A guide to responding to Payment Claims under WA’s new Security of Payment Legislation

The Building and Construction Industry (Security of Payment) Act 2021 (WA) (Act) signifies the harmonising of security of payment legislation in Western Australia with the “East Coast” model, and implements a shift of power to those lower down the contracting chain.

Gone is the ability for a principal to bring an adjudication claim against a head contractor, or a head contractor to make an adjudication claim against a subcontractor.

This shift is also evident in some of the procedural changes introduced by the Act around payment claims and responses. Payment claim responses will now define what a party can raise later in an adjudication response. This means that the respondent will have to articulate its defence/s at a much earlier stage of the adjudication process, and is a constraint that parties in Western Australia are not used to.

A new Act

The Act passed through WA Parliament on 22 June 2021 and received Royal Assent on 25 June 2021. The majority of the operative provisions of the Act commence on proclamation, which may yet take several months.

The Act introduces sweeping changes to WA’s security of payment regime, which closely reflect the legislative model used in other Australian jurisdictions, and are designed to enhance the payment protections available to contractors and subcontractors.

The Act replaces the Construction Contracts Act 2004 (WA) (CCA), but will only apply to construction contracts entered into after its assent and proclamation.

Payment claims under the new Act

A key feature of the Act is the inclusion of a statutory right for parties that carry out construction work, or supply related goods or services, to receive progress payments.[1]

To be entitled to a progress payment, a claimant must submit a payment claim. Under the Act, unless the contract requires payment within a shorter time, progress payments are deemed to be payable[2]:

• for a payment claim issued by a principal to head contractor – 20 business days after the payment claim is made;
• for a payment claim issued by a principal to a non-head contractor (where there is no head contractor) – 25 business days after the payment claim is made; and
• for a payment claim issued by a contractor to a sub-contractor - 25 business days after the payment claim is made.

Payment schedules

The Act introduces the concept of a payment schedule for responding to a payment claim. When a claimant makes a payment claim, the respondent has the option to either:

• pay the claim in full within the specified time under the Act (or contract); or
• issue the claimant a payment schedule within 15 business days of receiving the payment claim (unless a shorter time is specified by the contract).[3]

Although issuing a payment schedule is optional, there are significant consequences for a respondent failing, or choosing not, to do so.

The most immediate consequence is that, if the respondent has not issued a payment schedule by the date the payment claim is deemed to be payable, the respondent is liable to pay the full amount of payment claim (regardless of the merits of the claim).[4]

More critical is the fact that, under the Act, issuing a payment schedule in response to a payment claim is a precondition to a respondent’s entitlement to respond to an adjudication application.[5] This means a respondent will be precluded from putting submissions to an adjudicator if it has previously failed to issue a payment schedule in response to the payment claim the subject of the adjudication.

Additionally, the scope of the information included in the payment schedule determines what can be included in any adjudication response.[6] A respondent is not permitted to include any reasons for withholding payment of a payment claim, in whole or in part, unless those reasons were articulated in a payment schedule issued to the claimant.

This is a significant change. Previously, under the CCA, the respondent had a significant advantage.  An applicant had to include everything that it intended to rely on in an adjudication application and the respondent could consider this before responding. Under the new Act, the respondent’s defence is defined by the reasons articulated in the payment schedule.  This puts the party higher up the contracting chain at a disadvantage, as it is forced to show its hand much earlier in the payment and dispute process. This will also make the payment claim process more adversarial from the outset, as respondents are required to clearly state the legal and factual bases for withholding the payment of each rejected claim item.

This raises questions about what should be included in a payment schedule to ensure that respondents are adequately protecting their right to defend an adjudication application. Just how much of the respondent’s hand does it need to show?

What to include in a payment schedule?

The Act prescribes what must be included in a valid payment schedule. A payment schedule must[7]:

• be in writing and be in the approved form (if any);
• state that it is a payment schedule under the Act;
• identify the payment claim to which it relates;
• if the amount to be paid is less than the amount of the payment claim, clearly indicate the amount that the respondent proposes to pay (Scheduled Amount) and the reason/s for that amount being paid; and
• if the respondent does not propose to make any payment, clearly state that and the reason/s why no payment is being made.

Lessons from the East Coast

In addition to the requirements specified in the Act, cases in other jurisdictions where the security of payment legislation aligns with the Act provide guidance on responding to payment claims. 

An examination of cases in New South Wales, Queensland and South Australia shows that the Courts consider two main factors when assessing the adequacy of a response to a payment claim.

(a)     Clear identification of the issues

Respondents must define (clearly, expressly and as early as possible) the issues in dispute to explain the reduced or non-payment of the payment claim.[8]

Accordingly, respondents should clearly identify the payment claim to which the payment schedule relates, the relevant dates and indicate each of the precise reasons that the Scheduled Amount differs from the claimed amount.

(b)     Detail

Under the new Act the payment schedule serves two important functions:

• to inform the claimant of the scope of the dispute with respect to its payment claim so that it can make an informed choice as to whether it wants to refer the claim to adjudication[9]; and
• to articulate the respondent’s case (which, as above, will become critical if the matter is ultimately referred to adjudication).[10]

As such, the basis for refusing to pay the payment claim, in full or in part, should be comprehensively articulated.

Courts have acknowledged that payment schedules are issued and received by parties familiar with the issues at hand, and that payments schedules must be produced quickly. Therefore, a payment schedule does not have to be as precise and as particularised as a Court pleading. However, Courts have said that a respondent to a payment claim cannot always content itself with cryptic or vague statements in its payment schedule as to its reasons for withholding payment on the assumption that the claimant will know what issue is sought to be raised.

Sometimes the issue is so straightforward, or has been so expansively agitated in prior correspondence, that the briefest reference in the payment schedule will suffice to identify it clearly. However, more often than not parties to a building dispute see the issues only from their own viewpoint: they may not be equally in possession of all of the facts and they may not equally appreciate the significance of what facts are known to them.

The respondent should provide as much detail as reasonably and practically possible to justify the Scheduled Amount or non-payment.^[11] The payment schedule must contain the essence of the reason for withholding payment sufficiently to enable the claimant to make a decision whether or not to pursue the claim, and to understand the nature of the case it will have to meet in an adjudication.

How much detail is required will become apparent over time as this issue is tested in the Western Australian Courts.  For example, in response to an extension of time, is it enough to respond that there was a concurrent delay, or does the concurrent delay need to be identified with reasonable details?  For the time being, it is preferable that more detail is included until this becomes clearer.

The Courts have shown a willingness to incorporate documents by reference in a payment schedule.  However, any document or documents to be so incorporated need to be identified with sufficient particularity so that the recipient to the payment schedule knows which precise document is being incorporated.[12]

Practical tips

The requirement to use payment schedules will inevitably lead to an increased administrative burden on parties as more detail is now required to simply respond to a payment claim. 

Ideally, respondents should include the following in a payment schedule:

• written reasons as to why the respondent intends on withholding any amount, including identifying and providing an explanation of any:
  • alleged defective or incomplete work;
  • challenges to the pricing or calculation of the payment claim amount;
  • legal basis for disputing the payment claim, including rights of set off etc.; or
  • alleged non-compliance of the payment claim with the requirements of the Act; and
• workings showing how the scheduled amount has been calculated.

In practice, this will change the way in which principals, head contractors and other parties respond to payment claims. For example, payment responses on large projects often include a line by line evaluation of each payment item by the principal or certified engineer in a large spreadsheet showing the amount the respondent deems payable (if any). Under the Act, in relation to each item where the evaluation is different to the claimed amount, it will also be necessary to give reasons for the difference (not just the value of the evaluation).

These reasons could be given by reference to emails or other correspondence exchanged by the parties.  However, it would be preferable for the reasons to also be included in the payment schedule itself.

It will also be important for a payment schedule to provide all of the reasons that the evaluated amount is different to the claimed amount, not just the main reason. For example, a claim for delay costs may be rejected because the costs claimed were not incurred, there was a concurrent delay and the claims were time barred (because a required notice was late).  It will be important to list all of the reasons and not just rely on one, otherwise the alternative defences will not able to be included in a subsequent adjudication response.

It is important that the industry gets up to speed with these changes quickly to avoid losing rights and the frustration of having to make payments that the claimant would not otherwise be entitled to.

Important Disclaimer: The material contained in this article is comment of a general nature only and is not and nor is it intended to be advice on any specific professional matter. In that the effectiveness or accuracy of any professional advice depends upon the particular circumstances of each case, neither the firm nor any individual author accepts any responsibility whatsoever for any acts or omissions resulting from reliance upon the content of any articles. Before acting on the basis of any material contained in this publication, we recommend that you consult your professional adviser. Liability limited by a scheme approved under Professional Standards Legislation (Australia-wide except in Tasmania).