Australia: Important changes proposed for security of payment in New South Wales

In brief - Proposed changes intended to improve the operation of the Act and further facilitate cash flow along the contracting chain

On 22 August 2018 the NSW Government released for public comment a draft Building and Construction Industry Security of Payment Amendment Bill 2018 ("the draft amending Bill") in respect of proposed amendments to the Building and Construction Industry Security of Payment Act 1999 ("Act").

The government has also released for public and stakeholder comment a consultation paper in relation to its proposal for the introduction of "deemed" statutory trusts into the Act, which are proposed to better protect payments in the building and construction industry from misuse and insolvency and to support sustained growth in the industry.

Draft amending Bill and "deemed" statutory trust consultation paper open for comment until 18 September 2018

The proposed amendments to the Act set out in the draft amending Bill are open for public comment until 18 September 2018, after which the draft amending Bill may be amended to take into account the comments and feedback received.

The "deemed" statutory trust consultation paper, in which a cascading "deemed" statutory trust model is proposed by the government, is also open for public and stakeholder comment until 18 September 2018, after which the feedback is to be analysed by the government.

Change to definition of "reference date" to provide minimum entitlement to monthly progress payment and to provide reference date on termination

Currently, "reference date" is defined in section 8(2) of the Act to mean:

  • a date determined by or in accordance with the contract as the date on which a claim for a progress payment may be made in relation to work carried out (or related goods and services supplied or undertaken to be supplied) under the contract; or
  • if the contract makes no express provision with respect to the matter - the last day of the named month in which the construction work was first carried out (or the related goods and services were first supplied) under the contract and the last day of each subsequent named month.

The draft amendment to section 8(2) provides generally for a statutory "reference date" under a contract on the last day of each month in which work is carried out/related goods and services are supplied, with the following exceptions in new sections 8(3) - 8(6):

  • if the contract makes express provision with respect to the date on which a claim for a progress payment may be made, the date determined in accordance with the contract is a "reference date":
    • except where there are single/one-off payments or milestone payments or if the contract is terminated; and
    • so long as the date is earlier than the date that would otherwise apply pursuant to section 8(2) (ie earlier than the last day of each month).
  • in the case of a single/one-off payment, the day immediately following the day on which work was last carried out/related goods and services were last supplied is the "reference date".
  • in the case of a milestone payment, the day immediately following the event/date on which the milestone payment is based is the "reference date".
  • if the contract is terminated, the day immediately after the day on which the contract is terminated is the final "reference date".

The intention in redefining "reference date" is to provide for a minimum entitlement to a progress payment of at least once per month for work done that month (with the exceptions noted above), with a view of more effectively meeting the Act's objective of promoting cash flow.

To protect this minimum statutory entitlement to a monthly progress payment, any attempt in the relevant contract to avoid this statutory entitlement would be void. However, a contract may still provide for earlier and/or more frequent reference dates than the minimum statutory entitlement.

The creation of a "reference date" upon contract termination is intended to ensure that contractors and subcontractors get paid for work they carry out up to the date of termination.

Shortening of due dates for payment

Currently, a progress payment to be made by a principal to a head contractor is due and payable on the 15th business day after a payment claim is made (or an earlier date as provided in the contract) and a progress payment to be made to a subcontractor is due and payable on the 30th business day after a payment claim is made (or an earlier date as provided in the contract).

The draft amendments to section 11 of the Act provide for a shortening of these time periods to 10 business days and 20 business days, respectively, with a view of facilitating prompt payment.

Reinstatement of statutory endorsement in payment claims

Currently, section 13(2) of the Act requires that a payment claim identify the construction work (or related goods and services) to which the progress payment relates and indicate the amount of the progress payment claimed to be due.

The proposed amendment to section 13(2) re-introduces the previous requirement (which applied to contracts entered into prior to 21 April 2014) that a payment claim state that it is made under the Act.

The rationale for the amendment is to provide greater certainty and clarity about when the processes of the Act are being engaged in circumstances where stakeholder feedback indicated that removal of the requirement in 2014 created problems and uncertainty for respondents and claimants.

Change in penalties for offences relating to supporting statement declarations by head contractors

Currently, a maximum penalty of 200 penalty units is applicable where a head contractor, in contravention of section 13(7) of the Act, serves a payment claim in the principal that is not accompanied by a supporting statement that indicates that it relates to the payment claim.

If a head contractor serves a payment claim on the principal accompanied by a supporting statement knowing that the statement is false or misleading in a material particular in the particular circumstances, the maximum applicable penalty is 200 penalty units, 3 months imprisonment, or both.

The proposed amendments to section 13, along with the introduction of new section 34D, would:

  • impose 1,000 penalty units (in the case of corporations) for offences against sections 13(7) and (8);
  • impose 200 penalty units, 3 months imprisonment (or both) in the case of individuals offending against sections 13(7) and (8); and
  • create an executive liability offence for an offence by a corporation against sections 13(7) and (8) (and also for an offence against the retention money trust account requirements), which would attract executive liability of a director or an individual involved in the management of the corporation.

The intention of the amendments is to deter the commission of offences relating to the requirements for supporting statements and retention money trust accounts as well as to ensure that directors and managers are held personally liable for their involvement in contraventions of the Act.

Corporations in liquidation prohibited from making payment claims and enforcing payment claims and determinations

Section 32B is proposed to be inserted into the Act to prevent a corporation in liquidation from serving a payment claim and also from taking any steps to apply for adjudication of a payment claim or to enforce an adjudication determination.

The amendment is intended to address the situation where a respondent may otherwise be compelled to pay an adjudicated amount to a corporation in liquidation, such that what was intended to be an interim payment under the Act is converted into a final payment.

Withdrawal of adjudication application

Currently, section 26(2) of the Act entitles a claimant to withdraw an adjudication application in specific circumstances.

Section 17A is proposed to be inserted into the Act to expressly provide for the right of a claimant to withdraw an adjudication application at any time before an adjudicator determines the application.

This new section is intended to facilitate and promote the timely resolution of disputes and to remove the need for adjudication where the issues have resolved.

Adjustment of time for adjudicators to determine adjudication applications

Currently, section 21(3) of the Act requires an adjudicator to determine an adjudication application within 10 business days after the adjudicator notifies the claimant and respondent of his/her acceptance of the application or within such longer time as the claimant and respondent may agree.

The proposed amendments to section 21 of the Act would slightly increase the available time for an adjudicator to determine an application by providing that the 10 business day timeframe for determining the application starts to run (where a respondent is entitled to lodge an adjudication response) when the adjudication response is received or, if no response is lodged, when the period for the response expires.

New power of Supreme Court to set aside part of determination and/or remit matter to adjudicator for redetermination

Currently, an adjudicator's jurisdictional error made when determining an adjudication application in NSW generally results in the entire adjudication determination being declared void/quashed/set aside.

The introduction of new section 32A would enable the Supreme Court to, where appropriate, sever the relevant part of the determination affected by a jurisdictional error and confirm the enforceability of the balance of the determination.

The Supreme Court would also be empowered to remit the matter (in whole or in part) back to the adjudicator for redetermination.

The rationale for the proposed amendment is that parties will be discouraged from challenging adjudication determinations which are not favourable to them, particularly those which contain mistakes of a minor nature.

Addition of investigation and enforcement powers

It is proposed to add a new Part 3A into the Act which will include what are described as standard compliance and enforcement powers found in other acts administered by the Office of Fair Trading.

Notably, the new Part 3A provisions would empower authorised officers, when investigating complaints of non-compliance with the Act, to request and take possession of documents, require answers to questions, enter premises, obtain a search warrant and issue and enforce penalty infringement notices.

Foreshadowed changes to retention money trust account arrangements

Currently, head contractors in projects having a value of at least $20 million are obliged to hold retention money for subcontractors in a trust account, keep records in relation to the trust account and issue annual reports.

Although amendments to the Building and Construction Industry Security of Payment Regulation 2008 ("Regulation)" have not yet been drafted, it has been foreshadowed that the government proposes to amend the existing requirements for retention money trust accounts in the following ways:

  • the monetary threshold at which the trust account requirements will apply is proposed to be reduced from $20 million to $10 million (project value).
  • subcontractors will be allowed to inspect the retention money trust account records held by the head contractor.
  • the annual reporting requirement will be removed.
  • penalty notice offences in relation to trust account requirements will be prescribed (for both corporations and directors/managers).

Foreshadowed introduction of code of practice for authorised nominating authorities

Section 28A is proposed to be inserted into the Act to expressly provide for the future publication of a code of practice ("Code") to be observed by authorised nominating authorities ("ANA") in relation to activities under the Act.

The Code is expected to identify expected standards of conduct and practices for ANAs and adjudicators in discharging their respective functions, with a focus on honesty, fairness, accountability, transparency and impartiality.

Failure to comply with the Code will attract a penalty. Further, the Minister may exercise power to withdraw the ability of an ANA to nominate adjudicators.

Consultation paper - proposed "deemed" statutory trust

The "deemed" statutory trust consultation paper identifies previous reviews by others (including John Murray AM and Bruce Collins QC) in relation to the need for statutory trusts in the industry, sets out the Government's proposed model for a "deemed" statutory trust and invites public feedback in relation to the government's proposed model.

The government proposes, with the primary objective of ensuring that money is protected until the time arrives for the making of a progress payment pursuant to the provisions in the Act, that the Act be amended to provide that all amounts received by a head contractor or subcontractor (as trustee) as payment for work completed under a construction contract are deemed to be trust funds for the benefit of subcontractors, workers and suppliers (as beneficiaries).

Key elements of the government's proposed model for a deemed statutory trust include:

  • "cascading" of the trust requirement such that it would apply to all subcontractors linked to the head contractor;
  • application of the trust requirement to:
    • construction projects having a value of $1 million or more;
    • alternatively, those parties in the construction chain where the value of the contract between those parties is $1 million or more;
  • the establishment of a deemed statutory trust immediately when the contract monies are received by the trustee;
  • the trustee's responsibility for management of the deemed statutory trust;
  • the permitted use by the trustee of one consolidated trust account (being separate from its other accounts);
  • the trustee being subject to Fair Trading's risk-based compliance program, but not to any external audit of the account in which the trust funds are maintained;
  • the trustee's entitlement, before a subcontractor has been paid, to withdraw funds from the account for its own profits and overheads (provided there is sufficient money left in the trust fund to pay the beneficiaries);
  • where there are insufficient funds in the trust to satisfy the claims of all beneficiaries, the distribution of the remaining funds on a pro rata basis as a proportion of payment claims (with the trustee not relieved of liability to a beneficiary for the balance of the outstanding claim);
  • use of the Act's adjudication provisions for an interim decision on disputes about payment of a progress payment into or out of the account;
  • the head contractor's entitlement to invest progress payments received and to retain proceeds of the investment (once all beneficiaries are paid what is due and owing to them in full);
  • a statutory right of the beneficiaries to inspect trust account records;
  • the holding of directors and other individuals involved in the management of a corporation personally liable for breach of the corporations' duties as a trustee (if the person had knowledge of the breach and failed to take reasonable steps to prevent or stop the breach).

Status of proposed reforms

Public comment in relation to both the draft amending Bill and the "deemed" statutory trust consultation paper may be made until the closing date of 18 September 2018.

Following analysis of the feedback received, it is noted there may be changes to the draft amending Bill and a period of further targeted consultation.

It is further noted that the draft Regulation is yet to be drafted and released for public consultation.

We will provide updates on developments relating to the proposed reforms as they emerge.

Charles Brannen
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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