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A number of common law countries in the Asia Pacific region have introduced security of payment legislation for construction contracts. Such legislation can present a number of pitfalls for the unwary, particularly where payment arrangements are concerned.
There are two main approaches to payment terms in construction contracts. These differing approaches are considered below.
Many countries adopt a relatively relaxed approach to payment terms in construction contracts, whereby the parties are generally free to agree the payment arrangements between them. This is the case in Korea where there are no statutory or other legal procedures regulating how an employer is to pay a contractor. As such, issues relating to payment are typically decided between the parties and are set out in the contract. A not dissimilar approach exists in China, where the construction contract payment structures are generally subject to mutual agreement.
This liberal approach to payment terms is reflected in many standard form contracts. A typical construction contract payment procedure comprises a number of basic steps:
This general approach is followed in FIDIC contracts, which are widely used on international construction projects. The short form FIDIC Green Book, for example, provides for interval payments with the employer paying the amount applied for less disputed items. The standard contract drafting imposes few requirements concerning the paperwork (if any) that parties are required to put in place. The Employer is not required to object to disputed items in a particular manner.
Legislation regulating construction contracts has been introduced in a number of Asia Pacific common law countries such as New Zealand, Singapore and Malaysia. In Australia, each state has its own security of payment legislation governing the construction industry with terms differing between states. What such legislation has in common is that it introduces more prescriptive arrangements regarding payment terms in construction contracts. Whilst there are differences between the legislation in each of these countries and states, insofar as the issue of payment is concerned a number of general principles apply:
An important feature of all security of payment related legislation is that it is not possible to contract out of the arrangements. The legislation generally applies to construction contracts for relevant works being carried out within the country or state regardless of the parties’ contractual choice of law. For non-construction related contracts or contracts that do not concern construction operations, it may not be necessary to comply with the statutory requirements. This could mean that different payment terms apply to different suppliers working on the same project.
Summary and practical advice
There are a number of different approaches to payment terms in construction contracts across the Asia Pacific region but, by following the above framework and being aware of the issues, the potential pitfalls can be avoided. In terms of practical advice: