Security of payment

Security of payment is a relatively new initiative introduced in the Australian provinces to allow for the rapid determination of progress claims under building contracts or sub-contracts and contracts for the supply of goods or services in the building industry. This process, which establishes adjudication of disputes, was designed to ensure cash flow to businesses in the construction industry, without the parties getting tied up in lengthy and expensive litigation or arbitration. In addition to quick payment, the scheme also allows for security of payment to be provided in lieu of payment. In NSW, the scheme is governed by the Building and Construction Industry Security of Payment Act 1999 (NSW).

Adjudication is much quicker than litigation in a court. An adjudicator’s determination must be made within 10 days of receipt of application. It is also less expensive. An adjudicator’s determination is binding on the parties and can be recovered as a debt owing in a Court. The recent case of Probuild Constructions (Aust) Pty Ltd v Shade Systems Pty Ltd^[1] has allowed an adjudicator's determination for a non-jurisdictional error to be overturned through judicial review.^[2] The case went against Brodyn Pty Ltd v Davenport^[3] which previously held judicial intervention was limited to cases of a breach of essential and basic requirements.

Security of Payments.org

To head off problems that arise where a Client or Head Contractor may not have enough finance initially or runs out of finances to pay their Sub-Contractors and thus preventing others further down the money chain from getting paid, Security of Payments.org^[4] alleviates that problem by creating a Trust Account between the Payer (Clients, Head Contractors) and the Payee (Sub-contractors, Suppliers) to ensure that finances are available by the Client or Head Contractor for the Sub-contractor or Supplier. Those further down the money chain who perform the work or supply the goods are, to a degree, also protected from financial hardship should a Client or Head Contractors' finances run out.

Security of Payments.org is also used as a gauge to determine whether Clients or Head Contractors have the financial capacity, cash flow, as well as goodwill, to pay their Sub-contractors or Suppliers.

The benefits attributed to the Client or Head Contractor using Security of Payments.org is that their cash flow is not affected, as only small portions are held in Trust relative to the size of the Contract, and that they secure dedicated Sub-contractors and Suppliers willing to provide their services.

References