19 September, 2018
What you need to know
On 22 August 2018, New South Wales Fair Trading released the Building and Construction Industry Security of Payment Amendment Bill 2018 (NSW) proposing a number of changes to the Building and Construction Industry Security of Payment Act 1999 (NSW).
Some of the key changes include introducing a statutory entitlement to progress payments at least once per month and introducing liability for directors and other individuals where they are involved in contraventions of the Building and Construction Industry Security of Payment Act 1999 (NSW).
The New South Wales Government has also released a consultation paper on a proposal for the introduction of "deemed" statutory trusts.
New South Wales Fair Trading is currently seeking public and stakeholder feedback on both the Building and Construction Industry Security of Payment Amendment Bill 2018 (NSW) and the Consultation Paper by 18 September 2018.
Amendment Bill
On 22 August 2018, New South Wales Fair Trading (Fair Trading) released the Building and Construction Industry Security of Payment Amendment Bill 2018 (NSW) (Bill) proposing a number of reforms to the Building and Construction Industry Security of Payment Act 1999 (NSW) (Act).
The Bill is the result of stakeholder feedback on a discussion paper released by Fair Trading in 2015, as well as consultations with peak industry bodies in 2017 and 2018. The reforms are intended to "provide greater protection for subcontractors and promote cash flow and transparency in the contracting chain", whilst also ensuring that any additional regulatory requirements are not unduly burdensome.
Some of the key reforms proposed by the Bill are summarised as follows:
Reform 1: statutory entitlement to a monthly progress payment
The Bill seeks to amend the definition of "reference date" so that contractors will be entitled to progress payments at least once per month (or more frequently if agreed) for work done within that month.
The Explanatory Statement says that this reform is aimed at removing industry confusion in relation to the definition of "reference date" and is also intended to ensure that the objective of prompt payment is met.
The Bill still allows for contracts to incorporate provisions for payments to be made on the achievement of milestones or on a "one-off" basis. However, any such milestone or "one-off" payment would only be valid to the extent that it was paid earlier than the reference date on the last day of each month (ensuring that monthly payments are still made).
Reform 2: entitlement to a final progress payment after termination
This reform would establish a statutory entitlement to a final progress payment for work carried out following termination of a contract.
The Explanatory Statement says that following the High Court's decision in Southern Han Breakfast Point Pty Ltd (in Liq) v Lewence Construction Pty Ltd [2016] HCA 52 (that where a contract provides for reference dates, those reference dates do not survive termination of the contract), "a practice emerged whereby head contractors strategically wait until the work is completed, or close to completion, and then terminate the contract prior to a reference date, to prevent a claimant from making a final claim". This reform would overcome this practice.
Reform 3: re-introduction of the requirement that a payment claim include an endorsement that it is made under the Act
The re-introduction of this requirement is in response to "overwhelming" feedback from industry stakeholders that its removal in 2014 created uncertainty for both respondents and claimants (resulting in ambiguity as to the status of claims). According to the Explanatory Statement, "Stakeholders agreed that a payment claim endorsed with a statement that it is made under the Act evidences a clear intention to engage the formal process under the Act".
This proposal comes less than a year after the enactment of reforms in Queensland removing the requirement to endorse payment claims (although the relevant amendments have not yet commenced).
Reform 4: adjudication applications can be withdrawn
This reform would allow claimants to withdraw an adjudication application at any time before it is determined.
Although the Act implies that an adjudication application may be withdrawn or settled (see section 29(4)) there is no express provision to that effect. This reform would remedy any uncertainty in this regard and bring New South Wales into line with the security of payment laws of Queensland, South Australia, Western Australia, Tasmania and the Northern Territory (each of which contain a similar provision).
Reform 5: code of practice for ANAs
This reform would provide for and enforce a "Code of Practice" (Code) established under the Act for Authorised Nominating Authorities (ANAs) who are responsible for receiving adjudication applications, appointing adjudicators and advising parties in relation to adjudication procedures.
It is said that "the Code will outline and clarify expectations, responsibilities and obligations [of ANAs] when undertaking their functions under the Act" with the aim of relieving stakeholder concerns about the independence of the adjudicator selection process, as well as perceptions of bias in the current system. Failure to comply with the Code will attract financial penalties and may also result in the Minister exercising their power to withdraw the authority of the ANA to nominate adjudicators.
Reform 6: Supreme Court power to sever and remit adjudication determinations
The draft Bill includes a provision to the effect that if the Supreme Court finds that a jurisdictional error occurred in the making of an adjudication determination, the Court may sever the part of the determination infected by jurisdictional error and, in the process, confirm that the balance of the adjudication decision remains enforceable.
This reform would change the current position under the common law, which provides that jurisdictional error invalidates the whole of an adjudicator's determination. The Explanatory Statement provides that the reform intends to "remove the incentive for a party to challenge a decision with only minor mistakes in an attempt to have the entire decision set aside".
The Building and Construction Industry Payments Act 2004 (QLD) contains a similar power (see section 100(4)), but the Supreme Court of Queensland has only exercised it in a small number of cases since its enactment.
Reform 7: liability for directors and managers involved in contraventions of the Act
This reform would introduce liability for directors and individuals involved in the management of a corporation where they are involved in contraventions of the Act. Whilst the reforms provide for accessorial liability to all offences under the Act that are capable of being committed by a corporation, the reforms will only apply executive liability to "serious offences" (that include, for example, not attaching a supporting statement to a payment claim or providing a supporting statement that is false or misleading).
That the implementation of these reforms may have significant consequences for both corporations and individuals is recognised in the Explanatory Statement that says that corporations "will likely need to implement additional practices in relation to financial and business management to ensure compliance with" the Act.
Proposal for deemed statutory trusts
In addition to the Bill, the New South Wales Government has also released a consultation paper on a proposal for the introduction of "deemed" statutory trusts (Consultation Paper).
The Consultation Paper sets out the Government's proposal to amend the Act to "provide that all amounts received by a head contractor or subcontractor (the trustee) as payment for work completed under a construction contract are deemed as trust funds for the benefit of its subcontractors, workers and suppliers (the beneficiaries)". The nature of the trust as "deemed" refers to the fact that the "monies are automatically taken to be held on trust the moment they are received by a party".
The implementation of statutory trusts has been considered and endorsed in a number of previous inquiries and reviews, including the 1985 Law Reform Commission of WA Review (WA Review), the 2012-13 Collins Inquiry into Construction Industry Insolvency in NSW (Collins Inquiry) and the recent national Review of Security of Payment Laws (Murray Review) (which released its report on 21 May 2018: see our previous article on the Murray Review here). In the final report published by the Murray Review, Mr John Murray AM stated that a cascading statutory trust is "the most effective way that payments can be secured from misuse and the risk of head contractor insolvency".
The Consultation Paper proposes to give effect to this recommendation and provides an opportunity for stakeholders to submit feedback.
Some of the key features of the proposed model include that:
- unlike Project Bank Accounts (which have been trialled on various government projects in New South Wales and Western Australia, and which have commenced in respect of certain government projects in Queensland) statutory trusts would extend along the contractual chain and apply to all subcontractors linked to the head contractor (including vulnerable subcontractors at the base of the contractual chain);
- the requirement for "deemed" statutory trusts would apply to all construction projects worth 1 million dollars or more;
- the trustee (i.e. the contractor holding money that is owed to another contractor/beneficiary) would be responsible for managing the deemed trust monies;
- the trustee would be required to hold trust monies in a separate trust account so as to prevent trust funds from becoming mixed with other money of the trustee and to make it clear that trust moneys do not form part of the general pool of funds to be distributed to creditors in the case of insolvency;
- beneficiaries would be provided with a statutory right to inspect trust account records; and
- directors and other individuals involved in the management of the corporation would be held liable for a breach of the corporations' duties as a trustee if the person had knowledge of the breach and failed to take reasonable steps to prevent or stop it.
The Consultation Paper says that "[t]he primary aim of this model is to ensure that when the time arrives for a progress payment…that the monies remain protected".
Next steps
Fair Trading is currently seeking public and stakeholder feedback on both the Bill and the Consultation Paper by 18 September 2018.
Fair Trading will review the submissions and may make further amendments to the Bill. It may also undertake further targeted consultation on any key issues identified.
All submissions made in relation to the Consultation Paper will be made publicly available on the Fair Trading website. Following the consultation period, feedback will be analysed and progress of the review will also be published on the Fair Trading website.
Analysis
The Bill provides for a number of reforms that will bring the New South Wales security of payment laws into line with the security of payment laws of other States and Territories. It also includes other reforms that the Explanatory Statement says "are consistent with the findings of the Murray Review".
One of the principal recommendations of the Murray Review was for a nationally consistent legislative model. By moving alone on only a limited number of findings of the Murray Review, the Bill may ultimately mark a further divergence in the security of payment laws across Australia.
However, the adoption of the Bill would at least provide a case study for some of the Murray Review recommendations, and the success (or otherwise) of the reforms may pave the way for the implementation of a nationally consistent legislative model going forward.
For further information, please contact:
Georgia Quick, Partner, Ashurst
georgia.quick@ashurst.com
