13 October, 2016
A much anticipated report on Western Australia’s Construction Contracts Act has been made public and the State Government’s quickly released response suggests that the sector is headed for its biggest shake up in 10 years.
The Report on the Operation and Effectiveness of the Construction Contracts Act 2004 (WA) indicates that certain unscrupulous practices, largely driven by a tightening market, will lead to industry changes designed to address a perceived imbalance in a sub-contractor unfriendly market.
Unlike previous reviews of security of payment legislation undertaken in other states, the Report casts the Construction Contracts Act 2004 (WA) (Act) in a generally favourable light, as an uncomplicated statutory scheme for the evaluation of payment claims, through a rapid dispute resolution process.
Whilst the Report makes 28 recommendations, there is no indication that the Act will undergo any major structural amendments; rather the recommendations are directed at improving the operation and effectiveness of the Act, while also keeping the legislation simple, for ease of use.
Government’s Response to the Report
The Report identified insolvency of head contractors as a key challenge to the construction industry, with inadequate cash flow and high cash use touted as the main contributors to higher insolvency rates. This highlighted the importance of security of payment legislation and explains the Government’s support for the recommendations which improve the security of payment within the construction industry.
In this regard, the Government has committed to making a series of amendments to the Act to improve the rapid adjudication process and will consider the viability of using statutory retention trusts and Project Bank Accounts to hold retention moneys on trust for contractors and sub-contractors. It is also likely that the Government will set up a reference group to better protect sub-contractors on State Government projects.
Recommendations the Government supports
The most significant amendments to the Act, which the Government supports include:
a) a likely significant increase (likely to be 90 business days) to the time in which adjudication applications can be made;
b) altering time periods from calendar days to business days and excluding the Christmas holiday period;
c) permitting recycled claims;
d) removal of the obligation to dismiss applications for technical deficiencies;
e) additional and ongoing registration and renewal process for adjudicators; and
f) penalties for failure to comply with prohibited terms.
The Government will legislate to permit the publication of certain adjudication determinations and adjudicators’ experience and expertise.
The Government also agrees that the Act should not be amended to exclude liquidated damages or allow parties to contract out of the Act. The implied terms provisions will also remain as part of the Act.
The ‘softer’ recommendations supported by Government involve the Building Commission, as the industry regulator, working to increase and enhance the information and resources available about the Act and its processes. It seems this will be done through advertising, industry awareness sessions and the publication of online information.
What’s been deferred
Government has opted to defer its position on some of the recommendations, subject to further consideration and industry consultation. For example, at this stage the ‘mining exclusion’ in the Act will stay (contrary to the recommendation in the Report).
The Report also recommends that consideration should be given to amending the Act to ensure that trust money is held by an independent third party, rather than by the principal. The Government is reluctant to support this as a wholesale change and will also refer consideration of this recommendation to the Building Commission. Further consideration will be given to using Project Bank Accounts. The Government has conducted a trial using Project Bank Accounts for high value projects and is finalising the results of this trial.
What’s ruled out
While the Government supports a majority of the recommendations made in the Report, or will at least consider them further, it does not accept:
a) amending the Act to require that construction contracts be in writing; and
b) requiring Australian Standard forms of contract to apply where the State Government is the principal (or the contract administrator).
Details ahead
The Government’s Response is clearly directed to addressing two main features of the current construction market in this State – unscrupulous and insolvent contractors. The industry can expect an emphasis on measures to assist smaller and exposed sub-contractors. The industry awaits the detail.
For further information, please contact:
Dan Dragovic Partner, Herbert Smith Freehills
dan.dragovic@hsf.com
