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22 Dec 2017

Basic principle: the right to be paid what your work is worth and lump sum contract

A contractor is entitled to be paid for their work:

  1. where the principal agrees to pay a certain sum of money to the contractor for a specified scope of work; or
  2. where a contractor does work on behalf of a principal and the principal freely accepts that work (in the sense that they have an opportunity to reject it but do not reject it).

Some of the most common payment regimes for civil works or construction projects include lump sum contracts, schedules of rates, cost-plus or a combination of these.

In this guide we will focus on lump sum contracts. You should seek advice on the best payment regime for your business.

Implications of basic principles

Progress payments under lump sum contracts are interim payments on account only. They are not payments that the contractor earns where only part of the works under the contract is complete. Progress payments are only payable to the contractor at certain intervals while the work is still being done, to ensure that the contractor has enough money to continue doing its job.

However, if something goes wrong, the contractor is not guaranteed the right to keep those payments because they are not parts of the lump sum contract price but payments payable only under the contract. The only payment that the contractor actually earns for carrying out its works under the contract is the final payment, due upon practical or substantial completion of the whole of the scope of works (and which takes into account progress payments made “on account” to that point).

Sometimes, before practical completion, payment is no longer available under the contract. There are several reasons why this can happen.

When this happens, the contractor may be entitled to the fair value of the work that it has done rather than the amount that the contract said would be payable upon practical completion (which was never achieved). This fair value amount may be more or less than the agreed lump sum contract price. Usually, expert evidence is required to help the court or arbitrator work out this amount.

Under the law as it is right now, a contractor can only recover the fair value of the work that they have done up to the point where the construction contract has failed, if that failure was not the contractor’s fault. Daniel Morris, Special Counsel and Construction Law Expert at HHG Legal Group, has published an authoritative paper that argues that even where the contractor is at fault, they may still be entitled to be paid the fair value of the work that they have done. Until the High Court definitively determines this issue in a specific case, the law in this area will remain uncertain.

Why contactors are vulnerable under lump sum contacts

There is an important implication to the fact that ordinarily only one lump sum contract price is payable when one contractual scope of works is practically complete. That is, contractors often rely on the goodwill of their principals to make sure that they are paid adequately along the way, so that they have enough money to finish their work. This makes contractors vulnerable, particularly where:

  1. strict time bars apply to progress payment claims; and
  2. a contractor’s entitlement to a progress payment depends on certification of a payment claim by a superintendent which is employed also as the agent for the principal.

Changes to the Australian Consumer Law which took effect on 12 November 2016 may be used to overcome time bars and notice and certification processes that are unnecessarily complicated, strict, or onerous in a way that is not necessary to protect the principal’s commercial interests.

Protecting contractors’ payment rights: security of payment legislation

To try and prevent principals from exploiting contractors’ vulnerability, security of payment legislation was enacted around the country.

In WA, that legislation appears in the Construction Contracts Act 2004 (“the Act”).

The Act empowers decision-makers called adjudicators to review decisions made by principals and their superintendents, in relation to contractors’ payment claims, during the course of, and after completion of, construction works. If the adjudicator thinks the payment claim was not dealt with as the contract requires, they can determine that a different amount is payable.

In WA, the adjudicator cannot look outside the contract for a basis to award a payment to a contractor. Their only role is to enforce what the contract says about payment.

Adjudication can mean the difference between a contractor becoming insolvent and having enough money to complete the works under their contract. It is therefore very important for contractors to be aware of their right to apply for adjudication.

Adjudicators’ determinations are not final but they are binding

If the adjudicator makes a payment award that is not paid, the award can be enforced in the same ways as a judgment of a court.

If there are other issues to be decided between the contractor and the principal those issues can still be raised in an arbitration or court case, as if there had been no adjudication. Neither party is allowed to rely on the result of adjudication, or even the fact that there has been adjudication, in any court or arbitration. All the issues are determined afresh.

Recent amendments to the Construction Contracts Act 2004 that improve contractors’ rights in adjudications

Key changes to the Construction Contracts Act 2004 (“CCA”) took effect on 15 December 2016.  They include:

  1. extending the time limit to apply for adjudication from 28 calendar days to 90 business days;
  2. allowing contractors to reissue payment claims that have been rejected by the principal, or that were issued incorrectly, as long as they have not been adjudicated or ruled upon by a court or arbitrator; and
  3. doing away with the need for the Supreme Court to give permission to enforce adjudication awards, and instead, making them immediately enforceable once certified by the Building Commission.

Possible future improvement of contractors’ rights in adjudications

At the moment, even if an adjudicator’s decision is incorrect, it cannot be challenged in a court or the State Administrative Tribunal unless:

  1. the adjudicator wrongly refused to treat an application as an application for adjudication of a payment dispute under the CCA; or
  2. the adjudicator made a decision that he or she had no power to make under the CCA.

Other kinds of error by adjudicators may include misunderstandings of the law that applies to adjudications, incorrectly applying the law to the facts found by the adjudicator, or making findings of fact based on a misunderstanding of the evidence.

For now, adjudications cannot be challenged based on these kinds of error. This may change, however, as a result of an appeal that is due to be heard in the High Court of Australia on 8 November 2017. The appeal case is Probuild Constructions (Aust) Pty Ltd v. Shade Systems Pty Ltd & Anor.  In that case, the contractor’s lawyers will argue that these limitations on the right to challenge adjudications are based on a misunderstanding of the law and should be abolished.  If this argument succeeds, it may allow the courts to overturn an adjudicator’s decision based on any error of law.

We will advise members of the outcome of this appeal as soon as the High Court hands down its decision.

Other legal grounds to get paid for the work you do under a construction contract

If for some reason, you lose all your rights to payment under the contract, the law recognises other grounds for payment, which include:

  1. restitution;
  2. implied promise; and
  3. estoppel.

These legal doctrines are beyond the scope of this guide.

The important thing to remember is that, however well you know your own contract, there may still be other payment rights that you have, but do not know about. Whatever the circumstances, if you have not been paid what your work is worth, you should take our advice about your payment rights.

Use the Personal Property Securities Act to protect yourself against your principal’s insolvency

Of course, all the payment rights in the world will mean nothing to you if the principal or head contractor that owes you the money is insolvent and unable to pay you. Beyond conducting some basic checks into your principal’s credit-worthiness before accepting a contract from it or having a good working relationship with your principal, there is nothing you can do to ensure the future financial viability of your principal.  Fortunately, though, there is a way that you can protect your rights to payment, in the event of your principal’s insolvency, to some extent.

You can do this by setting up a system for the proper and timely registration of Personal Property Security Interests on the Personal Property Securities Register. These security interests basically give you a right to take back your own property from an insolvent head contractor’s or principal’s site and to take back material which you have delivered to site but have not been paid for at the time of the insolvency. If the material can no longer be taken back because it has been incorporated into the construction works, a properly registered security interest may allow you to recover, in money, all or some of its value.

If you do not register security interests properly and early, and your principal becomes insolvent, the liquidator of that principal may be entitled to seize your property and sell it and pay the proceeds to other creditors of the insolvent principal.

Please note that the liquidator can seize and sell your property and pay the proceeds to other creditors of the insolvent principal, even though you own those assets.

This is because ownership no longer matters, as a result of the Personal Property Securities Act 2009. As long as your assets are in the insolvent principal’s possession, if another creditor has registered their Personal Property Security Interests properly and on time and you have not done so, that other creditor may take the proceeds of the sale of your property.

It is therefore very important that you take advice about the proper use of Personal Property Security registrations to protect your assets in the event of your principal’s insolvency.

Further protection against principals’ insolvency for government contractors

When a head contractor becomes insolvent on a WA Government project worth between $1.5m and $100m, Project Bank Accounts (“PBAs”) further protect the payment rights of subcontractors. This applies to all subcontractors with contracts over $20,000. It also applies to any subcontractors with contracts worth under $20,000 and suppliers, that decide to opt in. PBAs protect the rights of these subcontractors and suppliers in three ways:

  1. Throughout the project, progress payments (including retentions) are paid into PBAs, which are trust accounts that are kept separate from the assets of the head contractor. That way, if the head contractor becomes insolvent, the money stays out of the liquidators’ reach;
  2. The head contractor, subcontractors and all participating suppliers (“Beneficiaries”) are given a security interest under the Personal Property Securities Act 2009 (“PPSA”) over all funds held in the PBAs;
  3. If anyone other than the Beneficiaries has a security interest in the money held in the PBA, they cannot enforce that security interest ahead of any Beneficiary.

Given the close interaction between PBAs and the PPSA, it is very important for contractors wishing to have the benefit of PBAs to take legal advice about the proper registration of security interests under the PPSA.

Government contractors’ rights (including payment rights) also receive protections in WA under the Building and Construction Industry Code of Conduct. (“Code”).

To win and retain government work in WA, the Code requires civil and construction contractors to comply, and make sure that their subcontractors comply, with all state and federal industrial relations laws and work health and safety laws that apply in WA. The Code also requires contractors to ensure that they and their subcontractors:

  1. do not enter into subcontracts or labour hire contracts that are harsh or would be considered unfair, either under the Independent Contractors Act 2006 (Commonwealth) or the Australian Consumer Law 2010 (Commonwealth);
  2. do not try to evade their legal obligations as employers (in relation to paid leave, minimum wage, superannuation contributions and payroll tax, for example) by disguising employment contracts as independent subcontractor engagements (known as sham contracting); 
  3. do not allow any contractor or employee on their worksite to be coerced into joining an industrial association (trade union);
  4. include a procedure for resolving workplace disputes in their employment contracts;
  5. pay their subcontractors on time and give timely responses to subcontractors’ notices of dispute and adjudication applications;
  6. advise subcontractors that are small businesses (basically, that are not public listed companies and that are personally run by their owners or directors rather than by employed managers or a parent company) that they have a right:
  1. to seek adjudication of pay disputes under the Construction Contracts Act 2004; and
  2. to ask the Small Business Commissioner to help them resolve their disputes;
  3. do not collude with other contractors when tendering for government work; and
  4. do not engage foreign contractors or employees that are not permitted to work in Australia.

There are further requirements where the contract value exceeds $10m.

Actual and suspected breaches are investigated by the Building and Construction Code Monitoring Unit (“BCCMU”). The BCCMU must report a breach to the breaching contractor and invite that contractor to rectify the breach.

If the contractor fails to rectify the breach, the BCCMU must invite the contractor to make submissions (that is, written arguments) in response to the breach report, make any changes to that report having regard to the contractor’s submissions, and then give the report and the submissions to the Minister for Building and Works.

If the Minister approves the report (with or without amendment), the Minister may blacklist the defaulting contractor from tendering for future government work.

Government contractors and subcontractors may also be bound by the Government Building Training Policy which sets minimum levels of apprentice/trainee engagement on government projects.

HHG serving the construction industry through law reform

HHG Legal Group is investigating and assisting the WA Building Commissioner to inquire into and implement law reforms which will further protect contractors’ rights to payment for the work that they do.

HHG Legal Group will keep the construction industry informed of developments in relation to these initiatives, designed to make sure that construction contractors get paid what their work is worth.