Australia: National Review of Security of Payment Laws by John Murray AM released

In brief - The recent release of the Review of Security of Payment Laws final report may deliver improvements to the building and construction sector nationwide

Terms of reference

To address the inconsistent operation of Security of Payment (SoP) regimes in the states and territories, the Federal Government commissioned a review by John Murray AM to identify areas of legislative best practice with a view to improving consistency and the level of payment protection afforded to construction industry participants.

Murray's Terms of Reference also included taking into account recent reviews and inquiries conducted in relation to SoP (including the 2003 report of the Cole Royal Commission into the Building and Construction Industry and the 2015 report by The Senate Economic References Committee on insolvency in the Australian construction industry), and consulting with business, governments, unions and interested parties. As a result, the Report includes a detailed "round up" of key aspects of SoP law and reform bids over the life of the nation's SoP laws.

Efforts to harmonise divergent regimes

Calls for greater uniformity amongst SoP regimes arose almost as early as the arrival of the nation's second SoP law - the Victorian Act that commenced operation in 2003, four years after the NSW ground breaking Act. In 2003, the Cole Royal Commission provided recommendations and even a draft Building and Construction Industry Security of Payment Bill 2002 (Cth) to improve the functioning of SoP across Australia.

Numerous report writers and commentators from industry, government, the judiciary, academia, and the legal profession have called for reform and harmonisation. In 2011, the Hon Justice Vickery commented:

"We now have a national scheme comprising 8 Acts. It is a scheme which has at least two common themes - the recognition of a common objective and a manifest divergence in approach to achieving it."

Since that time, further divergence in legislative and judicial approaches has only flourished.

Headline recommendations of the National Review of Security of Payment Laws

Consistent with the stated task of selecting legislative best practice, and noting that SoP regimes involve the balancing of competing priorities, Murray recommends adoption of the "East Coast" model, following the NSW Act most closely.

Key recommendations

Of Murray's 86 recommendations, the following are amongst the more noteworthy:

Best practice model

  • Rejecting the Queensland 2014 reform of a two-tier system of "complex" and "standard" claims, Murray recommends simplicity, without a composite approach;

Definitions

  • Murray recommends only claimants who are appropriately licensed to carry out construction work be entitled to make a claim under SoP;
  • Murray recommends that the definition of "business day" exclude the longer shut-down period of 22 December to 10 January;

Application of the legislation

  • Consistent with the Victorian Court of Appeal's decision in Façade Treatment Engineering (in liq) v Brookfield Multiplex Constructions [2016] VSCA 247, Murray recommends that claimants in liquidation should be barred from accessing the processes of SoP;
  • Murray recommends rejection of the Victorian-style "excluded amounts" regime, with the result that SoP will cover all amounts that a person is entitled to under a construction contract;
  • In a fillip to the residential building industry, Murray recommends that SoP should apply to residential construction contracts, albeit with a longer period for provision of the payment schedule and the mandating of an information sheet to be served with the builder's payment claim;

Rights to progress payments

  • Murray recommends the confusing phrase "reference date", which has been differently used and interpreted in various East Coast model SoP regimes, be abandoned. In its place, he recommends that claimants may make a payment claim for every named month, or more frequently if so provided under the construction contract;
  • To overcome the impact of the High Court decision in Southern Han Breakfast Point (in liq) v Lewence Construction [2016] HCA 52, Murray recommends an express right be conferred on claimants to make a payment claim following termination of a construction contract;
  • Seemingly inspired by the 2014 NSW amendments that prescribe maximum payment terms at head contract and subcontract levels, Murray recommends identical maximum payment terms of 25 business days for each of those contracting levels;

Process for recovering progress payments

  • Murray recommends that payment claims include greater detail, including identification of the relevant contract, and descriptions and breakdowns of the items constituting the claimed amount;
  • Rejecting the 2014 NSW reform dispensing with the requirement for a payment claim to be endorsed as a payment claim, Murray recommends that endorsement be required, together with a statement in the payment claim stating when the payment schedule is due and the potential consequences of failing to provide a payment schedule;
  • As to the time for making payment claims, Murray's recommendation "splits the difference" between the different jurisdictions and posits a six-month maximum period for making a payment claim after construction work was last carried out (unless the construction contract provides for a longer period);
  • Murray recommends that payment claims by head contractors include a "supporting statement", including a declaration that all subcontractors have been paid amounts due and payable to them for construction work undertaken, endorsing the 2014 NSW reforms to that effect. Murray also recommends that a copy of the supporting statement be provided to those subcontractors whose work is included in the head contractor's payment claim;

Adjudication of disputes

  • Murray recommends the interposition of a Regulator to appoint adjudicators based on ANAs' nomination of suitable adjudicator candidates (unless the parties agree on an accredited adjudicator at the time when the dispute arises, within two business days of the claimant serving a notice of adjudication and where the dispute concerns a payment claim of more than $250,000);
  • Murray recommends that the parties be allowed to agree an extension of time for an adjudicator to determine an adjudication application, provided that the total duration is not more than 30 business days;
  • Murray recommends that respondents be prohibited from including in adjudication responses any reasons for withholding payment that were not included in the relevant payment schedule, rejecting the Victorian "second chance" mechanism;
  • Surprisingly, Murray recommends a variant of the current Victorian adjudication review process, to apply where either the adjudicated amount exceeds the scheduled amount by $100,000 or more, or where the adjudicated amount is less than the claimed amount by $100,000 or more, and also where the adjudicator has rejected an adjudication application;
  • Murray recommends that adjudication applications be capable of withdrawal and being made anew if an adjudicator fails to accept appointment, or where an adjudicator has accepted the claimant's application but fails to decide the application within the time limit, or where the adjudicator gives notice of withdrawal from the adjudication. In addition, Murray recommends that an adjudicator, having accepted an adjudication application, be entitled to withdraw from the adjudication by notice to the parties;
  • Murray recommends that an adjudication certificate be capable of filing as a judgment debt, removing the necessity in the higher Courts of Victoria, that ex parte proceedings be commenced and heard by a judicial officer before judgment can be obtained;

Adjudicators

  • Murray recommends an express requirement that adjudicators decide on jurisdiction;
  • Murray recommends measures for the registration, grading and disciplining of adjudicators, including prohibitions on ANAs nominating adjudicators who have been found by a Court to have made technical errors in adjudications or who have not acted in good faith in their adjudication duties;

Miscellaneous - cash retentions

  • As to protection of payments the subject of payment claims, Murray recommends that all cash retentions are to be held on trust for the party whose payments have been part retained, and recommends that adjudicators decide whether retention amounts and/or other security is to be released and by when;

Statutory trusts

  • Murray recommends that deemed statutory trusts apply at all levels of the contract chain for projects over $1,000,000, following the model set out by the NSW Collins Inquiry of 2015. In so recommending, Murray rejects the system of project bank accounts trialled in NSW, WA and Queensland on various recent state government construction projects;

Unfair contract terms

  • Responding to that part of the Terms of Reference that required consideration of means to prevent the use of contractual provisions to defeat the legislative purpose of SoP regimes, Murray recommends making void contract terms (such as time bars) that purport to make a right to claim or receive payment (or a right to claim an extension of time) conditional upon giving notice where compliance with the notice requirements would: not be reasonably possible; or be unreasonably onerous; or serve no commercial purpose.

Further action

On the whole, Murray seems faithfully to have identified SoP legislative best practice, with the probable exceptions of recommendations that:

  • residential construction contracts with owner-occupiers be subject to SoP; and
  • identical maximum payment terms for head contract and subcontract levels of the contracting chain be imposed, which immediately appears unworkable in circumstances where the maximum terms are relied on.

If taken up, Murray's recommendations would impact parties' interests around cashflow. The views of industry participants about these impacts will differ.

Given that it was not part of Murray's task to identify means to implement nationally consistent SoP laws (albeit Murray briefly recaps key options), the main focus should now shift to delivery of the recommended improvements. States' referral of power to the Commonwealth appears a stronger candidate by reason of breadth of coverage than reliance by the Commonwealth on the corporations power.

Conclusion

Upon releasing the report, the Commonwealth Government stated it would work co-operatively with the states and territories on the recommendations, including through the Building Ministers' Forum, to deliver improvements to the building and construction sector nationwide. Industry participants eagerly await those next steps.

Catherine Bell Cameron Mason
Construction and engineering
Colin Biggers & Paisley

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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