Security of payment in WA: the next frontier

The Western Australian Government has released an exposure draft Bill to replace the Construction Contracts Act 2004 (WA) with new security of payment laws that are more consistent with those in place on the east coast.

Background

The draft Bill has been released to key industry stakeholders for comment. It draws on some of the recommendations in the Security of Payment Reform in WA Building and Construction Industry Final Report (Fiocco Report dated October 2018) to replace the existing Construction Contracts Act 2004 (WA) (CCA) with new security of payment laws that provide an effective and fair process for securing payments under construction contracts in WA’s building and construction industry.

As currently drafted, the Bill proposes amendments in four key areas:

• regulating certain contract terms;
• reforming the payment dispute adjudication process;
• creating deemed trusts for retention money; 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 2011 (WA).

Application of the Bill

The Bill proposes to apply to building and construction contracts entered into after its commencement. It would not apply to some construction contracts, including:

• building contracts with homeowners worth less than $500,000;
• contracts between employers and employees for construction work or related goods and services;
• contracts relating to loan agreements with financial institutions;
• contracts for drilling for or extracting minerals, oil and gas related works (this is a narrower exception than the current ‘mining exception’ in s 4(3) of the CCA);
• contracts to build watercraft; and
• contracts involving works where a party fails to hold a registration in contravention of the Building Services (Registration) Act 2011.

Contract terms

As with the existing legislation, the Bill contains a ‘no contracting out’ clause. Importantly, the Bill proposes to:

• give adjudicators, arbitrators and courts power to declare ‘unfair’ time-bar clauses void in prescribed circumstances;
• extend the prohibition in the current CCA of ‘paid-when-paid’ provisions; and
• create statutory rights (which may be inconsistent with the terms of a contract) to:
  • receive advance notice of an intention to call on a performance security; 
  • substitute a performance bond for retention money;
  • make progress payment claims (and provides minimum requirements and procedure for making progress payment claims); and
  • require a principal to respond by way of a payment schedule.

Time bars

Notice-based time-bar provisions are common in construction contracts. The Bill proposes to regulate these provisions by giving an arbitrator, adjudicator or court the power to declare void any notice-based time bar provision that it considers unfair in the particular circumstances of each case.

A declaration that a provision is unfair (and thus void) in respect of one payment claim would apply only to that claim, and would not void the provision otherwise. The provision would continue to operate with respect to other payment claims.

The Bill considers the operation of a time-bar unfair where compliance with the provision is not reasonably possible or would be unreasonably onerous. This is largely consistent with the recommendation in the Fiocco Report, which considered the Murray Report[1] recommendation.

A claimant seeking to argue that any notice-based time bar is unfair will bear the onus of proof.   

‘Pay when paid’ provisions

As with the CCA, ‘pay when paid’ provisions will continue to be prohibited. The Bill proposes to extend the prohibition beyond contract terms that make payment dependent on payment from another party, to other provisions that are contingent or dependent on the operation of another contract such as: 

• liability to pay an amount owing;
• the due date for payment of an amount owing;
• the making of a claim for an amount owing; or
• the release of retention money or of a performance bond.

Performance security

A party seeking recourse to a performance security will be required to give a notice of intention to the other party. The notice of intention must be given at least five business days before the party has recourse to the performance security (or any longer period provided for in the contract).

The notice of intention must:

• be in writing,
• identify the construction contract and the relevant provisions of the contract that the party relies on to have recourse to the performance security, and
• describe the circumstances that entitle the party to have recourse to the performance security.

Right to substitute performance security

The Bill proposes an entitlement to seek the release of retention money under a contract by substituting a performance bond for the retention money in a payment claim. To do so, the payment claim will need to include a draft of the proposed performance bond (or multiple bonds) in its final form that meet the minimum standards provided in the Bill.

Right to make payment claims and receive payment 

The Bill proposes that a party who carries out or undertakes to carry out construction work, or to supply related goods and services, have a statutory right to receive progress payments and to make a payment claim every month (or more often if provided for in the relevant contract). This is consistent with security of payment statutes in other states.

The Bill prescribes when and how payment claims may be made, and how a party receiving the claim must respond. They must do so in the form of a payment schedule to be provided within 15 days of receiving the payment claim. Any payment dispute may then be referred to adjudication.

Adjudication procedures

The Bill introduces an adjudication process that will be more consistent with those in most other Australian states and territories.

The adjudication procedures in Part 3 of the Bill remain broadly similar to those in the CCA. Their purpose is to determine payment disputes on an interim basis as quickly and inexpensively as possible, while ensuring the principles of natural justice are adhered to within the compressed timeframe. The key differences proposed by the Bill include:

• a requirement to provide notice of intention to apply for adjudication where a response to a payment claim is provided and the claimed amount is unpaid;
• shortening the time frame in which to bring an adjudication application to 20 business days following the payment claim and response procedure;
• penalising a party who does not provide a response to a payment claim or fails to provide reasons for not agreeing with the claimed amount by:
  • not allowing the party to submit an adjudication response in the case of no response to the payment claim being given; or
  • restricting the adjudication response to including only the reasons given in the payment schedule; and
• introducing a new review process, under which in some cases another (and, likely, more senior) adjudicator may be appointed to review an adjudication determination. However, the parties still retain their full rights to litigate or refer the matter to some other form of dispute resolution.

Deemed retention trusts

The Bill introduces a retention money trust scheme to provide security for builders, contractors, subcontractors and suppliers if their immediate contractual counterpart becomes insolvent. The scheme grants a first priority to the retention money retained as security under a contract over other security interests, effectively ‘ring-fencing’ the money from being claimed by other creditors.

The Bill proposes requiring all construction contracts that exceed $20,000 to have retention money trust accounts established. A trust will not need to be established for construction contracts with:

1. Government Principals; or
2. home owners, if the contract is for home building works worth more than $500,000 (with a few exceptions).

The retention money trust account works by having the party procuring the construction work or service (Principal or Trustee) retain money in a trust account in accordance with the construction contract. This is held as security for the other party’s (Contractor or Beneficiary) performance of works or services under the contract. The Bill contemplates allowing a Trustee to engage an agent to manage the trust account, at their own expense and at their own risk. A Trustee will be liable for an agent’s acts and defaults as if they were acts and defaults of the Principal themselves.

Enhanced powers of the Building Services Board

Finally, the Bill proposes to amend the Building Services (Registration) Act 2011 (WA) and the Building Services (Complaint Resolution and Administration) Act 2011 (WA) to give the Building Services Board enhanced powers to manage the commercial conduct and behaviour of registered building services providers.

The Building Services Board will be empowered to:

• declare an individual or non-corporate body an ‘excluded contractor’ where an event resulting in their insolvency has occurred;
• exclude people with a history of insolvency from registering as a building service contractor either temporarily or permanently; and
• discipline a building service provider for their failure to pay a ‘building service debt’ (a judgment debt or adjudication determination).