Payment Clauses In Construction Contracts - How the Addition of a Simple Clause Could Save You Time and Money

Consider this hypothetical.  You perform construction work or provide related goods and services on a site in WA under a written construction contract.  You render a progress claim, but before the progress claim falls due for payment, the contract is terminated, whether by mutual consent or otherwise.

In this unpalatable, but entirely conceivable scenario, the situation can be potentially dire. Clearly, payment is critical for the maintenance of cash flow, liquidity and solvency.  The inability to recover progress claims in a timely and cost-effective manner can often mean the difference between the business surviving, and having to close its doors.

So how can you place your business in what is arguably a better position to recover the progress claim amount more quickly and cost effectively, if this scenario occurs?  A possible answer may lie in the insertion of a “survival clause” when preparing or negotiating the relevant construction contract.

So, what is a “survival clause”?  Why is it necessary, and how can it help?

Survival Clauses

A “survival clause” is a clause in a contract which sets out which of the contract clauses will remain in effect after the termination of the contract.

Importance of Survival Clauses

Survival clauses become important when a contract is terminated.

This is because, at common law, termination of a contract brings the future performance of any unperformed obligation to an end, so that once a contract is terminated, the parties do not have to continue to perform either:

• any obligation which has been partly undertaken at the time of termination (for example, to complete the work the subject of the contract); or  
• any obligation that would have had to have been undertaken, had the contract not been terminated (for example, the time for responding to, and/or making payment of progress claims which, as at the date on which the contract is terminated, have not fallen due).  

This does not mean, however, that if a contract is terminated before the time has arisen for a progress claim to be dealt with under the contract, the amount of the claim cannot be recovered. There is no doubt that it can.

What it does mean however, is that the following two options (which are, arguably, the quickest and most cost-effective means to seek to recover the progress claim amount) will not be available to a creditor:

1. Statutory Demands; and
2. Adjudications pursuant to the Construction Contracts Act 2004 (WA).

“Blocking” the statutory demand process

A statutory demand may be issued by a creditor to a debtor company immediately after a debt (for an amount greater than $2,000) has become due and payable.  The debtor company will then have 21 days from the date of service of the statutory demand to either:

• pay the amount of the debt;
• come to some other suitable payment arrangement with the creditor; or
• apply to either the Supreme Court of Western Australia or the Federal Court of Australia to have the Statutory Demand set aside.  

There are various grounds on which the Statutory Demand can be set aside -  the most common being either because there is a genuine dispute about the existence or amount of the debt, or because the debtor company has an ‘offsetting claim’ (eg, a counter-claim or set-off). The ‘offsetting claim’ does not need to relate to the debt to which the statutory demand relates.

The decision of the court in Niroda Holdings Pty Ltd v Road Contractors Pty Ltd[1]  (Niroda) illustrates the importance of having a ‘survival clause’ in a construction contract to preserve the payment clauses/obligations in that contract after termination. In Niroda, Niroda Holdings engaged Road Contractors Pty Ltd (Road Contractors) to perform civil and earthworks for, relevantly, a project in North Dandalup, Western Australia. The contract for that project (North Dandalup Contract) incorporated the Australian Standard General Conditions of Contract (AS 2124-1992) (Conditions of Contract).

Between November 2015 and January 2016, Road Contractors performed works for Niroda pursuant to the North Dandalup Contract. The rights and obligations of the parties relating to progress payments that operated while the North Dandalup Contract was on-foot were governed by the operation of cl 42.1 of the Conditions of Contract.  On around 31 January 2016, Niroda and Road Contractors mutually terminated the North Dandalup Contract. Niroda alleged that the termination was due to Road Contractor's performance.

On 2 February 2016, after the North Dandalup Contract was mutually terminated by the parties, Road Contractors submitted its final claim for payment for works up to 31 January 2016. The Superintendent under the North Dandalup Contract was KCTT.
Clause 42.1 of the North Dandalup Contract, as amended, stated:

“Subject to the provisions of the Contract, within 28 days after the receipt by the Superintendent of a claim for payment or within 14 days of issue by the Superintendent of the Superintendent's payment certificate, whichever is the earlier, the Principal shall pay to the Contractor or the Contractor shall pay to the Principal, as the case may be an amount of not less than the amount shown in the Certificate as due to the Contractor or to the Principal as the case may be, or if no payment certificate has been issued, the Principal shall pay the amount of the Contractor's claim”.

Road Contractors argued that the above clause survived termination of the North Dandalup Contract, and relied upon the failure by the Superintendent to issue a payment certificate as the source of the debt the subject of the statutory demand. Road Construction’s position was that the operation of the deeming provision within cl 42.1, in circumstances where no payment certificate was issued, resulted in a debt 'due and payable' by Niroda to Road Contractors in the amount of its 2 February 2016 payment claim.

Niroda argued that the clear purpose of cl 42.1 was for progress payments, to ensure that payment was made while work was on-going. However, the parties elected to mutually terminate the North Dandalup Contract. As there was no clear intention or agreement to the contrary to preserve the operation of the relevant clause post-termination, the operation of the payment claim regime did not survive termination and therefore could not be relied upon by North Dandalup to support a statutory demand alleging that a debt was due and payable.

Ultimately, the Court found that there was a genuine dispute as to the proper construction of the North Dandalup Contract, and the operation of clause 42.1 after termination. Accordingly, the statutory demand was set aside.

Simply put, because there was no survival clause in the North Dandalup Contract to the effect that the relevant clause would survive termination of that contract, it was arguable that Road Contractors could not rely on cl 42.1 and on the operation of the deeming provision within cl 42.1 to the effect that where no payment certificate was issued by the Superintendent within the time stated in that clause, the amount stated in Road Contractor’s 2 February 2016 progress claim was deemed to be a debt 'due and payable' by Niroda to Road Contractors.

Adjudications pursuant to the Construction Contracts Act 2004 (WA).

The Construction Contracts Act 2004 (WA) (CCA) provides for a rapid adjudication process. It is available to builders or contractors who perform construction work or provide related goods and services on a site in WA, whether pursuant to a written contract or a verbal contract.  Certain types of work are excluded from the operation of the CCA[2].

Under the CCA regime, once a party has lodged an application for adjudication (and provided it is done within the time frame specified in the CCA), the other party has 10 business days to file a response to the application and the Adjudicator then has 10 business days after a response is either filed or was due to be filed, to hand down his/her determination (decision).  The determination of an Adjudicator if not paid within the time stipulated by the Adjudicator, can be enforced as a judgment of a Court.

Rapid adjudication under the CCA operates in addition to a party’s contractual and other legal rights. A determination under the CCA may be accepted by the parties to a contract, and the dispute is resolved. However, if either party wishes, the dispute can still be dealt with more formally under the dispute resolution process in the contract, or through the courts. In this case a determination under the CCA makes a payment “on account” pending the outcome of the formal process.

The CCA provides for adjudication of 'payment disputes', not adjudication of 'payment claims'.

Section 6(a) of the CCA provides that a payment dispute arises if:

“by the time when the amount claimed in a payment claim is due to be paid under the contract, the amount has not been paid in full, or the claim has been rejected or wholly or partly disputed.”

So, could Road Construction have used the rapid adjudication process under the CCA to recover its 2 February 2016 progress claim amount?  Unfortunately, the answer is arguably no.  By section 6(a) of the CCA, a payment dispute is only triggered when the amount claimed in a progress claim is due to be paid under the contract.  In Road Construction’s case, the North Dandalup Contract was terminated before the time / the due date (being the time by which the Subcontractor was to respond to the payment claim) had arisen, with the consequence that no ‘payment dispute’ existed which could be adjudicated under the CCA.

Conclusion

It pays to ensure your construction contracts contain an appropriately drafted survival clause, and that your termination rights (or your response to another party’s proposed or actual termination) are exercised with the benefit of proper advice from a lawyer with expertise in construction contracts.

If you need assistance in reviewing your contract terms, or assistance exercising or responding to a termination, contact Sonia Edwards. 

[1] [2018] WASC 10
[2] drilling for the purposes of discovering or extracting oil or natural gas; constructing a shaft, pit or quarry, or drilling, for the purposes of discovering or extracting any mineral bearing or other substance; fabricating or assembling items of plant used for extracting or processing oil, natural gas or minerals; or construction related to any watercraft