Does Security of Payment apply to universities? Yes! Universities who engage contractors, consultants, manufacturers, suppliers and other parties to perform construction work or supply construction-related goods and services in Australia will be subject to Security of Payment legislation.
Among other things, this legislation imposes statutory requirements for responding to payment claims, which means that in most circumstances universities must meet strict timeframes if they wish to avoid being at risk for paying groundless claims.
This is the first in a series of three articles to be published in the Higher Education Focus relating to security of payment. This article is introductory, the following editions will provide a more in-depth consideration of the topic, including:
- a 'ready reckoner' showing differences between the States and Territories in relation to key features of Security of Payment legislation;
- a summary consideration of some of the leading case law concerning disputes in this space; and
- a practical guide for responding to inflated payment claims.
Security of Payment (SOP) legislation has been enacted in each state and territory of Australia for the purpose of ensuring that contractors and subcontractors in the construction industry are paid for the work that they perform on an interim basis, in a timely manner and without the need for litigation. Payments under SOP legislation are "on account" and therefore subject to being recovered by a principal bringing a restitutionary claim in court proceedings. However, it can take years to recover any overpayments in such court proceedings.
SOP legislation was introduced primarily for the benefit of subcontractors, including to ensure that "mum-and-dad" businesses did not fail due to being improperly held out from payment while disputes about payment claims played out. That is achieved by the SOP legislation providing for a "quick and dirty" adjudication process which results in an interim determination of the dispute pending final determination in a court proceeding or settlement of claims.
However, SOP legislation applies equally to other industry participants including contractors, consultants, manufacturers and suppliers. Accordingly, it is possible for very large claims to be adjudicated under SOP legislation, including in the hundreds of millions of dollars.
Universities must comply with the relevant SOP legislation in their state or territory. It is not possible to contract out of the legislation.
There are two prevailing models for SOP legislation in Australia, generally referred to as the 'West Coast' (Western Australia and Northern Territory) and 'East Coast' (New South Wales, Queensland, Victoria, South Australia, Tasmania, and Australian Capital Territory) models. The East Coast model offers a more detailed statutory payment scheme where, for example in NSW, head contractors are guaranteed to be paid within 15 business days of issuing a payment claim. The payment scheme under the West Coast model is only implied in contracts where no express provision is made for a payment scheme. The comments below are mainly applicable to the East Coast model.
Why is this important for universities?
Universities regularly engage contractors to construct buildings and infrastructure for very large sums of money, to be used in the performance of their functions.
In our experience, it is not uncommon for universities to have strong and ongoing relationships with their construction contractors. While those construction contractors may be participants in adjudication processes under SOP legislation, some universities have little (or no) experience in this area. One reason for that may be that construction contractors are reluctant to damage their relationship with their university clients by triggering an adjudication process, for fear it will impact them winning new work. Indeed, some large contractors pride themselves on not using the adjudication processes under the SOP legislation, a matter they raise in responses to invitations to tender for new work.
However, some universities have been the recipient of very large claims under the SOP legislation, including claims in the hundreds of millions of dollars. Given the tight timeframes, it is appropriate for universities to be familiar with the processes that apply under SOP legislation so they can respond appropriately to claims which they consider to be improperly inflated in the required time, without need to get up to speed when inflated claims are served.
Payment claims and payment schedules
Where a university has engaged a contractor, SOP legislation grants the contractor a statutory entitlement to 'serve' a payment claim on the University, and 'receive' progress payments from the university.
Payment claims must be served on a reference date, which is usually defined in the contract and if not, is the last day of the month. After receiving a payment claim, the university must produce a response called a 'payment schedule', and make payments on time or refer the matter to an adjudicator for determination.
If a university fails to provide its payment schedule within a stipulated time (usually 10 business days), then the university can be liable to pay the whole amount claimed, even if the claim is baseless.
Payment schedules must meet certain minimum requirements to be valid, and so care is required in producing the payment schedule.
If the university is disputing the amount claimed, the payment schedule must include all reasons for withholding payment. These reasons must be as detailed as possible as the university will generally not be able to raise new arguments later (ie. during an adjudication).
A failure to include all information stipulated (including reasons) may expose the university to an obligation to pay the entire amount claimed, even if the payment claim is inflated. Accordingly, care needs to be taken in the preparation of the payment schedule and there can be difficult and complex strategic decisions to be made by the university to best position itself for any subsequent dispute between the parties, particularly in relation to high-value construction contracts.
Figure 1: Example - The SOP process in New South Wales
Click here to view image.
Adjudication application and response
If the university disputes the amount being claimed, the contractor may submit an adjudication application.
If you are faced with an adjudication application, an urgent response is required. In NSW for example, the time for lodging an adjudication response is five business days after receiving the application. Such responses are often required to be very detailed and contain numerous submissions. In Queensland, a longer period of time to respond is provided for complex payment claims and, for such claims, the adjudicator can order an extension of time upon application of the respondent (but still within mandated and tight time limits).
If you are engaging contractors, consultants, manufacturers, suppliers or other providers to perform construction work or supply construction-related goods and services in Australia you must:
- have in place a system for identifying when payment claims and adjudication applications have been made – the timeframes for response are very tight;
- always respond to a payment claim with a carefully composed payment schedule, within the time stipulated in the legislation (usually 10 business days);
- always respond to an adjudication application with a detailed adjudication response, within the time stipulated in the legislation (can be five business days); and
- where you receive significant claims that you consider are improperly inflated, take particular care with preparation of the payment schedule and any adjudication response, to ensure that you do not inadvertently prejudice the university's position, resulting in very significant "on account" payments becoming due to the contractor with no quick and easy mechanism for recovering overpayments.