Bowen Buchbinder Vilensky

DISPUTE RESOLUTION UNDER CONSTRUCTION LAW IN WA

by
Builders Choice Magazine

As construction activity in Perth continues to grow, it’s an unfortunate reality that so too will disputes between contractors and principals.  Changes in legislation, as well as the legal decisions handed down by the Courts, means that the legal landscape for handling disputes is constantly, subtly shifting.  Where does this leave parties in dispute as of June 2014?

DISPUTE RESOLUTION UNDER CONSTRUCTION LAW IN WESTERN AUSTRALIA :WHAT ARE THE QUICKEST WAYS TO GET PAID?

 By Craig Hollett and Darryl Koh, Bowen BuchbinderVilensky (BBV)

 As construction activity in Perth continues to grow, it’s an unfortunate reality that so too will disputes between contractors and principals.  Changes in legislation, as well as the legal decisions handed down by the Courts, means that the legal landscape for handling disputes is constantly, subtly shifting.  Where does this leave parties in dispute as of June 2014?

 Legal Options Available to Parties in a Construction Contract

 Right now we would see four broad means of dispute resolution by which parties to a construction contract may pursue in the event of a payment dispute. They are:

 Adjudication under the Construction Contracts Act 2005 (WA);

  1. Arbitration;

  2. Commencing legal proceedings in a court,  also known as litigation;

  3. Issuing of a Creditors Statutory Demand.

 Of these four, litigation is often the slowest, most cumbersome and most expensive process. Arbitration is only available if the contract in question provides for such an option.  In any event, arbitration may sometimes be a long drawn-out affair and prove equally costly, if not more costly than, litigation. For these reasons alone, most contractors choose to pursue adjudication as a means of dispute resolution. However, adjudication is not the only quick way to get paid – another option available to a party wanting to get paid is by issuing a Creditors Statutory Demand.

 Adjudication Under the Construction Contracts Act (CCA)

 In the last edition of Builders’ Choice magazine, our colleague, Les Buchbinder, outlined the adjudication process in some detail.  But at what point can the adjudication process be triggered?

 Before an aggrieved party can lodge an application for adjudication, several requirements must first be satisfied, the most important one being the arising of a “payment dispute”.Under section 6(1) of the CCA, a payment dispute arises if, by the time the amount claimed in a payment claim is due to paid under the contract:

  1. The amount has not been paid in full; or

  2. The claim has been rejected, either wholly or partially.

 The payment dispute in question arises upon the earlier of the two events above.Under section 26(1) of the CCA, the aggrieved party must lodge the adjudication application within 28 days after the payment dispute arises. This is a very strict timeframe and there is no room for extension. In fact there have been several cases where a party lodged an adjudication application only to have it dismissed because it was outside the 28-day limit, albeit by one or two days.

This confusion arises predominantly because most construction contracts fail to specify one or more of the following:

  • How to respond to a payment claim;

  • When to respond to a payment claim;

  • The time for payment pursuant to a payment claim

If a construction contract fails to specify these matters, then the implied provisions of the CCA are activated and the aggrieved party must act swiftly to work within the timetable to file the adjudication application.

 However, it is not uncommon for parties to a construction contract to think that the payment dispute arises only when one party files a Notice of Dispute to the other party, disputing a payment claim, whether in part or in whole. To be precise, the payment dispute arises at the earlier of either, the time due for payment of the amount specified in the payment claim, or, the time when a Notice of Dispute is issued. In other words, it is imperative that a party, who wishes to bring a matter to adjudication, be aware of the time limitations to do so. If the adjudication application is not filed within 28 days after the payment dispute arises, then the adjudicator can dismiss the application without a consideration of its merits. In such a scenario, the parties will have to re-start the process again, albeit after incurring significant legal costs for no benefit..

 Creditors Statutory Demand

An alternative, relatively quick way of getting paid, if the debtor party is an incorporated company, is for the creditor party to issue a Creditors Statutory Demand under Section 459E (1) of the Corporations Act to the debtor party seeking payment as a debt. This requires payment of the debt to be made within 21 days, failing which the debtor party commits an act of insolvency.  The creditor party is then entitled to apply to wind up the debtor party relying upon the non-compliance with the Creditors Statutory Demand to satisfy the insolvency requirements.

Note that the debtor party may apply to set the Creditors Statutory Demand aside on the basis that a “genuine dispute” exists about the existence or amount of the debt.  In such an application, the debtor party must establish there is a bona fide dispute which is not spurious, hypothetical, illusory or misconceived. Other grounds to apply to set it aside are a defect in the Creditors Statutory Demand and for “some other reason”.

The Western Australian Court of Appeal recently considered a situation where a Creditors Statutory Demand had been issued based upon a judgment that had been registered in the District Court following two separate determinations by an Adjudicator under the Construction Contracts Act 2004 (WA).[1]

The Court of Appeal drew an analogy to the way in which tax debts are treated – i.e., you may dispute the amount you owe the Australian Taxation Office, but you must pay first then argue later.  The Court of Appeal said that even though the debtor party had commenced District Court proceedings disputing the liability to pay the debts which were the subject of the adjudication, this could not give rise to a genuine dispute which would be capable of setting aside the Creditors Statutory Demand.  

This case provides a clear direction to potential creditor parties in a construction contract , even while there may be a dispute continuing with the other side.  This is a very different situation from the one they’ve faced in the past when they had to wait until the conclusion of any Court proceedings (or litigation) before they can hope to see any payment, often with crippling financial consequences. 

Arbitration and Litigation

Commencing legal proceedings is probably the first thing that comes to most peoples’ minds in the face of a dispute. However, as we mentioned above, litigation is often the least desirable option and there are rarely any true winners in a long-drawn litigation process.

Arbitration was originally introduced as a form of alternative dispute resolution process instead of litigation. However, the amount of work that is put into an arbitration process can sometimes equal or exceed the amount of work necessary for litigation. More importantly, arbitration is only available if the contract in question provides for it. It is useful to note that the standard form construction contracts, the AS 2124 and the AS 2545, both provide for arbitration as a means of dispute resolution.

Conclusion

To put things into context, adjudication is often the most desirable option to resolve a dispute under a construction contract. The issuing of a Creditors Statutory Demand is an alternative for a creditor party to get paid, assuming that the debtor party is an incorporated company. It is important to note that it is not all doom and gloom if you are ordered by an adjudicator to pay a creditor party, or, if you decide to pay up pursuant to a Creditors Statutory Demand. Many parties often opt for arbitration as well because neither adjudication nor a Creditors Statutory Demand will prevent an arbitrator from finding in favour of the party who had already paid up previously. If all else fails, litigation will often be the last resort.

Nevertheless, as with all legal matters, it is always prudent to seek professional legal advice when in doubt or simply as a matter of risk management.


Bowen BuchbinderVilensky, www.bbvlegal.com.au

Tel (08) 9325 9644

[1]Diploma Construction (WA) Pty Ltd v KPA Architects Pty Ltd [2014] WASCA 91. The full decision of is available on the Supreme Court website: (http://decisions.justice.wa.gov.au/supreme/supdcsn.nsf/judgment.xsp?documentId=5EE18FD9166D886E48257CC40013285E&action=openDocument&SessionID=DRZT6Y89A4).