The Fiocco Review: A step closer to national security of payment laws

The WA Government has released its Security of Payment Reform in WA Building and Construction Industry final report.

In a time of financial distress for many participants in the construction industry, the report proposes various reforms to promote prompt payment to maintain a contractor’s cash flow. In doing so, the report provides an in-depth Western Australian view on this year’s national Review of Security of Payment Laws (Murray Review).[1]

WHAT WAS THE FIOCCO REVIEW?

The Security of Payment Reform in WA Building and Construction Industry final report (Fiocco Review) was produced for the WA State Government by an independent advisory group chaired by prominent barrister John Fiocco[2] and was undertaken in response to continuing payment delay and default in the construction industry. The independent advisory group was asked to consider, among other things, the extent to which WA should adopt the Murray Review’s recommendations.

WHAT DID IT RECOMMEND?

The Fiocco Review recommends adopting a range of the Murray Review’s recommendations, but differs from the Murray Review in some significant respects. It also proposes key new reforms not considered by the Murray Review.

Regarding statutory adjudication, the Fiocco Review proposes movement away from the model used in Western Australia and the Northern Territory (West Coast Model) towards the significantly different model recommended by the Murray Review (Murray Model) (which itself was based on the various forms of the ‘East Coast Model’ adopted in the Eastern States).

The Fiocco Review also makes other significant recommendations aimed at bolstering payment security for contractors and subcontractors, including statutory trust schemes and penalties for builders with poor payment practices.

HOW WILL IT AFFECT THE ADJUDICATION REGIME?

The Fiocco Review, in largely adopting the Murray Model, admitted it was more complex than the West Coast Model. However, it reasoned that ‘some additional complexity is a price worth paying to achieve’ the aim of ‘providing parties with statutory rights to claim and receive payment promptly and an efficacious means of enforcing their rights, rather than simply a rapid dispute resolution process.’[3]

Some of the key aspects of the recommended model include:

• A new security of payment Act would be introduced, replacing the WA Act.
• It would provide a statutory right to progress payments that supplements (and overrides) any inconsistent contractual regime, as distinct from simply a rapid dispute resolution process.
• Claimants would have to comply with statutory requirements regarding the information in payment claims and how and when they are made in order to apply for adjudication. The Fiocco Review, unlike the Murray Review, recommends s 13 of the NSW SOP Act as the preferred model.
• Respondents must then provide a payment schedule containing certain prescribed information, within the earlier of the time provided by the construction contract or 15 business days after the payment claim is served (compared to the 10 business days recommended by the Murray Review).
• A respondent would not be able to include in its adjudication response any reasons for withholding payment which had not already been included in a payment schedule provided to the claimant.
• The claimant may apply for adjudication or recover the unpaid portion of the claimed amount as a debt from the courts if the Respondent fails to provide a payment schedule within the prescribed timeframe or fails to pay the amount claimed by the due date of payment.
• A narrower mining exclusion (in the form of s 5(2) of the NSW Act) would be adopted. Unlike the Murray Review, the Fiocco Review also calls for discussion of further limiting the exclusion or removing it entirely.
• The WA Act’s limited right of review by the State Administrative Tribunal when an application is dismissed by an adjudicator would be retained. The review process recommended in the Murray Review, which also has triggers based on the adjudicated amount, would not be adopted.

HOW WILL IT AFFECT CONTRACTS AND CONTRACT ADMINISTRATION?

The substantial proposed reforms to the adjudication regime should not overshadow the significance of the other recommendations made in the Fiocco Review.

Recommendations which are similar to, or adopt, Murray Review recommendations include:

• Statutory trust schemes be adopted, in preference to a right of adjudication applicants to require principals to withhold money owed to head contractors/respondents. For projects over $1 million, payments received by a party for work conducted by another party would be held on trust for the party who performed the work. Further, any party holding retention moneys would hold that money on trust, irrespective of the contractual value.
• Time bars would be void where compliance with them would ‘not be reasonably possible’ or ‘be unreasonably onerous’, or where ‘non-compliance would [not] result in prejudice to the other party’.[4] The last test is recommended instead of the Murray Review’s ‘serving no commercial purpose’ test.[5]
• The date for payment of progress claims by a principal to a head contractor would be 20 business days, and 25 business days from a head contractor to a subcontractor.

The key new recommendations, not addressed in the Murray Report, include:

• Late payments of adjudication determinations or court judgments would be a disciplinary matter actionable by the Building Services Board.
• There would be a demerit point system whereby building service providers may be fined or have their registration suspended or cancelled for poor payment practices.
• All security held under a contract would be required to be returned within 12 months after practical completion, and notice of 10 business days’ would be required prior to recourse to security.
• All building services contracts valued at $20,000 would be required to be in writing and contain certain information, with limited exceptions.

WHAT TO EXPECT?

If adopted, the security of payment model recommended by the Fiocco Review would represent a significant step towards greater federal unity of security of payment laws. However, by retaining aspects of the WA Act and picking and choosing from the Eastern States, it would result in yet another unique form of the East Coast Model.

Whether a national regime will be implemented remains to be seen, but as the Fiocco Review points out, ‘while national harmonisation is an admirable objective, it may be more realistic to aim for greater national consistency, at least in the short term.’[6]

Any move in WA towards the key components of the Murray Model for payment claim adjudication would require WA industry to invest significant time in adjusting to the working of the new, more prescriptive, regime. Parties would have to have a better understanding of their statutory rights and obligations than under the existing system. With these factors in mind, the Fiocco Review recommends a lead-in period of at least 12 months if the regime is adopted.

The recommendations for reforming the contract administration process could encourage timely responses to claims, which could in turn reduce cash flow uncertainty for those down the contractual chain. A consequence of the more rigorous requirements may be increased administration costs and less flexibility with cash flows. Further, the introduction of statutory deemed trusts could increase insolvency risk, particularly for head contractors.