Australia: WA government announces proposed measures to protect subcontractors

Following calls in the lead up to the March 2017 state election to "give small businesses a fair go", the Western Australian government has recently announced that it will be implementing measures to provide greater protections to subcontractors.1

The state government has described subcontractors as the backbone of the construction industry and has stated it is committed to supporting subcontractor small businesses by:2

  • amending the Construction Contracts Act 2004 (WA) (the Act); and
  • introducing mandatory Project Bank Accounts (PBA) and a code of conduct for state government run projects between $1.5 million and $100 million.

The proposed amendments to the Construction Contracts Act 2004 (WA)

On 10 June 2014, as required under s 56(1) of the Act, the state government commissioned Professor Philip Evans of Curtin University to review the operation and effectiveness of the Act. In October 2014, Professor Evans presented the "Discussion Paper – Statutory Review of the Construction Contracts Act 2004 (WA)" (Discussion Paper) for review and comment by key stakeholders and industry participants to enable him to prepare a report for Parliament (Report).

The state government considered the Report in detail and on 16 August 2016, the Hon Michael Mischin, Minister for Commerce, tabled the Report in the Legislative Council.

Michael Mischin stated that while the Report does not signal the need for significant structural reform to the rapid adjudication regime, the state government will adopt a number of the 28 recommendations in the Report.

The state government, through the Building Commission, has committed to:

  • developing better processes and procedures for lodging applications for adjudication (including an online lodgement facility and a fixed fee service for adjudicating low value payment disputes);
  • increasing industry awareness (including dedicated phone services for resolving payment disputes, advice on how to access solvency information, information on the Act and how to use its processes and procedures properly); and
  • increasing the use of the Building Services (Registration) Act 2011 (WA) as a means of investigating and disciplining builders that have engaged in unfair behaviour or systematic non-payment of subcontractors.

The state government has also signalled its intention to make the following changes to the Act:3

  1. Increasing the application time for adjudication of payment disputes from 28 days to 90 business days.
  2. Enabling 'claims recycling' (by which claims which have previously been rejected may be made again later in the life of a contract).
  3. Reducing the maximum time a head contractor can take to pay a subcontractor from 50 days to 30 business days.
  4. Making it an offence to intimidate, coerce or threaten a person or business in their access to remedies available under the Act.
  5. Developing express statutory trust arrangements for retention money on high-value construction projects, which will protect retention moneys during insolvency events.

The potential implications of each of these five proposed changes are discussed in further detail below.

Change 1: Increasing application time

The short timeframe for marking an adjudication application was a concern raised by the Small Business Commissioner's 2013 investigation into subcontractor insolvencies.4 The Society of Construction Law Australia's (SoCLA) Legislation Reform Subcommittee recommended 90 days as striking a balance between the 90 days in the near equivalent Northern Territory security of payment legislation and 12 months in New South Wales's security of payment legislation.5

It also raises the question whether adjudication response times should be increased to counter 'ambush tactics' that may be used by contractors. That is particularly in light of SoCLA's Legislation Reform Subcommittee criticising the current 3 month timeframe for all adjudication applications as being a 'one size fits all approach'.6

Change 2: Enabling claims recycling

The second change is the legislature's response to a body of case law which does not allow the adjudication of 'recycled claims'.7 Michael Mischin stated the amendment would be introduced to ensure parties to a contract have a greater time frame and increased flexibility in seeking rapid adjudication of a payment dispute. It remains to be seen how this amendment will work and if the legislature will target the avoidance of 'adjudication shopping' where claims can be repeated or 'recycled' in different adjudication applications in the hope of a favourable result.

Change 3: Reducing maximum time for payment

The third change will only have the practical difference of approximately one week (with 30 business days being approximately 45 days). It follows the Department of Commerce's bulletin earlier this year reminding contractors of their rights under the Act8 in response to revelations that some construction contracts had greater payment terms than 50 days.

Change 4: Intimidation and coercion

The fourth change may affect negotiations attempting to resolve disputes. Depending on how broad the legislature drafts the proposed amendment, it may be an offence or prohibition to agree that one party will not exercise its remedies under the Act. In particular, it may be an offence where there is unequal bargaining power between the parties.

Change 5: Trust arrangements

The fifth change may have a significant impact depending on how the legislature intends to deal with the release of retention funds from the separate trust account. The concern for contractors arises if the legislature goes as far as mandating the timing of the release of retention. If that is mandated, it may present a problem where there is a dispute between the parties about significant defects at the time when retention is to be released. If the release of retention is not mandated, then the requirement to maintain a separate trust account will only affect cash flow and interest earning potential for contractors.

In addition to the five recommendations that Michael Mischin has identified, the state government may also introduce other recommendations in the Report. The most significant potential change tabled in the Discussion Paper was to include a provision in the Act to disallow liquidated damages to be deducted from a progress claim.9

It is unclear when these changes will be introduced through Parliament, but what is clear is that the state government has identified these changes as a matter of priority.10

The introduction of Project Bank Accounts on government projects

The state government has also delivered its promise to introduce a measure to guarantee payments to subcontractors when the government contractor becomes insolvent. Following a three year trial on seven government contracts, from 30 September 2016, PBA's will be mandatory for projects valued between $1.5 million and $100 million run by the Building Management and Works section of the state government.

The opposition has put pressure on the state government following the fallout from the CPD Group collapse.11 After the introduction of the measures, the opposition criticised the government for not going far enough and has promised that, if elected, it will introduce PBA's on construction projects run by the Treasury Office; greater than $100 million.12

PBA's are a dedicated trust account to facilitate payments directly from the principal to the head contractor and participating subcontractors as follows:13

  1. the principal, head contractor and subcontractors sign a PBA trust deed;
  2. the principal, head contractor and the Commonwealth Bank of Australia (Bank), who has pre-agreed to the PBA documentation, sign a PBA agreement;
  3. the head contractor establishes the PBA with the Bank;
  4. subcontractors who have a direct contract with the head contractor are required to sign up and participate in the PBA if the value of the contract exceeds a specified amount or otherwise can opt to sign up and participate in the PBA;
  5. during the project, the head contractor submits a 'payment instruction' to the Bank which allocates a certain amount to be paid between the head contractor and subcontractors and provides for retention; and
  6. the principal pays the money into the PBA and the Bank disburses those funds according to the payment instruction (including retention arrangements).

Other than increased administration work, compliance with the PBA mechanism should not be of major concern to contractors and subcontractors. The major concern is how the release of retention is dealt with, which is unclear. The Bank will hold the retention funds, but under the PBA arrangements, it is not clear when the retention is released to subcontractors and whether a contractor can call on retention funds in circumstances where there are significant defects and the parties are in dispute.

The introduction of a Code of Conduct on government projects

In addition to the PBA's and following requests by construction industry participants,14 the state government also proposes to introduce a code of conduct for tenderers on state government funded construction projects.

This code will be used to actively weed out bad behaviour on building sites, poor payment practices and anti-competitive behaviour. Those companies who do not adhere to the code of conduct will be ineligible to tender on future state government projects.

Footnotes

1 https://www.mediastatements.wa.gov.au/Pages/Barnett/2016/08/Greater-protection-measures-for-subcontractors.aspx

2 Western Australia, Parliamentary Debates, Legislative Council, 16 August 2016, p. 3 (Michael Mischin, Minister for Commerce).

3 Western Australia, Parliamentary Debates, Legislative Council, 16 August 2016, p. 3-4 (Michael Mischin, Minister for Commerce).

4 Professor Phil Evans, Discussion Paper – Statutory Review of the Construction Contracts Act 2004 (WA), October 2014 citing the Final Report Construction Subcontractor Investigation - Advice and Recommendations Provided to the Minister for Small Business from the Western Australian Small Business Commissioner, Mr David Eaton, March 2013.

5 Professor Phil Evans, Discussion Paper – Statutory Review of the Construction Contracts Act 2004 (WA), October 2014 citing the Report on Security of Payment and Adjudication in the Australian Construction Industry", Australian Legislation Reform Sub-Committee of Society of Construction Law Australia, February 2014.

6 Professor Phil Evans, Discussion Paper – Statutory Review of the Construction Contracts Act 2004 (WA), October 2014, at [3.1.2] p 40.

7 See for example Georgiou Group Pty Ltd v MCC Mining (Western Australia) Pty Ltd [2011] WASAT 120.

8 https://www.commerce.wa.gov.au/sites/default/files/atoms/files/ib_065_payment_terms_under_cca.pdf

9 Professor Phil Evans, Discussion Paper – Statutory Review of the Construction Contracts Act 2004 (WA), October 2014, at [3.1.6] p. 43. See Building and Construction Industry Security of Payment Act 2002 (Vic) s 10B(2)(c).

10 Western Australia, Parliamentary Debates, Legislative Council, 16 August 2016, p. 3 (Michael Mischin, Minister for Commerce).

11 Western Australia, Parliamentary Debates, Legislative Assembly, 28 June 2016, p4158f-4169a.

12 Protection to help safeguard subcontractors is welcome, The West Australian,13 August 2016.

13 https://www.finance.wa.gov.au/cms/uploadedFiles/Building_Management_and_Works/New_Buildings/introduction_to_project_bank_accounts.pdf

14 https://cciwa.com/about-us/CCI-News-Centre/news-articles/2015/07/29/wa-needs-a-construction-code-of-conduct

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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