Security of Payment Act was 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 stages or payment schedule. In NSW, the scheme is governed by the Building and Construction Industry Security of Payment Act 1999 (NSW).
Adjudication using a third party is much quicker rather than litigation through 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 claims can be recovered as a debt owing in a Court.
Clearly, despite the "Security of Payment Act" lengthy litigation disputes do still persist. The scale of the problem is still huge, as witnessed by "Australia Gas Firms Locked in Legal Battles with Contractors"
In addition an adjudicator's decision may be overturned as well, the case of Probuild Constructions (Aust) Pty Ltd v Shade Systems Pty Ltd has allowed an adjudicator's determination for a non-jurisdictional error to be overturned through judicial review. In another case, it went against Brodyn Pty Ltd v Davenport which previously held judicial intervention was limited to cases of a breach of essential and basic requirements.
Commonly, businesses in the building and construction industry in Australia will include the following statement on payment claims or tax invoices:
"This is a payment claim made pursuant to the Building and Construction Industry (Security of Payment) Act 2009 (ACT)” or "This is a payment claim made under the Building and Construction Industry Security of Payment Act 1999 NSW". These Statements may vary depending in which Province the Claim is made.
There is an expectation amongst many business owners within the construction industry that, upon the insertion of this statement, the payment claim or tax invoice becomes a compliant payment claim or tax invoice under the Act.
However, in a number of judicial hearings, this was not the case. Principals, Developers, Head Contractors and Builders have taken advantage of even minor incorrectly made payment claims in order to delay or defer payments if they feel they need to build up their cash flow or their expenses have blown out. Thus preventing those further down the money chain from getting paid, despite the fact there is a Statutory Declaration regarding remuneration of workers, sub-contractors, suppliers, etc., having been paid.
In order to make progress payment claims (tax invoices) or any payment claims a much smoother process and to even head off problems that arises where a Principal, Client or Head Contractor may not initially have enough finances or runs out of finances due to cost blow outs cannot pay their Sub-Contractors and thus preventing others further down the money chain from getting paid, Security of Payments.org alleviates that problem by creating a Trust Account between the Payer (Principals, Clients, Head Contractors) and the Payee (Sub-contractors, Suppliers, etc.) to ensure that finances are available by the Principal, 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, protected from financial hardship should a Principal, Client or Head Contractors' finances run out, as there is money available via a Trust Account should it go the adjudication route.
Security of Payments.org is also used as a gauge to determine whether Principals, Clients or Head Contractors (called the Payers) have the financial capacity, cash flow, as well as goodwill, to pay their Sub-contractors or Suppliers (called the Payees). Adjudication by a third party can still be applied when using Security of Payments.org.
The benefits attributed to Principals, Clients and Head Contractors who use Security of Payments.org is that their cash flow is not affected, as only small portions are held in a Trust Account relative to the size of the Contract, and they secure a more dedicated crew of Sub-contractors and Suppliers willing to provide their services. The system provided by Security of Payments.org aids in preventing delays or interruptions in the progress of a project as Payees' know that finances are held in a Trust Account, as the work proceeds. This creates is a major advantage over the current system.
Payers also build up credits which helps their cash flow in what is termed as "SOP Credits". Which, when large enough, can eventually be used to pay for further work or materials without having to use cash to tie up their financial resources.