East Coast Model vs West Coast Model

The Building and Construction Industry Security of Payment Act 2009 commenced operation in South Australia on 10 December 2011 (the Act). The Act establishes a default based scheme intended to provide contractors and subcontractors with a quick and inexpensive way to get paid.

The onerous nature of the scheme has created reputational and relationship issues for all participants; and has resulted in many court challenges of adjudication outcomes, mostly in the jurisdictions which have adopted the more adversarial and contentious model, known as the East Coast Model.

A good analysis of the different models is set out in a report by the Society of Construction Lawyers1. The key differences between the East Coast Model and the West Coast Model followed in Western Australia and the Northern Territory are:

  • the East Coast Model allows only contractors and subcontractors to apply for adjudication of progress claims whereas under the West Coast Model, any party to a construction contract can seek adjudication of any payment dispute;
  • the West Coast Model sets out a strict time limit of 28 days for referral to adjudication after a payment dispute arises;
  • the East Coast Model uses Authorised Nominating Authorities to refer disputes to a nominated adjudicator selected by the authority whereas the West Coast Model allows the parties to agree an adjudicator;
  • the West Coast Model provides a remedy for reviewing an adjudicator’s decision whereas decisions are binding under the East Coast Model unless overturned by a court.

The South Australian security of payment legislation closely follows the East Coast Model and there has been no shortage of cases regarding contentious adjudication determinations. The SoCLA report found that across all jurisdictions nearly 4 out of 5 challenges overturn the adjudicator’s determination.

There is no uniformity in security of payment legislation throughout the different Australian jurisdictions, which itself creates complexity and administrative burdens and therefore inefficiency and unnecessary extra costs for organisations operating in more than one jurisdiction.

Significant changes to the legislation in Victoria, Queensland and New South Wales means the East Coast Model in South Australia is no longer consistent with the East Coast Model operating in those jurisdictions.

Issues Paper Review

The SA Government in conjunction with the Small Business Commissioner has commenced a review mandated by the Act to determine whether the policy objectives of the Act remain valid and whether the terms of the Act remain appropriate for securing the Act’s objectives.

The Small Business Commissioner has reported that a total of $35,098,872.61 was claimed through adjudication mechanisms under the Act in the 2013-2014 financial years. Of this amount, the total amount awarded to claimants in the same period is $9,912,126.08. The difference of $25,186,746.53 is reported as reflecting factors such as variation of costs sought versus actual costs incurred in estimation, withdrawal of applications, full payment by respondents before adjudication and settlement. To what extent these statistics are relevant to the effectiveness of the Act in achieving its objectives is not explained.

Some of the issues noted in the Issues Paper are:

  • whether the definitions of ‘construction work’ and ‘related goods and services’ are current;
  • whether the Act is sufficiently clear regarding rights to progress payments, calculations of amounts owing and valuation of ‘construction work’ and ‘related goods and services’;
  • whether it is appropriate for the Small Business Commissioner to have investigative powers in relation to unfair tactics by unscrupulous contractors not paying subcontractors on multiple occasions;
  • what changes could be made to timelines to ease the burden on claimants and respect the rights of respondents.

Commentary

A commercially balanced legislative approach addressing some of the technical complexities that have encouraged challenges to adjudicator’s decisions and flexible timelines will make the Act less adversarial, less onerous and more conducive to maintaining good relations.

Concerns abound across all jurisdictions regarding the independence of Authorised Nominating Authorities and lack of transparency regarding their arrangements with adjudicators whom they nominate. In South Australia, two Supreme Court decisions regarding the validity of adjudicator determinations concerned, in part, weaknesses on the part of Authorised Nominating Authorities.2

The most pressing issues are:

  • achieving uniformity of legislation across Australia; as this is unlikely to occur, there is merit in considering a significant change in approach to adjudication under the Act in line with the more balanced approach taken by the West Coast Model;
  • clarifying processes around recovery of progress payments, in particular with regard to calculation of the value of construction work and the interaction between the Act and relevant contractual provisions;
  • abolishing Authorised Nominating Authorities in line with recent changes to the Queensland Building and Construction Industry Payments Act 2004 following recommendations in the Wallace report3; a panel of adjudicators governed and administered by the Commissioner for Small Business may be a better approach.

It will be interesting to see whether the South Australian government is prepared to be bold and overhaul the Act to bring it in line with the West Coast Model so that adjudication is a fair alternative to resolving payment disputes; a process which can be effectively managed without the need for costly intervention of lawyers and courts.