Corrs High Vis: Episode 44 – Building and Construction Industry (Security of Payment) Bill 2020 (WA)

Chris Campbell - Partner
Michelle Dean - Partner
Michael Barnes - Senior Associate
Belinda Wong - Senior Associate

Michael Barnes - Hi and welcome to Corrs High Vis. I’m Michael Barnes, a Senior Associate in the Corrs Perth, Projects Team. With me today are Front End Projects Partner Chris Campbell, Litigation Partner Michelle Dean and Back End Projects Senior Associate Belinda Wong.

Our topic, which will be apparent from the title of the Podcast, concerns the changing landscape of security of payment laws in Western Australia. In late September, following a four month industry consultation process the WA Government introduced to Parliament the Building and Construction Industry (Security of Payment) Bill 2020.

As Chris, Michelle and Belinda will cover in detail, the Bill represents the most significant reform to WA’s security of payment laws in more than a decade. It seeks to replace WA’s current 2004 Construction Contracts Act with laws which better protect subcontractors and are generally more consistent with security of payment laws on the east coast of Australia.

Chris, let’s start with you. Can you tell us a little bit more about the Bill and what it means for participants in WA’s building and construction industry?

Chris Campbell – Yes, thanks Michael. The Bill has been introduced this week into Parliament following a discussion draft that was provided to industry previously. And it draws on some of the recommendations in the security of payment reform in the WA Building and Construction Industry Final Report that was produced by John Fiocco in late 2018. And that report provided a series of recommendations to amend the security of payment laws in Western Australia in order to provide an effective and fair process for securing payments under construction contracts in the industry.

And the over-arching theme behind the amendments that have been proposed to the Bill are to make WA’s security of payment regime more consistent with that that we see on the east coast.

And the Bill proposes amendments in four key areas, which are:

• regulating certain contract terms;
• reforming payment dispute adjudication process;
• creating deemed trusts for retention monies; and
• enhancing the powers of the Building Services Board to manage the commercial conduct and behaviour of registered building service providers under the Building Services Registration Act.
• when and how notice is required to be given; and
• the circumstances in which a notice is to be given,

Michael Barnes – Thanks Chris. Now, Belinda, WA obviously has security of payment laws already in the form of the 2004 Construction Contracts Act. Would any new Act apply to existing construction contracts, and are there limitations on the types of construction contracts to which any new Act would apply?

Belinda Wong – So any new Act will only apply to construction contracts entered into after its proclamation. There will likely be a period of overlap once the new Act is in effect where we continue to see adjudications and judicial reviews under the current regime.

There are some interesting changes to exclusions under the new Act. The mining exclusion is still there but fabricating or assembling items of plant used for extracting or processing oil, natural gas or any derivative of natural gas, or any mineral bearing or other substance is no longer excluded.

Other exclusions of interest are: building contracts with home owners worth less than $500,000; contracts between employers and employees for construction work or related goods and services; and contracts relating to loan agreements with financial institutions.

Michael Barnes – Thanks Belinda. Chris, when you and I last recorded a Podcast on WA’s security of payment laws, you spoke about time bar provisions, and specifically barrister John Fiocco’s recommendation to prohibit unreasonable time bar provisions from construction contracts. What does the Bill say on time bar provisions?

Chris Campbell –Well the Bill has taken up John Fiocco’s recommendation and under the provisions in the Bill an adjudicator, arbitrator or court will have the power to declare void any notice-based time bar provisions that they consider unfair as compliance with them is not reasonably possible or would be unreasonably onerous.

And the onus under these provisions is on the party seeking relief to argue that the time bar provision is unfair or unreasonable.

And a declaration of this kind would only apply to the particular payment claim under consideration and the provision will continue to operate with respect to other payment claims. An assessment as to whether a time bar provision is unfair is something that will be decided on a case by case basis.

Now provisions of this kind that seek to prohibit certain types of clause in a construction contract aren’t unusual and a lot of the security payment regimes, both in Australia and overseas, include prohibitions on pay when paid clauses, for example. But a provision of this kind which breaks down or gives a court or arbitrator or adjudicator the ability to strike down a time bar provision that seems to be unfair or unreasonable in its application is something that’s unusual and not something that we’ve seen in other regimes within Australia.

It also has some potential consequences in that because of the way in which the language of the Bill is worded, there is potential for the way in which the sections of the Act could be applied. So for example – in a most extreme example, you could have a situation where an adjudicator hearing a dispute in relation to a payment claim could determine that a time bar provision is unreasonable because it’s too onerous for example. But in a subsequent dispute in relation to a further payment claim, that same adjudicator could determine that the same time bar provision is reasonable and therefore stands. So there is scope for a lack of certainty to arise in relation to the application of these sections of the Bill and consequently a lack of certainty as to how time bar provisions will be construed.

The Bill also includes a number of provisions that set out some guidance that a court or arbitrator or adjudicator can apply to determine whether a notice based time bar provision is unfair or onerous. And they include:

and then there’s a couple of interesting limbs that are fairly broad in nature. The first is any other matter that the adjudicator, court or arbitrator considers relevant. So that’s obviously a very broad range of things that could be captured by that. But then there is a provision that says, that allows a court or arbitrator, to consider a rebuttable presumption that the party required to give notice possesses the commercial and technical competence of a reasonably competent contractor.

That in itself is an interesting provision in that in a number of construction contracts there’s quite often a warranty that a contractor has the skill, expertise and experience to perform the works under the contract and that might be followed up by an acknowledgement from the contractor that the principal is relying on the contractor’s expertise and skill to – in engaging the contractor to perform those works. And what this section of the Act appears to invoke is the scope for the contractor to argue that in fact it is not a competent contractor as it might expressly have said it is elsewhere in a construction contract in order to strike down a time bar provision which could potentially leave the contractor open to other causes of action from a principal under a construction contract if it was successful with that kind of argument.

Michael Barnes – Chris, obligations for a contractor or subcontractor to provide security for the performance of its obligations, whether in the form of a bank guarantee or otherwise, are another common feature of construction contracts. What does the Bill say about performance security provisions?

Chris Campbell – The Bill includes a provision which would imply into all construction contracts a requirement that a party seeking recourse to performance security give a notice of its intention to make a claim on that security at least five business days before doing so.

And the notice would have to be in writing; it would have to identify the construction contract and relevant provisions of the contract that the party relies on in order to have access to the relevant performance security; and it must describe the circumstances that entitle the party to make the claim on the performance security.

Now a failure to give a notice of that kind would, under the formulation that appears to have been presented to us under the Bill, be a breach of the construction contract which would give rise to an entitlement for the contractor or subcontractor to make a claim for damages should the relevant notice not be given. Now following on from that requirement to give notice, there’s also a provision in the Bill under which a contractor can seek the release of retention moneys that have been withheld during the construction phase of the project through substitution of a performance bond. And in order to do so the contractor will need to include in its payment claim a draft of the proposed performance bond or bonds in its final form, and that bond must meet the minimum standards that are set out in the Bill.

Michael Barnes – Thanks Chris. Belinda, I would like to ask one last question on the way in which the Bill seeks to regulate contract terms. The Construction Contracts Act currently prohibits pay if or when paid provisions. Will that change under any new Act?

Belinda Wong – So the current pay when paid prohibition, the payment of a contractor being dependent on a payment of its principal, it is still prohibited. The following four situations are also now prohibited where they are contingent or dependent on the operation of another contract. They are: the liability to pay an amount owing; the due date for payment of amount owing; the making of a claim for an amount owing; or lastly, the release of retention money or of a performance bond.

Michael Barnes – Belinda, Part 3 of the Bill deals with the procedure for obtaining progress payments. What are the key potential changes to the payment claim procedure?

Belinda Wong – So bringing us into line with other States, it’s proposed that the parties to a construction contract now have a statutory right to make a payment claim every month or more often if provided for in the relevant contract.

Progress payment claims can be made by the claimant up to the later of: any contractual date; and six months after the works the subject of the payment claim. This also applies to final payment claims except that if 28 days after the end of a final defects liability period falls after those other dates, that’s your last date.

The party who receives the claim will be required to either pay the claim in full within the stipulated time or provide a payment schedule within 15 business days, or an earlier date agreed in the contract, setting out the reasons for withholding payment. The payment schedule must set out what payment is being made, as well as the reasons for any part or non-payment. Critically, a respondent will be limited to whatever is stated in the payment schedule when responding to an adjudication application. If no payment schedule is issued, the respondent becomes liable to pay the full amount of the payment claim by the relevant due date. So it will pay to be very careful and considered when preparing the contents of a payment schedule, and if respondents are uncertain about it to get help at this point. There are proposed changes to the time for payment of payment claims and this will depend upon the claimant’s provisions in the contracting chain. Currently payment has to be within, at most, 42 calendar days.

The changes mean that claims from head contractors to principals or owners will now need to be paid within 20 business days of the claim, or any lesser period in the contract. Claims by subcontractors must be paid within 25 business days or any lesser period in the contract, and claims involving certain types of residential works within the period specified in the contract or ten business days if there is no period in the contract.

Michael Barnes–Belinda, I’m sure everyone listening will be really keen to hear about the potential changes to WA’s statutory adjudication regime; adjudication of course being such a key part of keeping money flowing through the contracting chain. What can we expect there from any new Act?

Belinda Wong – Yes. Once again the changes make the WA regime more consistent with other States.

If you haven’t received a payment schedule, there’s now a requirement to provide a notice of intention to apply for adjudication. That has to happen within 20 business days after the due date of your progress payment. Interestingly, a respondent can give a payment schedule within five business days after getting this notice. That really should be a last prompt to do so.

With an adjudication application, the time for bringing one is proposed to be shortened from 90 business days to 20 business days from the date payment was due, or from the receipt of a payment schedule. The time for issuing an adjudication response is still ten business days, and the time for the issuing of an adjudication determination is also still ten business days.

So no changes there, but bear in mind that the matters raised in a response are now limited to the matters raised in the payment schedule. So if you didn’t issue a payment schedule you don’t get to issue an adjudication response on the merits.

Brand new, is the review regime. So with some caveats if either party to an adjudication is unhappy with the determination they have five business days after the date of the determination to apply for review by a senior adjudicator. The ambit of the review is restricted to only matters raised in the adjudication. At the moment it’s proposed that reviews become available for a claimant if the amount determined is more than $200,000 under the amount of the payment claim, or for a respondent $200,000 or more over the amount assessed as owing in a payment schedule.

The senior adjudicator can uphold the determination or quash it and make a new one. The review process will become clearer once regulations are passed to support the Act. This is an interesting change. On the one hand this may help ensure consistency in the quality of determinations and stave off judicial reviews. But we’ll have to see what the impact is on the timing and cost of the adjudication process as the proposed difference of $200,000 can quite easily arise in your larger projects.

Lastly, it’s proposed that the Christmas break from 25 December to 7 January be extended to 22 December to 10 January. So that will put a bit of a spanner in the works for those Christmas adjudications.

Michael Barnes – Alright, now over to Michelle, and Michelle I’m sorry to have kept you waiting although I’m sure you will say I have just saved the best until last. My first question for you relates to what the WA Government’s September media statement describes as an Australian first. That being the proposed creation of a mandatory retention trust scheme. Part 4 of the Bill introduces a retention trust scheme which seeks to cope with the really unfortunate prevalence of insolvency in the building and construction industry. What are the key takeaways?

Michelle Dean – Thanks Michael. In answering this question I’ll be using the term ‘principal’ and ‘contractors’, but equally this whole regime now applies to the whole construction and contract chain. So it equally applies to the relationship between head contractors and subcontractors.

The scheme is a retention money trust scheme which tries to prevent contractors, subcontractors and suppliers being left out in the cold when their immediate contractual counterpart becomes insolvent. The Bill proposes requiring all construction contracts that exceed $20,000 to have retention money trust accounts established.

A trust won’t be needed in situations where you’ve got construction contracts with government principals or for certain home owner contracts, but otherwise it will apply across the industry. The retention money trust account works by having the party procuring the actual works or services, having an obligation to retain a certain amount of money in a trust account in accordance with the construction contract and that amount is then held as security for the contractor’s performance of works or services under the contract.

The retention money trust account must be established within ten business days after the parties enter into the construction contract, and as soon as possible after the account is established the principal who’s established the trust account must give the contractor written details of the account and notify the contractor at any time when those details change. So that the contractor at all times is aware where that money that protects them is being held.

A contractor also has a right throughout the contract to inspect and take copies of any accounting records of the retention money trust account, so that they can check that there’s actually money being still held in there for them and that there hasn’t been any improper transactions on the account. While the retention money is held on trust under the Act it is not available to pay any other third party creditors of the principal, and it’s not liable to be attached or taken away due to execution for a monetary judgement. So that amount is held aside for the contractor.

The principal’s also not allowed to set-off against that retention money any liability of the contractor which is under another contract; so not that particular construction contract, for the reason why it was set up, a separate contractor cannot exercise a set-off for that contract.

The retention money trust accounts – there can be separate accounts set up for each contractor that the principal deals with, or you can have a single trust account where all the retention money in respect of multiple construction contracts in respect of different contractors where all of those monies are held. An adjudicator, a court or an arbitrator can also make orders in relation to the application of that retention money that’s held in the trust account. So they can make orders requiring the withdrawal of that money.

The contractor’s interests in that retention money that is held on trust, their interest has priority over any other security interest which is granted by the principal and that’s quite an important protection. And if a principal fails to comply with the retention money trust provisions of the Bill it will be an offence, and for a corporation that would mean a fine of $250,000.

Michael Barnes – Michelle, the Bill also reflects an intent to stamp out incompetent and predatory operators from the building and construction industry. Can you step through the potential amendments to the Building Services legislation?

Michelle Dean – Yes thanks Michael. The Bill proposes to amend the Building Services Registration Act and also the Building Services Complaint Resolution Administration Act to give the Building Services Board enhanced powers to manage the commercial conduct and behaviour of registered building services providers in Western Australia.

The Building Services Board basically will be empowered to declare an individual or corporation as either a temporary or a permanent excluded contractor, where it has suffered an insolvency event or multiple insolvency events over its history. So for a corporation an insolvency event is when there has been a liquidator appointed, or a provisional liquidator or administrator or receiver has been appointed or a company is being wound up. It also extends to situations where it isn’t the corporation itself which has been through an insolvency process, it also covers when an officer has been an officer of another corporation which has gone through an insolvency process. The Building Services Board will also be able to discipline a building services provider if they fail to pay a building service debt which will be a judgement debt or an adjudication determination.

Michael Barnes – So what happens next? While there is no clear timeline, the Bill is now before Parliament and will likely become law in one form or another in the coming months. It is likely that there will then be a transitional period in order to allow time for participants in WA’s building and construction industry to adapt to the new laws. We will of course follow the progress of the Bill with interest and keep you up to date on any major developments.

For now thank, you to Chris Campbell, Michelle Dean and Belinda Wong for distilling the key takeaways from the Bill.

And thank you to our listeners for tuning in. My name is Michael Barnes, until the next Corrs High Vis Podcast, good bye.

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

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