Security of payment: In the time of COVID-19 cashflow is king

This article was written by Louise Andrew, Rebecca Petrie, Amy Munro, Scott Budd, Scott Watson and Samantha Kinsey.

Never has it been truer in the construction industry that cash is king. 

In past weeks we have seen the rapid devaluation of the Australian dollar, bleak economic forecasts, movement of people becoming restricted and potential site shutdowns looming on the horizon.  The Financial Review today reported that planned wind and solar power projects would be delayed or cancelled[1] and a number of UK construction companies have suspended work in the past week. 

As the downturn continues, cash forecasts will slow and it is inevitable that there will be an increase in extension of time and delay cost claims with contractors looking for COVID-19 relief. This, coupled with the current economic climate and the risk of late payment, is likely to lead to an upsurge in the use of the various statutes that enable contractors to obtain quick payment and maintain cashflow. 

Legislation available to obtain payment

The key statutory avenues available to contractors and subcontractors to obtain payment, are:

1. Security of payment legislation,[2] which provides a relatively fast and low cost process for contractors (carrying out construction work or providing goods and services under a construction contract) to obtain progress payments due under a construction contract.
2. Contractors / subcontractors debts legislation,[3] applicable in Queensland and South Australia, which enables a subcontractor to seek direct payment from the principal of monies due to the head contractor with whom he has contracted.
3. Statutory Demands under the Corporations Act 2001 ("Corporations Act"), which enables a contractor or subcontractor to serve a creditor's statutory demand on the company with whom has been contracted.[4]

The Australian Parliament has recently passed a suite of temporary insolvency measures under the Corporations Act to combat the economic impacts of COVID-19.  The changes, which are highlighted in our previous KWM alert here, will provide temporary relief from statutory demands and liability for insolvent trading.  Two of the key changes are a temporary increase in the minimum debt which can form the basis of a statutory demand (from $2,000 to $20,000) and the period within which the debt must be paid (from 21 days to 6 months), which now make statutory demands unappealing from a cash recovery perspective. 

At this time, the government has not passed any measures or made any announcements which seek to curb or curtail the use of security of payment legislation.  As such, below is a timely reminder of the various obligations imposed by the security of payments legislation.

Security of payment checklist

Payment schedules

Under security of payment legislation, contractors are required to provide payment claims to an individual or a company that owes them money for the construction work or related goods and services under a construction contract.  There are strict timeframes in which companies are either required to pay the claimed amount, or dispute it by way of providing a 'payment schedule' or 'notice of dispute'.   

Under State and Territory laws, where there is a disputed payment claim, the company must issue a payment schedules or notices of dispute within the following timeframes:

In all States and Territories (not including Western Australia and the Northern Territory), where payment schedules or notices of dispute are not provided within the above timeframes, the company will be liable to pay the full amount claimed in the payment claim. Therefore, it is important that companies comply with the strict timeframes required by the relevant legislation.

The content required to be provided in a payment schedule varies from State to State. A comprehensive list of all requirements can be found here.

In all States and Territories, the payment schedule or notice of dispute must, at least:

1. identify the payment claim to which it relates;
2. state the amount of payment the respondent proposes to make (excluding Western Australia and the Northern Territory); and
3. specify the reason as to why the payment is lower and why money is being withheld.

In preparing the payment schedule or notice of dispute, it is important that all reasons as to why the payment amount is lower are listed. This is to ensure that the company is not prevented from later relying on these reasons in the event of an adjudication, which will be the case in New South Wales, ACT, Tasmania, South Australia and Queensland.

State and Territory laws provide various consequences for companies failing to make payment by the due date or in accordance with a payment schedule or notice of dispute which are set out below.

Getting yourself ready for security of payment claims

Whether you are a principal or a contractor, companies need to ensure they are equipped to deal with a rise in SOPA claims.   The retention of records will be critical to enable a proper analysis of the impact of COVID-19 (or other events giving rise to a claim) should disputes arise.  Site diaries, meeting minutes and up-to-date correspondence helps to create contemporaneous records of what was actually happening at any given time during the project.  In addition, companies should familiarise themselves with the various avenues available to contractors to enforce payment under construction contracts.

As security of payment legislation framework is an accelerated form of payment relief, the short time frames can be onerous and difficult to comply with at the best of times.  With restricted movements and people working from home, companies need to ensure that they take appropriate measures now to ensure they are well placed to either make or defend a security of payment claim.  This is particularly the case where key records are kept in hard copy at offices or onsite or where soft copies are not backed up to central servers.   Some of the more practical challenges to consider are:

1. Is someone watching out for payment claims and making sure the payment  schedules are sent on time?
2. Is there anyone present to receive an adjudication application if the office is closed, and if not, how can this be monitored?
3. How will you get documents copied, printed and delivered?
4. Are your usual consultants available to assist with preparations of responses and applications?
5. Will there be additional difficulties getting access to witnesses?
6. How will you serve adjudication responses on the various parties?

[1] https://www.afr.com/companies/energy/new-renewables-to-grind-to-halt-under-covid-19-20200325-p54drv.

[2] Building and Construction Industry Security of Payment Act 1999 (NSW); Building and Construction Industry (Security of Payment) Act 2009 (ACT); Building and Construction Industry Security of Payment Act 2002 (Vic); Building and Construction Industry Security of Payment Act 2009 (Tas); Building and Construction Industry Security of Payment Act 2009 (SA); Building Industry Fairness (Security of Payment) Act 2017 (Qld); Construction Contracts Act 2004 (WA); and Construction Contracts (Security of Payments) Act 2004 (NT).

[3]  Building Industry Fairness (Security of Payment) Act 2017 (Qld), Chapter 4; Worker's Liens Act 1893 (SA).

[4] The issuing of a statutory demand is generally limited to circumstances of insolvency and the mechanisms of the Corporations Act are not to be used purely for debt recovery.

[5] See s 19(3)(a) of the Building and Construction Industry Security of Payment Act 2009 (Tas).

[6] Each Act has specific requirements relating to such notices.