Adjudication Research + Reporting Unit

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Adjudication

Statutory Adjudication in the NSW Building and Construction Industry

Statutory adjudication in the building and construction industry has its roots in the United Kingdom under the Housing Grants, Construction and Regeneration Act 1996 (UK).  New South Wales was the first Australian jurisdiction to introduce industry-specific security of payment legislation for the building and construction industry. The Building and Construction Industry Security of Payment Act 1999 (NSW) ('the NSW Act') was assented to on 5 October 1999 and commenced on 26 March 2000. The NSW Act has undergone two amendments since its introduction – the first in 2002, the second in 2010 and the third in 2013.  

In August 2001, the Honourable Terence Cole was appointed a Federal Royal Commissioner to inquire into a range of matters relating to the Australian building and construction industry. This Royal Commission was the first national review of the conduct and practices in the Australian construction industry (Cole, 2003). One of the issues before the Commissioner was security of payment in the building and construction industry.  In February 2003, the Commissioner presented his Final Report (comprising 23 volumes) to the Australian Governor-General. The Commissioner gave his recommendations in respect of the security of payment issue in Vol. 8 of the final report. In summary, the Commissioner considered the security of payment issue to be one of national relevance.

The term 'security of payment' refers to the 'entitlement of contractors, subcontractors, consultants or suppliers in the contractual chain to receive payment due under the terms of their contract from the party higher in the chain' (NSW Government, 1996).  The security of payment problem refers to 'the consistent failure in the building and construction industry to ensure that participants are paid in full and on time for the work they have done, even though they have a contractual right to be paid' (Commonwealth of Australia, 2002).  The NSW Act was introduced to counter the security of payment problem in the building and construction industry.

The tactic of unduly devaluing or delaying payment due under a construction contract is aimed at enhancing the cash flow of one contracting party at the expense of the other. According to the NSW Government (1999), '[it] is all too frequently the case that small subcontractors, such as bricklayers, carpenters, electricians and plumbers, do not get paid for their work. Many of them cannot survive financially when that occurs, with severe consequences to themselves and their families'.

To recover payments due under a construction contract, the claiming party (called the 'claimant') has generally relied on one or more traditional dispute resolution processes, such as arbitration or litigation.  However, the prohibitive costs and time delays involved in recovering payment under these processes has led many in the industry to abandon their right to payment and move onto other projects in order to maintain cash flow (Commonwealth of Australia, 2002) – cash flow is the lifeblood of the construction industry.

The NSW Act introduced new statutory rights for claiming parties, such as: a right to progress payments; a right to interest on late payments; a right to suspend work; and a right of lien.  The NSW Act renders void 'pay-when-paid' clauses in construction contracts, and the parties cannot contract out of the Act. The NSW Act also introduced a unique form of 'rapid adjudication', which is a speedy and relatively inexpensive interim mechanism for resolving payment disputes in the building and construction industry. Adjudication is a process that involves an independent third-party (called an 'adjudicator') making an interim determination as to the amount of progress payment to be paid for work done, or related goods or services supplied, under a construction contract.  

The adjudication procedures and timeframes are strict and governed solely by the NSW Act.  An adjudicator’s determination, whilst not final, is binding on the parties until the dispute is finally resolved, perhaps by private agreement or by a court.  In NSW, if the paying party (called the 'respondent') does not pay the adjudicated amount by the relevant date, the adjudicator’s determination is capable of being registered as a judgement in a court of competent jurisdiction via a relatively straightforward administrative process prescribed under the NSW Act. Once registered, the adjudicator’s determination is enforceable in the same way as a judgement of a court.  If at a later stage the respondent applies to the court to have the judgment set aside, the respondent will not be entitled to bring a cross-claim against the claiming party, or raise any defence in relation to matters arising under the construction contract, or challenge the determination by the adjudicator.  In addition, the respondent must pay into court as security the unpaid portion of the adjudicated amount pending the outcome of the court proceeding.  

As a result of the 2010 amendments to the NSW Act, if a claiming party elects to go to adjudication, they may elect to serve a 'payment withholding request' on the respondent’s client so as to 'freeze' sufficient moneys up the contractual chain  pending the outcome of adjudication. The effect of this procedure is similar to that under the Contractors Debts Act 1997 (NSW).

As at 10 December 2011, all Australian States and Territories had commenced comparable legislation for the building and construction industry.  In addition to the United Kingdom, comparable legislation exists in New Zealand, Singapore and the Isle of Man.  After originally being promoted as a Private Members Bill by Senator Feargal Quinn in 2010, the Construction Contracts Bill 2012 of Ireland has completed its second stage in the Dail.  In June 2012, the Irish Bill was referred to the Select Committee on Public Expenditure. Finally, the Construction Industry Payment and Adjudication Act 2012 (Malaysia) came into operation effective 15 April 2014.

Page Last Updated: 26 Sep 2014