30 August, 2016
In brief
Professor Philip Evans’ Report on the Operation and Effectiveness of the Construction Contracts Act 2004 (WA), has now been published, together with the State Government’s Response.
The Report makes 28 recommendations, to improve the operation and effectiveness of the Act, however no major structural changes to the Act are proposed.
Insolvency of contractors is raised as a key issue in the Report, and the State Government has committed to making changes to the Act to improve the rapid adjudication process to address security of payment and other issues which impact a contractor’s solvency.
Professor Philip Evans’ Report on the Operation and Effectiveness of the Construction Contracts Act 2004 (WA) (Report), which was tabled in Parliament on Tuesday 16 August 2016, has now been published, together with the State Government’s Response (Response). In this alert, we identify the main features of the Response and its potential impact.
The Report, the Response and particularly some early comments by the State Government suggests that the construction sector in Western Australian is headed for its biggest shake up in 10 years. Some unscrupulous practices largely driven by a tightening market, it seems, will lead to changes designed to address a perceived imbalance in a sub-contractor unfriendly market.
Unlike previous reviews of security for 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.
The Report recommends no significant structural amendments; rather the 28 recommendations are directed to the improvement of the operation and effectiveness of the Act, whilst also keeping the legislation simple, for ease of use.
Government’s Response to the Report
The Government has released its formal response to the recommendations made in the Report. Whilst consideration of the insolvency of head contractors as an issue for security of payment was not part of the original terms of reference of the Report, it was raised in the Report as a key challenge to the construction industry. Inadequate cash flow and high cash use were seen to be the main contributors to higher insolvency rates in the industry, thus highlighting the importance of security for payment legislation.
The State Government has acknowledged this issue in its response to the Report. To improve the security of payment within the construction industry, the Government has committed to taking a number of actions, including:
- amending the Act to improve the rapid adjudication process;
- evaluating, through the Building Commission, the viability of using statutory retention trusts and Project Bank Accounts (PBAs); and
- considering establishing a reference group, to better protect sub-contractors on State Government projects.
Further details of the Government’s response to the Report are set out below.
Recommendations the Government supports
Consistent with its aims, the Government will make various changes to the Act; the most significant ones being:
- a likely significant increase (likely to be 90 business days) to the time in which adjudication applications can be made;
- altering time periods from calendar days to business days and excluding the Christmas holiday period;
- permitting recycled claims;
- removal of the obligation to dismiss applications for technical deficiencies;
- additional and ongoing registration and renewal process for adjudicators; and
- 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 with the Report’s recommendations that the Act should not be amended to:
exclude liquidated damages, and the implied terms provisions should also remain in the Act; and
allow contracting out of the Act.
The Government has also accepted a number of recommendations which involve the Building Commission, as the industry regulator, working to increase and enhance the information and resources available on the Act and its processes. This will include the provision of education to ensure all stakeholders are aware of their rights and obligations and the procedures under the Act. It is proposed that this will be executed through advertising, industry awareness sessions and the publication of online information.
Recommendations deferred
The Government will consider further certain recommendations made in the Report. At this stage the ‘mining exclusion’ will stay (contrary to the recommendation in the Report), but the Government intends to consult with industry on that recommendation.
The State will also consider ways in which the enforcement of determinations can be streamlined.
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. The Government will also refer consideration of this recommendation to the Building Commission. Further consideration will be given to using Project Bank Accounts (PBA), as a way of addressing unscrupulous contractors and their solvency. The Government has conducted a trial using PBAs for high value projects and is finalising the evaluation of the trial.
Recommendations the Government does not support
Whilst the Government supports a majority of the recommendations made in the Report, or will at least consider them further, it does not accept the following:
- amending the Act to require that construction contracts be in writing; and
- requiring Australian Standard forms of contract to apply where the State Government is the principal (or the contract administrator).
The Government’s Response is clearly directed to addressing 2 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.
A copy of the Government’s complete response can be accessed here and a copy of the Report here.
For further information, please contact:
Dan Dragovic Partner, Herbert Smith Freehills
dan.dragovic@hsf.com
