14 June, 2018
What you need to know
The national Review of Security of Payment Laws released its final report on 21 May 2018.
The Report makes 86 recommendations, including for a nationally consistent legislative model.
The Australian Government is now working with the States and Territories through the Building Ministers' Forum to consider and respond to the findings and recommendations of the Review.
If implemented, many of the recommendations would have significant consequences for the construction industry.
Background
The Australian Government commissioned the national Review of Security of Payment Laws (the Review) "to examine ways to improve consistency in security of payment legislation and enhance protection to ensure subcontractors get paid on time for work they have done." The Review was conducted by John Murray AM and the final report was released on 21 May 2018 (the Report).
The security of payment regimes adopted by each State and Territory broadly fall into two categories:
- the "East Coast Model", based on the Building and Construction Industry Security of Payment Act 1999 (NSW); and
- the "West Coast Model", based on the Construction Contracts Act 2004 (WA).
Various reviews at State and Territory level have resulted in amendments being made to legislative regimes in individual States and Territories that have promoted "an on-going trend towards an ever-diverging legislative landscape".
Consideration of the regimes at the Commonwealth level has prompted calls for national harmonisation. For example, in the 2015 Senate Economics References Committee (SERC) Inquiry into insolvency in the Building and Construction Industry, the SERC considered security of payment laws across Australia and recommended that the Commonwealth enact uniform national legislation.
Against that background, the terms of reference for the Review included examining the various regimes to identify areas of best practice for the construction industry.
Aside from harmonisation, another driver of the Review was the finding of the SERC that "it is a fundamental right of anyone that performs work in accordance with a contract to be paid without delay for the work they have done". Accordingly, another theme of the Review was to consider how to prevent various contractual clauses that restrict contractors from obtaining payment.
Overview
The key policy considerations underlying the Review were the need to:
- preserve cash flow for construction contractors;
- provide a quick and efficient adjudication process; and
- protect progress payments for those to whom they are rightfully due.
Whilst the Report identifies deficiencies in each of the legislative models adopted by the States and Territories, Mr Murray considered that a national regime that incorporates the prime objectives and broad structure of the "East Coast Model" is preferable, but with significant modifications so as to provide greater flexibility and ensure greater procedural fairness.
Some of these modifications address criticisms such as that found in the Report on Security of Payment and Adjudication in the Australian Construction Industry released in 2014, wherein the then-Chair of the Society of Construction Law Australia said that "instead of mending fences, the toxicity of the process is prejudicial to any prospect of the claimant ever working with the respondent again".
Others are designed to address the SERC's concerns regarding the fundamental right of contractors to be paid promptly. It is these recommendations that appear likely to have the most significant impact for participants in the construction industry, particularly given the restrictions they would impose on the parties freedom of contract.
Key recommendations
Mr Murray makes 86 recommendations that he considers should be implemented Australia-wide.
The key recommendations are summarised as follows:
1. "Reference dates" should be abandoned
Issue: The concept of a "reference date" triggering entitlement to a progress payment is currently included in the laws adopted by each jurisdiction employing the East Coast Model. The Review found that the "industry has found the concept of a reference date very confusing", including because it is unclear (given the different approaches adopted across jurisdictions) whether a payment claim given before or after the "reference date" will be regarded as valid. In addition, the Review revealed stakeholders' concerns that permitting a "reference date" to be determined by reference to the time period set out in a construction contract may undermine the primary objective of promoting prompt payment in circumstances where the contract provides for the making of a payment claim considerably after the work has been carried out.
Recommendations 14 and 17: To avoid confusion within the industry and to ensure that the objective of prompt payment is met, Mr Murray recommends abandoning the term "reference date" in favour of contractors being entitled to make a payment claim for every named month (or more frequently if the contract provides). Mr Murray also recommends that the legislation include a provision to enable contractors (where a contract has been terminated) to claim for work carried out up to the date of termination. Mr Murray states that "[t]his will overcome the emerging practice (following the High Court decision in Southern Han) of some clients or head contractors strategically invoking the termination for convenience clauses in construction contracts prior to a reference date, thereby preventing a claimant from making a payment claim."
2. Time bars should be void in certain circumstances
Issue: The Review considered how security of payment laws should deal with apparently "unfair" time-barring provisions.
Recommendation 84: Mr Murray recommends that the legislation should void contractual time bars if compliance with them would not be reasonably possible, would be unreasonably onerous or would serve no commercial purpose. This recommendation is said to reflect an attempt to balance the right to receive notice against the right to receive payment. The impact of implementing this recommendation will depend upon the precise terms of any subsequent legislation. Some of the concepts are already familiar in the context of time bar clauses. Parties often agree in their contracts that notice is required to be given only to the extent practicable and the commercial purpose of notice provisions has been considered by the courts. However, the proposed changes would likely become a source of uncertainty as the outcome of time bar defences would be subject to a third party's view of what is unreasonably onerous, etc. Accordingly, this recommendation is likely to remain a source of interest for those in the industry.
3. Respondents should be entitled to make an application for an extension of time of up to 10 business days for giving an adjudication response
Issue: The laws of each jurisdiction employing the East Coast Model contain a specific provision detailing the timeframes within which a respondent may provide its adjudication response. The New South Wales, Victorian and South Australian regimes currently provide for a maximum of 5 business days from the date the respondent receives a copy of the application within which to provide an adjudication response whereas the Australian Capital Territory, Tasmanian and Queensland regimes provide for longer timeframes. In the case of Queensland, the timeframe also depends on whether the adjudication application relates to a "standard" or "complex" payment claim. In considering what timeframe should apply, the Review was required to strike a balance between two competing policy objectives; "ensuring that the adjudication process is rapid in nature whilst ensuring a respondent is provided sufficient time in which to prepare its adjudication response".
Recommendations 39 and 40: Mr Murray endorsed the compressed timeframe provided for in the New South Wales, Victorian and South Australian regimes. However, he recommends that respondents be entitled to make an application for an extension of time of up to 10 business days for giving a response. This recommendation is intended to provide for greater flexibility, whilst not overcomplicating the legislative scheme and still promoting a quick and efficient adjudication process. It is intended that the request for an extension of time will be a matter for the adjudicator to consider based on the circumstances of the particular adjudication application before them.
4. The East Coast Model "mining exclusion" should apply
Issue: The definition of "construction work" excludes certain mining activities from the application of security of payment regimes. This is known as the "mining exclusion". Whilst the "mining exclusion" is included in some form in the laws adopted by each State and Territory, the exclusion adopted by the jurisdictions employing the West Coast Model is broader than the exclusion adopted by the jurisdictions employing the East Coast Model.
Recommendation 4: Mr Murray recommends that the definition of "construction work" as it applies in New South Wales should be adopted nationally. This is in response to stakeholders' call for clarification and consistency and in accordance with the view that security of payment laws are intended to apply to "construction work" in the broadest sense of the term. If implemented, the security of payment regimes in Western Australia and the Northern Territory may apply in a broader range of circumstances.
5. Measures to combat "adjudication shopping"
Issue: Unlike the West Coast Model, the East Coast Model does not permit parties to agree on an adjudicator. This has supposedly resulted in a practice of "adjudication shopping" whereby the claimant chooses an authorised nominating authority (ANA) that is perceived to be "claimant friendly".
Recommendations 36 – 38: In response to stakeholders' concerns, Mr Murray has recommended that whilst ANAs should have the power to nominate adjudicators, the Regulator should be the one to appoint them. Mr Murray has also recommended that parties should be entitled to agree on an accredited adjudicator, at the time of the dispute, where the dispute relates to a payment claim of more than $250,000. These recommendations are intended to remove the perception of bias and to ensure that all participants have greater confidence in the integrity of the adjudication process.
6. Parties should be entitled to make an application for the review of an adjudicator's determination
Issue: Each year, there are a significant number of cases brought before the courts regarding review of adjudicator's determinations. As was recently confirmed by the High Court, judicial review is not available for non-jurisdictional errors of law in an adjudication determination: see our Construction Disputes Updatehere. However, in addition to the inherent power of the courts to review determinations for jurisdictional error, the legislation in Victoria, Western Australia and the Northern Territory provides for limited rights of review for specific jurisdictional issues (though the approach adopted differs dramatically). In Victoria, a party can only apply for a review of a determination where it considers that the original adjudicator has erroneously included or excluded a particular claimed amount from the determination. Alternatively, in Western Australia and the Northern Territory, a party can only apply for the review of a determination in circumstances where the adjudicator has dismissed the application on jurisdictional grounds (for example, because the contract concerned is not a "construction contract").
Recommendations 43 – 48: Mr Murray recommends that parties to an adjudication should be entitled to make an application for the review of a determination (by a review adjudicator) in cases involving larger payment claims, subject to a number of statutory preconditions being satisfied (for example, that the parties did not agree the adjudicator in accordance with Recommendation 38). Mr Murray did not specify whether the grounds for the review would be limited to jurisdictional issues or would also provide for a review on the merits. However, these recommendations apparently respond to the need for a practical mechanism to overcome the shortcomings of the rapid adjudication process (which may in some circumstances result in adjudication decisions that are perceived to have been made "contrary to law and/or contrary to supporting evidence") and are intended to limit the number of aggrieved parties seeking remedy by way of judicial review.
7. Adjudicators should be more heavily regulated
Issue: The Review revealed concerns as to the current lack of regulation surrounding the appointment, eligibility and role of adjudicators.
Recommendation 66: In an attempt to combat these concerns, Mr Murray has made a number of recommendations, including the recommendation that adjudicators should be registered and graded by the "Regulator" based on seniority and skill sets.
8. A system of deemed statutory trusts should apply
Issue: Mr Murray states in the Report that "[t]he hierarchical contractual chain within which the industry operates makes subcontractors vulnerable whenever a party higher up the contractual chain either misuses funds that are rightfully due to subcontractors, or becomes insolvent".
Recommendations 85 and 86: To overcome the risk that parties higher up the contractual chain will either misuse funds, or become insolvent, Mr Murray recommends the implementation of a cascading statutory trust for construction projects over $1 million. Mr Murray states that whilst the introduction of project bank accounts (which protect tier-one subcontractors) in Queensland "are a good first step", given the pyramidal structure within which the industry operates, the introduction of deemed statutory trusts that apply to all parts of the contractual chain is the only way to "secure the payments of all subcontractors, including the most vulnerable". In his view, "[s]uch legislative intervention is long overdue".
What is next?
According to Mr Murray, achieving national consistency will require the involvement of the Commonwealth as "[l]eaving it to the states and territories to implement the recommendations … will only result in cherry-picking and further divergence in the security of payment legislations operating across the nation".
The Australian Government is now working with the States and Territories through the Building Ministers' Forum to consider and respond to the findings and recommendations of the Review.
The recommendations outlined above and many others in the Review have the potential to significantly change both the security of payment landscape in Australia as well as the construction industry more generally. Principals and contractors alike should take a keen interest in the development of any legislative response.
For further information, please contact:
Georgia Quick, Partner, Ashurst
georgia.quick@ashurst.com
