Security of payment

Dr Jay Palmos

Hill International delay claims managing consultant Dr Jay Palmos looks at the issue of project delays due to failure to pay contractors and suppliers for completed work.

To date, both the public and private sector’s attempts to resolve this problem have failed. Security of Payment (SOP) style legislation has successfully solved this issue in other jurisdictions, and should be considered in Dubai before we lose the best sub-contractors and suppliers to other more reliably paying regions. Just last month, Laing O’Rourke closed its Middle East division of 20 000. The loss of this and other superior-grade contractors signifies that the presently available source of high-quality contractors has diminished.

SOP legislation is an alternative dispute resolution method which originated in the UK with the introduction of the Housing and Construction Regeneration Act 1996. It was an immediate success, virtually eliminating payment-related delays, and similar legislation was quickly enacted in numerous other Commonwealth jurisdictions, including Australia, New Zealand and Ireland. In essence, this legislation establishes a pseudo-judicial body whose sole task is to provide a swift interim resolution to construction payment disputes and keep monies flowing throughout the industry.

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Claims are made to this body by an unpaid party to a construction contract along with an application fee. A construction contract, within the context of the Act, is an agreement to supplying goods or services to a construction project. Therefore contractors, sub-contractors, consultants, architects and others who supply services to the industry can pursue a claim under SOP. The costs associated with an application depend upon the complexity of the claim.

However, they are a fraction of the costs associated with traditional construction arbitration/litigation proceedings, which commonly run into the millions of dollars. A simple unpaid material invoice may cost as little as AUD$250 (AED900), whereas a complicated contractual claim would be significantly more. There is no jurisdictional maximum value of a claim under this legislation, and therefore claims can be as large or small as the value of outstanding payments. Notwithstanding the value of the amount in controversy, a final decision is usually returned to the parties within 20 working days of the filing the application for adjudication.

The adjudication decision is legally binding upon both parties, even though it is only an interim solution. The term ‘interim’ in this context means that either party may appeal the adjudicator’s decision to a court of competent jurisdiction if they feel that it is in error. However, irrespective of any subsequent legal proceedings, which may take years to finally resolve, payment to the contractor must be made immediately upon the adjudication, thereby ensuring project cash flow.