Australia: NSW Government takes first step to address the insolvency crisis in the construction industry

The spate of insolvencies in the NSW construction sector shows no signs of easing. On 24 October 2013, the Building and Construction Industry Security of Payment Act Amendment Bill 2013 was introduced into Parliament. The Bill is part of the government's broader reform package to address the level of insolvency being experienced in the NSW construction sector.

The Bill will introduce important changes to the Building and Construction Industry Security of Payment Act 1999 for most industry participants, except for the domestic residential building sector.

The Bill's amendments will apply to construction contracts entered after the amendments come into force. They adopt various recommendations of the Collins Inquiry into the Construction Industry Insolvency (November 2012) with a focus on greater protection for subcontractors.

MANDATORY HEAD CONTRACTOR STATUTORY DECLARATIONS AND WIDER POWERS FOR PROSECUTION

Responding to allegations of the widespread submission of false statutory declarations with payment claims, the Bill introduces new offences and penalties.

It will be an offence for a head contractor to submit a payment claim without a "supporting statement", attracting a maximum penalty of $22,000. That statement will need to indicate that it relates to the payment claim and include a declaration that all subcontractors and suppliers have been paid amounts due to them. The form of the supporting statement will be prescribed by the Regulations to the Act.

Further, a head contractor that serves a payment claim with a supporting statement, knowing that statement to be false or misleading in a material particular in the particular circumstances, will be punishable by a maximum penalty of $22,000, 3 months imprisonment, or both.

Officers authorised by the Department of Finance and Services will be given broad powers to investigate and prosecute head contractors in relation to false statutory declarations.

Notably, these matters are expressed as prohibitions. The Bill does not say whether either of those offences will invalidate the payment claim to which they relate. On one view, a payment claim could still ground a statutory debt and an adjudicator may still have the power to award the payment – even though an offence has been committed.

CERTAIN PAYMENT CLAIMS NO LONGER REQUIRE THE "MAGIC WORDS"

The Collins Inquiry found that subcontractors were reluctant to submit claims under the Act due to perceived risks that they would not be awarded future work. To address this issue, payment claims will no longer have to include a statement to the effect that they are made under the Act in order to attract the operation of the Act. That is unless the claim related to a contract connected with an exempt residential building contract (see below).

While many repeat principals such as developers and government will be able to recognise a statutory payment claim by its accompanying supporting statement, "one off" principals may be caught out by this change. The situation will not be so clear for head contractors, with no statutory requirement on subcontractors to provide them with such a declaration.

Plainly, principals and head contractors will need to put in place even more rigorous claims management processes given that statutory payment claims will no longer be expressly identified as such.

PROMPT PAYMENT PROVISIONS

One of the key findings of the Collins Inquiry was that payments to subcontractors were consistently late, delayed or reduced with payment cycles being unacceptably long, ranging from anywhere between 14 to 120 days. The finding demonstrates that the "pay now argue later" intention of the Act was not being achieved.

In an effort to ensure prompt cash flow down the contracting chain, prompt payment provisions will be introduced requiring head contract payment terms to be no more than 15 business days and subcontract payment terms of no more than 30 business days. Longer payment terms will be void.

Once again, the Bill treats some residential building contracts differently.

CONTRACTS CONNECTED WITH DOMESTIC RESIDENTIAL BUILDING CONTRACTS

The Act still won't apply to construction contracts for the carrying out of residential building work on such part of any premises as the party for whom the work is carried out resides in or proposes to reside in, that is, domestic residential consumer contracts. Those contracts are described in the Bill as "exempt residential construction contract[s]".

Where the construction contract concerned is "connected" to an exempt residential construction contract, the Bill makes special provision.

In such cases, a statement to the effect that a claim is made under the Act will still be required in order to attract the operation of the Act. This will ensure that those operating in the home building sector cannot be taken by surprise.

Further, in such cases the contract will still govern the due date for payment. If the contract makes no express provision with respect to the matter the due date for payment will still be 10 business days after the payment claim is served.

MORE TO COME

The government has indicated a clear intention to strengthen the existing legislative framework of the Act through a series of reforms that will be introduced progressively in the short term. Looking ahead, the next tranche of reforms is likely to introduce retention trust schemes for subcontractors and changes to government construction procurement.

The Bill can be accessed by clicking here.

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