Corrs High Vis: Episode 41 – Security of payment changes in Qld, and two recent NSW Supreme Court decisions

Sarah Stroes – Lawyer, Corrs Chambers Westgarth

Wayne Jocic – Consultant, Corrs Chambers Westgarth

Andrew McCormack – Partner, Corrs Chambers Westgarth

James Arklay – Senior Associate, Corrs Chambers Westgarth

Sarah Stroes – Hello and welcome to High Vis, the Corrs Chambers Westgarth Construction Podcast. My name is Sarah Stroes and I am a lawyer in the Brisbane Projects Team. Today I am joined by Partner Andrew McCormack and Senior Associate James Arklay, both from the Brisbane Projects Team, and Consultant and Melbourne University Lecturer Wayne Jocic to discuss a number of recent developments, including amendments to Queensland Security of Payment Legislation and two significant recent New South Wales Supreme Court decisions.

In early February the Queensland Parliament introduced the Building Industry Fairness Security of Payment and other Legislation Amendment Bill. This bill is the Queensland Government’s response to the Building Industry Fairman Reforms Implementation and Evaluation Panel Report, which proposed amendments to the Queensland Security of Payment Legislation. In particular, the bill replaces the projects bank accounts regime with a simplified model of project trust accounts. Andrew firstly – what are project trust accounts, and how do they work?

Andrew McCormack – Project bank accounts (as it is currently is, a project trust account) are going to be, as the name suggests, trust accounts into which money is paid by a principal for work done by a contractor under a building contract that is subject to the new regime. Now the important thing to understand is that these are trust accounts. That means that the money in them is ring fenced from the other assets of the head contractor, so that in the evet of the insolvency of the head contractor the proceeds of the trust account do not form part of the assets available to creditors. They are preserved for the beneficiaries of the trust accounts, which will be subcontractors who have been engaged by the head contractor to do the job. The current legislation mandates that a project bank account is required in certain circumstances, and they are quite limited circumstances. This bill will make an important change when it becomes law, in that it will extend the reach of project trust accounts as they are now known.

Sarah Stroes – So I understand that the Project Trust Account regime will be implemented progressively. What are the proposed phases?

Andrew McCormack – I think it might be helpful to start with a quick recap on what does the law currently say about when a Project Bank Account is required. Well currently if you have a Construction Contract for building work as defined under the Security Payment Legislation, and that is when a Government’s client is the principal and the value of the contract is between one and ten million dollars, then you need a Project Bank Account.

Now that is a fairly limited category of projects that would be required to have a Project Bank Account, and that was deliberate because really I thought this was an extended trial period to see how the Project Bank Account regime worked and what industry feedback was garnered. The learnings from that trial and also the feedback given by the panel that you mentioned before have led to this bill.

So what would change? Well I think firstly the important thing to understand is that the current Project Bank Accounts chapter of the legislation – Chapter 2 – is going to be removed and replaced with a new chapter that is set out in the bill. That deals with statutory trusts, and as we alluded to before these will now be known as ‘Project Trust Accounts’.

There is also some terminology changing. What is currently defined as ‘Building Work’ will now be called ‘Project Trust Work’ although the breath of the definition is largely unchanged. The requirements to actually establish the Project Bank Account will be extended progressively in phases.

The first phase (which is helpfully phase 2A) will apply from 1 July this year, 2020. It will require government contracts – that is contracts where a government or a HHS (a health and hospital service) is the principal which are valued at over $1 million and where 50% of that contract price the Product Trust Work – you will have to have a Product Trust Account.

The next phase 2B will come in we think (because the dates are still to be confirmed for these phases) from 1 July 2021. That will apply to both government and private projects, so it doesn’t have to be just a government project, with a value of over $10 million.

Phase 3 is likely to commence from 1 January 2022. That will extend the Project Trust Account requirements of governments and private projects valued over $3 million, so the value is coming down.

Finally phase 4, which we think will come into force from 1 July 2022, will extend to all governments and private projects with a value of over a million dollars the requirements for a Project Bank Account.

To be clear all the amounts that I have just talked about are GST-exclusive amounts, and each phase is an extension of the last. It doesn’t replace the previous phase it just adds a new category of contract to the list of those requiring this Project Trust Account.

Sarah Stroes – I see and finally Andrew are there any other important amendments in the Bill that people should be aware of?

Andrew McCormack – Well the Bill deals with quite a few issues and some of them are more notable than others. I think one item that certainly any principal listening should be aware of is it will now be an offence carrying out a charge of penalty units to pay less than the amount a principal agrees to pay when it issues a payment schedule in response to a payment claim.

A second notable feature is that previously the Project Bank Account was really actually three trust accounts. A general account which was for normal payments under the contract. There was also what was known as a Disputed Funds Account, and a Retention Trust Account. Now those second two requirements have been removed and replaced with some slightly different arrangements so the Project Trust Account now is just a general account for making payments into under the contract.

What does that mean then in terms of those new arrangements? Well, where a claimant that is in this language that is a subcontractor has obtained an adjudication determination so it has been through the adjudication process under the legislation, got an outcome that has ‘yes you are entitled to a payment’, that claimant or subcontractor can give what is called a ‘payment withholding request’ to the principal under the Head Contract who is then required to retain money from the payments it makes to a head contractor to cover the adjudicated amounts.

In terms of retention monies, all contractors and principals who have a contract that is governed by a Project Trust Account will now be required to open a separate retention trust account into which all retention monies they are required to hold are then paid.

So the retention money will also be held in a separate trust account, again to protect it in the event of an insolvency of the head contractor.

A final pointer to know, again for any principals who are listening, is that there is no longer the ability for the principal to take over and administer a project trust account in the event that the head contractor goes insolvent. Under the current legislation that is in fact possible, but the legislation will be changed by the bill and only the QBCC (the regulator) will have the ability to step in and administer a trust account where the head contractor who established that trust account has gone insolvent.

Sarah Stroes – Thank you Andrew. Wayne you will be discussing the recent New South Wales Supreme Court decision BH Australia Constructions v Capella. Can you tell us exactly what happened in that case?

Wayne Jocic – This case was the front end lawyer’s nightmare. So it concerned the construction of someone’s home. That party was clear, it just wasn’t clear though who the builder was and this is obviously a real nightmare.

So it was clear, moderately clear, that it was either company A or company B but there were signs that pointed in both directions. So the company had changed names at various times and used the same or similar logos. There were complications of email addresses, licensing numbers, very, very hard to work out who the contact for and as you might expect that really mattered because one of the companies went into insolvency while the other one remains solvent. This is a vitally important question for the homeowners, who are concerned about whether they had a contract with a live company or a dead one.

Sarah Stroes – So did the case break any new legal ground?

Wayne Jocic – So in many ways this is a really unfortunate situation but it is not a hugely novel one. I think though there are two things that come out of this decision. A decision of Justice Leeming, a very capable judge of the New South Wales Court of Appeal.

So the first person that is important to note Justice that Justice Leeming was able to identify a particular contracting party and to do that by way of interpretation, they did that by interpreting the words and circumstances rather than using the doctrine of rectification and a recent High Court case that some people will be aware of, the Simic case, suggested perhaps that rectification was the appropriate doctrine. It seems that Justice Leeming recognised in accordance with long tradition that there is still, if you like, a slip rule which you can correct obvious errors where you are well and truly satisfied that the error has been made and what the correction is. So it was dealt with by way of interpretation rather than rectification. That is the first issue.

The second interesting thing is that a real legal problem in this case was whether you can take into account post-contractual conduct to work out who the contracting party was. We know that courts are very reluctant typically to consider anything that has taken place after the contract has formed in the interpretation of the terms. There is a slightly different question, not because it is about who the contracting party is. So Justice Leeming considered this issue at length and eventually determined that the evidence of post-contractual conduct was inadmissible and not capable of being heard, but it does raise an interesting question. All in all this is not a terribly complex case. I don’t think it develops an enormously substantial new law, but frankly it is a reminder of the importance of getting the details right. All of this could have been avoided if the parties had been very clear about who they actually were.

Sarah Stroes – Thank you for that Wayne. James you will be discussing a recent New South Wales Supreme Court decision White Constructions v PBS Holdings, which as I understand takes a look at delay analysis and in particular offer some commentary around society of construction laws delay and construction protocol. So James can you tell us what the case is about?

James Arklay – No problem, Sarah. White Constructions was a dispute between the developer and two consultants relating to a project in the Illawarra Region of New South Wales. Now the project was a 100 lot subdivision which required, among other things, the design and installation of sewerage infrastructure. The developer alleged that the consultant’s acts and omissions had caused the project to run over time, and caused the developer to suffer loss and damage.

So questions of delays and who as between the parties to the case were responsible for it were issues in dispute. Now these kind of questions are of course very common in construction disputes, and expert opinion evidence is often required in order to allow courts and tribunals to determine them. That evidence is given by delay or more accurately programming experts, who assist the court or tribunal to determine the impact that particular delay events have had on activities within a construction program.

There are various methodologies by which delay analysis can be undertaken, and delay analysis is notoriously technically complex. It involves very sophisticated analysis techniques and software, and so there are various publications that exist which try to demystify some of the concepts which are associated with delay analysis One of the best known is the Society of Construction Laws Delay and Disruption Protocol ,and what is interesting about White Constructions which I will come to in a moment is some of the commentary that the case has about the protocol.

The protocol is now in its second edition which was published in 2017, 15 years after the first and what it does it outlines some of the core principles associated with delay and disruption and provides some general guidance about them as well as an explanation of various methods by which delay analysis can be undertaken. Now the protocol itself disavows any notion that it should be regarded as a statement of the law. It says itself that it should not be a contract document. It states that it is not intended to be a contract document nor does it purport to take precedence over the express terms and governing law of a contract or constitute a statement of the law.

In the White Constructions dispute, the protocol’s acknowledgement that it was not intended as a statement of the law or of general application Justice Hammerschlag described it as apparently having been accepted into programming or delay analysis lore but which His Honour was referring to is a suggestion that is at times made within the industry that unless a delay analysis methodology is mentioned and supported by the delay and disruption protocol it is illegitimate.

Now there is one Australian case in which a delay analyst’s methodology was not accepted because it was not found to be a method that was not recognised within the engineering profession, and one of the reasons why that was found was because it was not mentioned in the protocol. But aside from that there has really been limited judicial consideration of the protocol and support for the methodologies stated in the protocol.

All that is by way of introduction. I will now briefly describe the facts of the White Constructions case. As I mentioned, the case involved a 100 lot subdivision in the Illawarra Region of New South Wales and the developer engaged two consultants. One of whom was the designer of the sewerage infrastructure and the other was a water servicing co-ordinator who was responsible for co-ordinating with Sydney Water the relevant statutory authority to obtain approval of the sewerage design.

The developer separately engaged a contractor to perform the construction work under a construct only contract. Now in the White Constructions case the developer claimed damages from its two consultants, alleging that they had failed to prepare and have approved a satisfactory sewerage design which had delayed completion of the development and cause the developers loss and a large component of that loss was alleged to be delay costs that the developer would have to pay its construction contractor due to the prolongation of the project.

The developer’s contention was that were it not for its consultant’s breaches, the project would have been competed in July 2016 when in fact the project was delivered in March 2017. The Court ultimately found that the developer had failed to establish liability on the part of the consultants but nevertheless gave detailed consideration to the party’s delay evidence, so it is really those aspects of the Court’s decision that we are interested in today.

So both the developer and the consultants called delay experts to give evidence in the case and I think it is fair to say that they did not agree on much. They disagreed with each other as to what was the appropriate delay analysis method to be adopted, and they also disagreed with how the other had applied the method that the other had selected. They reached what the Court described as ‘profoundly differing conclusions'.

The developer’s experts considered that the project could have been completed by July 2016 and that the delayed approval of the sewerage design had caused 240 days’ delay. The consultant’s expert, on the other hand, considered that at best the project would not have finished before February 2017 due to various reasons, including variations that had been directed which were unrelated to the sewerage works.

Both parties’ experts selected methods to analyse delay that are referred to in the Delay and Disruption Protocol. In the case of the consultants the collapsed as built method of analysis was selected, and in the case of the developer the as plan versus as built window method of analysis was selected.

Now remarking on the reports that were delivered, the Court described as ‘complex and to the unschooled impregnable’. As a consequence of that the Court said that it found it necessary to use a procedure permitted by the Uniform Civil Procedure Rules of New South Wales to obtain advice from a third expert to enable it to critically evaluate the parties’ experts’ opinions, and the Court remarks that it found the assistance by the third expert invaluable and had acted on it.

The Court said that his advice demonstrated that the complexity that has been introduced is a distraction, and the Court ultimately acted on the third expert’s advice, preferring it to the findings of either of the party appointed experts.

Now as to what was said about the protocol and delay analysis, methodologies and debate that had arisen between the parties appointed experts. The Court interestingly said for the purposes of any particular case the fact that a method appears in the Protocol does not give it any standing, and the fact that a method which is otherwise logical or rational does not appear in the Protocol does not deny its standing. So in essence merely because the party appointed experts had used delay analysis methodologies that are referred to in the Delay and Disruption Protocol did not necessarily mean that they had to be right. Another method could be the appropriate one for use in this particular case, having regard to the facts and what was in issue.

The Court also found that neither of the methods adopted by the party appointed experts was appropriate in the case at hand, and that instead what was required was close consideration and examination of the actual evidence of what was happening on the ground to reveal if the delay in approving the sewerage design had actually played a role in delaying the project and if so, how and by how much. In effect the Court said ‘what was required was a common law, common sense approach to causation’.

So really what the Court is saying is that close regard needs to be had to the actual evidence of what was happening on the project, and that debates about appropriate delay analysis methodologies should not distract from those issues. In its reasons the Court had particular regard to a site diary which had been maintained by the construction contractor which the Court described as comprehensive and well-kept, and the Court remarks that the developer had taken the Court to very little of the contents of this important contemporaneous record and so the inference to be drawn is that the contemporaneous record did not support the developer’s case. The Court said that although the diary made references to the delayed sewerage design it did not support any particular findings that activities on site had been delayed as a consequence of it. In fact the diary showed that the work was progressing on site even without the delayed sewerage design. The developer had also sought to rely on some evidence given by a site supervisor that was employed by its construction contractor but the Court found that it was overly general and therefore incapable of founding any specific findings of delay.

Sarah Stroes – What lessons can be learnt from the Court’s decision?

James Arklay – Well, without commenting specifically on the parties to this case some general principles emerge from the decision that are of use and should be borne in mind.

For project participants the case really highlights the importance of contemporaneous document management and record keeping. There is real discipline that is involved in keeping accurate, comprehensive, contemporaneous records of what is happening on site from day to day but those kind of documents can be invaluable if a disagreement later arises or indeed a dispute. Now it is very important that such records be kept and well organised, so that if the need does arise at a later stage they can be marshalled quickly and analysed for the purpose of any dispute.

I think there are also a few lessons for experts that arise out of this case which is that reports by experts need to be written very clearly, so they are capable of being understood both by experts on the other side and also by the parties and the Court and tribunal who will ultimately be determining the matter. While there will at times be legitimate debates about delay analysis methodologies that need to be addressed, it is important that those sorts of questions do not distract from the real issues that require resolution.

Sarah Stroes – Andrew, James and Wayne I think that is all we have time for today. Thank you very much for joining me. My name is Sarah Stroes and you have been listening to the Corrs High Vis Postcast and we look forward to you joining us for our next edition of High Vis.

This podcast is for reference purposes only and does not constitute legal advice and should not be relied upon as such. You should always obtain legal advice about your specific circumstances.