payment claim under the SOP Act
When can a contractor make a payment claim?
The SOP Act creates a separate statutory right to a monthly progress payment, aligning Western Australia with the East Coast model. This right is separate to any rights in the construction contract.
A claimant can make a payment claim under the SOP Act each month by serving the payment claim on the person who is liable to make the payment under the construction contract.
The SOP Act distinguishes between when payment claims for progress payments and final payments may be made:
- Progress payment claims may be made monthly, and up to 6 months after the construction work to which the claim relates was last carried out (or related goods and services were last supplied).
- Final payment claims can be made up to 6 months after completion of all construction work (or supply of all related goods and services) or 28 days after the end of the last defects liability period (whichever is the later).
Recycling of unpaid payment claims is still allowed under the SOP Act.
Content of payment claims
A payment claim under the SOP Act must:
- be in writing and in the approved form (if any);
- state the amount being claimed;
- describe the items and quantities of construction work or related goods and services to which the payment claim relates; and
- state that it is made under the SOP Act.
A payment claim can include amounts claimable under the SOP Act (eg. for release of performance security under section 58 or for suspension under section 63) or for amounts claimable under the contract (eg variations and delay costs). However, it cannot include common law claims for things like damages.
What must a principal do when faced with a claim?
Respondent to serve payment schedule
If a respondent is served with a payment claim, it must respond by serving the claimant with a payment schedule setting out the amount that the respondent proposes to pay.
When to serve a payment schedule
Payment schedules need to be issued before the earlier of:
- the time required by the construction contract; or
- 15 Business Days after the payment claim is made.
If a payment schedule is not issued on time, the respondent is deemed liable to pay the full amount of the payment claim, on the due date for the payment claim. If the respondent does not pay, the claimant may recover that amount as a debt due and payable through court proceedings or adjudication.
What must be included in the payment schedule?
To comply with the SOP Act, the payment schedule must:
- be in writing and in the approved form (if any);
- identify the payment claim to which it relates;
- indicate the amount (if any) the respondent proposes to pay (scheduled amount); and
- if the scheduled amount is less than the claimed amount, explain the reasons for the difference. If the reason is that the respondent is withholding payment, explain the reason why the respondent is withholding payment.
It is important to clearly include all reasons for withholding any payment, as a respondent will be limited to the reasons in the payment schedule for withholding any payment when responding to any adjudication application.
When is payment due?
The SOP Act requires that amounts certified in a payment schedule must be paid:
- in the case of payments from a principal to a head contractor, 20 Business Days after the payment claim is made; and
- in the case of payments to a subcontractor, 25 Business Days after the payment claim is made.
It is important to check if the definition of ‘Business Days’ in the SOP Act may be different to that in your contract.
Both the CCA and the SOP Act prohibit ‘pay-when-paid’ provisions, which is where a first party (contractor) makes its liability to pay a second party (subcontractor) dependent on payment to the first party by a third party (principal).
However, the SOP Act goes further than the CCA by prohibiting provisions which make:
- the due date for payment of an amount owing by the first party to the second party dependent on the date on which payment of that amount is made to the first party by the third party; or
- any of the following contingent or dependent on the operation of another contract:
- the liability to pay an amount owing;
- the due date for payment of an amount owing;
- the making of a claim for an amount owing; or
- the release of retention money or of a performance bond.
Unfair time bars
A ‘notice-based time bar’ is a provision in a construction contract that makes payment or additional time that affects payment contingent on the provision of a notice.
For example, a construction contract may provide that a contractor is only entitled to payment in respect of a variation, latent condition or extension of time if it provides notice within a specified timeframe.
The SOP Act provides that ‘notice-based time bars’ may be declared unfair, meaning a party (eg a principal) cannot rely upon a failure to comply with a time bar to dismiss a claim from the other party (eg a contractor).
The party who alleges that a notice-based time bar provision is unfair bears the onus of establishing that it is unfair.
An adjudicator (or other person determining the issue) may declare that a time bar is unfair if the affected party can establish that compliance with the provision it is not reasonably possible or would be unreasonably onerous. Section 16.6 of the SOP Act sets out a list of factors to be considered when determining whether a notice-based time bar provision is unfair. However, there is no guidance or direction in the SOP Act as to whether one factor is more important than the other.
If declared unfair, the time bar will be ineffective only in relation to the particular entitlement and circumstances in question, but will continue to have effect in relation to other circumstances.
Recourse to security
The SOP Act provides that a party to a construction contract is not entitled to have recourse to performance security unless it has given at least 5 Business Days’ written notice of its intention to have recourse. The SOP Act also overrides any contrary term in a construction contract regarding notice to call on security.
A notice of intention must identify the construction contract and the provisions of that contract entitling the party to have recourse, and describe the circumstances that entitle the party to have recourse.
When can the contractor suspend performance?
A contractor can, upon giving 2 Business Days’ written notice, suspend carrying out construction work (or supplying related goods and services) if the principal fails to pay a claimed or scheduled amount, an adjudicated amount, or return security or retention monies. If the principal descopes the contractor’s work as a result of the suspension, the contractor is entitled to be paid for its loss.
Making an adjudication application
An adjudication application must be made within 20 Business Days of the claimant first becoming entitled to make the application. It should be noted that adjudication is only permitted up the contracting chain by the contractor against the principal.
A claimant becomes entitled to apply to adjudicate a payment claim:
- if a payment schedule has been issued, when:
- the other party has not paid the claimed or scheduled amount owed in full on or before the due date for the progress payment; or
- the scheduled amount is less than the claimed amount (or the scheduled amount is nil).
- if a payment schedule has not been issued, when
- the claimant has, within 20 Business Days after the due date for the progress payment, given the respondent written notice of its intention to apply for adjudication; and
- the respondent has failed to provide a payment schedule within 5 business days of receiving the notice.
The application may contain submissions relevant to the application and must:
- be in writing and in the approved form (if any);
- identify the payment claim and the payment schedule (if any) to which it relates;
- be accompanied by a copy of the construction contract (or the relevant provisions); and
- be accompanied by the application fee (if any).
Responding to an adjudication application
If the respondent has given the claimant a payment schedule within the time allowed under the SOP Act, then the respondent may submit an adjudication response within 10 Business Days after receiving a copy of the adjudication application.
The response may contain submissions relevant to the response and must:
- be in writing and in the approved form (if any); and
- identify the adjudication application to which it relates.
If no payment schedule is given within the time allowed, the respondent cannot make an adjudication response to an adjudication application. If a payment schedule is given, the respondent cannot include in an adjudication response reasons for withholding payment that were not identified in the payment schedule.
Adjudication and the adjudicator
The adjudicator is required to issue a determination within 10 Business Days, unless an extension of time is granted by the parties.
Under the SOP Act, the adjudicator has the power to call an informal conference of the parties, carry out an inspection, or arrange for a test, or any matter or thing to which the payment claim relates, and engage an expert to investigate and report on any matter.
The adjudicator must determine:
- the amount of the claim payable by the respondent to the claimant or if no amount is required to be paid, that no amount is payable;
- the due date for the payment; and
- the rate of interest payable on that amount.
Review of adjudication
As in Victoria, a party is entitled to apply for a review of an adjudication determination by a senior adjudicator.
A claimant can apply if either:
- the adjudicated amount is less than the claimed amount and the difference exceeds $200,000; or
- the adjudicator decided that the adjudicator did not have jurisdiction to determine the application and the claimed amount exceeds $50,000.
A respondent apply for review if:
- the respondent gave the claimant a payment schedule and the adjudicator an adjudication response on time; and
- the adjudicated amount is more than the scheduled amount and the difference exceeds $200,000.
An adjudication review application must be made within 5 Business Days after the party making the application is given the adjudicator’s determination.
The review adjudicator is required to determine an adjudication review application within 10 Business Days, unless an extension of time is granted by the parties.
Contracts entered into before 1 August 2022
The CCA applies to contracts entered into before 1 August 2022.
The CCA is different to the security of payment legislation in other states, including:
- the CCA provides for adjudication of payment disputes, not adjudication of payment claims;
- either party to the construction contract can apply for adjudication;
- any payment dispute can be adjudicated – there are no requirements to identify progress claims as claims being made under the CCA;
- an adjudication application may only be made within 90 business days after a payment dispute arises;
- there is no right to a default debt under the CCA if the respondent does not respond to the payment claim;
- a respondent is not limited to the issues raised in its response to the payment claim in any adjudication;
- a payment dispute can also arise in relation to payment of retention or the return of security; and
- the parties can agree for applications to be made to a particular prescribed appointing authority and are bound to apply to that authority only.
The parties to a construction contract are free to agree their own mechanism for payment and are not bound by a statutory process of payment claims and schedules, subject to the prohibited provisions under the CCA.
The terms set out in the CCA providing reasonable terms for payment will only be implied into the construction contract if the contract does not contain payment provisions. To the extent a construction contract contains provisions which are prohibited under the CCA, these will be of no effect.
This contrasts with security of payment Acts in other jurisdictions which will override the requirements of the contract to the extent that they contradict the payment provisions in those Acts.
When does the CCA apply?
The CCA applies to a contract to perform construction work or provide related goods and services on a site in WA. The definition of construction work is similar to that in the NSW Act, as are the exemptions.
However, the CCA also excludes:
- drilling for the purposes of discovering or extracting oil or natural gas;
- constructing a shaft, pit or quarry, or drilling, for the purposes of discovering or extracting any mineral bearing or other substance;
- fabricating or assembling items of plant used for extracting or processing oil, natural gas or minerals; or
- construction related to any watercraft.
The construction contract can be written or oral or a combination of both. Even if a construction contract states that it is governed by the law of another state, the CCA will still apply if it is for construction work on a site in WA.
Construction contracts cannot include:
- ‘pay when paid‘ provisions, for example, where a contractor makes its liability to pay a subcontractor or supplier dependent on payment to the contractor by a principal;
- any provision requiring payments later than 42 days after being claimed, otherwise the provision will be deemed amended so that payment is required within 42 days of being claimed; and
- any provision allowing the parties to contract out of the CCA or waive any rights under the CCA.
How to make a claim under the CCA
If a construction contract does not contain written provisions about the contractor’s right to claim progress payments for obligations performed under the contract, then that right will be implied into the contract.
A progress payment claim:
- is a claim made under a construction contract by either a contractor or a principal for payment of an amount in relation to the performance or non-performance by the contractor of its obligations under the construction contract; and
- does not prevent the contractor from making any other claim for moneys payable under the contract.
If there is nothing written in the contract, the content of a payment claim is implied into the contract.
Specifically, a payment claim made under the CCA, in the absence of payment provisions in the contract, must:
- be in writing;
- be addressed to the party to which the claim is made;
- state the name of the claimant;
- state the date of the claim;
- state the amount claimed;
- if the claim is made by the contractor, itemise and describe the obligations that the contractor has performed and to which the claim relates in sufficient detail for the principal to assess the claim;
- if the claim is made by the principal, describe the basis for the claim in sufficient detail for the contractor to assess the claim;
- be signed by the claimant; and
- be given to the party to which the claim is made.
A contractor can also claim for payment of retention or return of security if the payment or return has not occurred by the due date under the contract. These circumstances constitute a ‘payment dispute’.
What must a principal do when faced with a claim?
To avoid the terms implied by the CCA from operating, owners or principals should ensure that their contracts are in writing and have provisions as to payment, variations and progress payment claims.
If a construction contract does not set out how a party must respond to a payment claim, the CCA provides that when the party receiving the payment claim either:
- believes it has not been made in accordance with the contract; or
- disputes part or the whole of a claim,
that party must, within 14 days of receiving the payment claim, issue a notice of dispute to the claiming party.
A notice of dispute must:
- be in writing;
- be addressed to the claimant;
- state the name of the party giving the notice;
- state the date of the notice;
- identify the claim to which the notice relates;
- if the claim is being rejected because it is not made in accordance with the contract, then it must give reasons why;
- if the claim is being disputed, the notice must identify each item of the claim that is disputed and give reasons why it is disputed; and
- be signed by the party giving the notice.
In the case of a claim that has not been disputed, the party receiving the payment claim must, within 28 days, either pay the part of the claim that is not disputed, or pay the whole of the claim.
Adjudication of disputes
Where a payment dispute arises under a construction contract (for example, when a principal issues a notice of dispute, or when a principal simply does not make a payment due), a contractor (or a principal) can apply for adjudication under the CCA.
A ‘payment dispute’ arises if:
- by the time the amount under a payment claim is due, the claim has not been paid in full;
- the claim has been rejected or been wholly or partly disputed; or
- by the time any retention money or security is due to be paid or returned, the money or security has not been paid or returned.
When to apply for adjudication?
Within 90 business days of a payment dispute arising, the contractor may make a written application for adjudication, and serve it on the principal and the adjudicator. The parties may nominate an adjudicator in the contract or a prescribed appointor who is required to nominate the adjudicator. The adjudicator or prescribed appointor may require the contractor to lodge a deposit or security for the costs of the adjudication.
If an application for an adjudication is taken to be dismissed on the basis that no decision has been made and the time for making a decision has elapsed, any further application for adjudication must be made within 20 business days after the previous application is taken to be dismissed.
The prescribed appointor must, within 5 days of being served with the application, appoint an adjudicator for the dispute and notify all parties.
An adjudication application must:
- set out the details of the construction contract involved (or relevant extracts);
- set out the payment claim that has given rise to the dispute; and
- attach the information, documentation and submissions on which the contractor will be relying in the adjudication.
A contractor may recycle payment claims if it does not proceed to adjudication within 90 business days of making a payment claim, although each claim can only be adjudicated once.
How to respond to an adjudication application
When a principal has been served with an application for adjudication it must prepare and serve within 10 business days a written response to the application on the contractor and the adjudicator.
The response must set out or attach details of the rejection or dispute in relation to the payment claim and attach all the information related to the dispute.
The adjudication procedure
The adjudicator is required to determine the payment dispute within 10 business days of the date of the service of the response, or if there was no response, 10 business days after the last date on which the response was required to be served.
The adjudicator may dismiss the application without considering the merits of the application if:
- the contract is not a construction contract;
- the applicant gives written notice that it wishes to withdraw the application;
- the application has not been prepared and served as required, unless the adjudicator is satisfied that the application complies with the formal requirements for an application sufficiently for the adjudicator to commence adjudicating the dispute;
- a finding has already been made in respect of the particular payment dispute; or
- the matter is too complex and there is not enough time to make the determination.
The determination made by the adjudicator must be in writing, comply with the CCA Regulations and give the reasons for the decision in the adjudication. It must set out the amount to paid and the date by which it must be paid, including interest, or in the case of security to be returned, the date by which it must be returned and any interest.
The determination will be binding on the parties, even if there are other proceedings relating to the dispute and payment (if any) must be made by the date specified in the adjudicator’s determination.
Right to suspend work
If a determination is made in favour of a contractor and the principal is required to make payment by the specified date and does not, the contractor may, upon 3 business days’ notice, suspend the works under the contract until payment is made.
Effect of adjudication determinations
Payments made under adjudication determinations are made on account.
This means an adjudication determination remains binding on the parties even if arbitration or other legal proceedings have been commenced but only until such other proceedings are concluded and finally determine the matter.
In the meantime, an adjudication determination may be enforced by filing a copy of the determination that the Building Commissioner has certified and an affidavit as to the amount not paid under the determination in a court of competent jurisdiction.
The CCA states that, except for a SAT review, there is no right of appeal or review from an adjudicator’s determination. The SAT may review an adjudication determination on the basis of procedural or other nominated grounds.