Australia: Fiocco Report released, on reform of WA construction industry security of payment

Last Updated: 19 December 2018
Article by Daniel Morris

Last week, Barrister, John Fiocco's report to the WA Minister for Commerce titled Security of Payment Reform in the WA Building and Construction Industry ("Fiocco Report") was published. The report addressed the vexed question of how to ensure subcontractors get paid what their work is worth, particularly in the face of increasingly frequent head contractor insolvency. It is the most recent of 7 Parliamentary reports to address this question over the past 15 years.

The Fiocco Report largely adopted the following recommendations made by John Murray last year:

  1. apply the "east coast model" of security of payment laws around Australia; and
  2. legislate for a system of statutory, "deemed" trust accounts to protect retention monies and progress payments in the hands of, or payable to, insolvent head contractors, from being lost to the subcontractors that have earned them.

The "east coast model" favoured by the Fiocco Report refers to the system of rapid pay dispute adjudication that requires payment claims to be made and answered by the exchange of payment schedules. In one form or another, this is how pay disputes are adjudicated in every Australian state and territory except those on the "west coast". The "west coast" exceptions are Western Australia and the Northern Territory, where the payment rights that an adjudicator applies in determining a pay dispute are simply the payment rights that the construction contract sets out.

We at HHG Legal Group see benefit in applying either the east coast or the west coast model of adjudication consistently around the country. There is obvious benefit in having one set of rules that allows subcontractors to take basically the same steps to recover the progress payments that they have earned by their labour, regardless of where in Australia they did their work. Many construction companies operate around Australia as do the companies that supply them the money, labour, materials and professional services that they need; and the peak construction industry bodies such as MBA, HIA and CCF have a national presence. A harmonised security of payment regime would allow efficient and reliable processes and procedures to be developed for:

  1. contractors and subcontractors to make and respond to adjudication applications;
  2. adjudicators to determine adjudication applications;
  3. professional service providers to assist with and educate contractors about their security of payment rights; and
  4. industry bodies to advocate for security of payment funding and reform.

These overriding benefits seem to us to apply equally under the east coast or west coast model. In this light, it makes sense that the Fiocco Report, in proposing law reforms for WA only, would seek to achieve consistency by proposing that WA adopt the east coast model, rather than waiting for the "eastern states" to adopt the west coast model.

The other proposed reform, the adoption of statutory, "deemed" trust accounts, seems to be somewhat misunderstood by certain industry advocates. The proposal is simply that, if a head contractor becomes insolvent, the money that each subcontractor has earned, but not been paid, at the time of the insolvency, be treated by the law as if it were being held on trust for that subcontractor. The Fiocco report (sensibly, in our respectful view) proposes that these trusts be "cascading". Tthis means that where several tiers of subcontractor sit below an insolvent contractor, each of them will be both:

  1. the beneficiary of trust money held by their principal; and
  2. the trustee, for themselves and their own subcontractors, of the trust money that they hold or are entitled to be paid.

We consider this to be a good first step towards protecting the flow of money down the contractual chain from being disrupted, at the point of insolvency, by (at least) the following:

  1. the claims of third party, secured creditors (e.g. banks); and
  2. the principal's right to set off claims for delay and defects against the insolvent contractor's payment claims. (For a while, the WA Supreme Court cast doubt over this right of set-off in

Hamersley Iron Pty Ltd v Forge Group Power Pty ltd (in Liquidation) (Receivers and Managers Appointed) [2017] WASC 152. However, on appeal from that decision, the WA Court of Appeal said the right existed in Hamersley Iron Pty Ltd v Forge Group Power Pty Ltd (in Liquidation) (Receivers and Managers Appointed) [2018] WASCA 163): see this article for more.

The deemed statutory trusts proposed in the Fiocco and Murray Reports are not the complete solution to protecting subcontractors' payment rights, in our view. That would also require:

  1. proper and timely registration on the Personal Property Securities Register, of subcontractors' Personal Property Security Interests in progress payment, retention monies and material supplies; and
  2. applying to adjudicate payment disputes as soon as they arise – and certainly, long before the expiry of the 90-business-day time limit that now applies a result of changes to the Construction Contracts Act 2004 in 2016.

Continuing industry education should help construction contractors at all levels of the contracting chain protect their payment rights in these ways. HHG Legal Group is proud to be leading the way in this area, through regular education sessions presented by special counsel, Daniel Morris, in partnership with the WA Building Commission , and with other construction industry groups, as well as HHG's regular boardroom Q&As.

Only one complete trust-based solution to subcontractors not getting paid as a result of head contractor insolvency has so far been proposed and trialed in WA which does not require subcontractors to take any additional steps to protect themselves. That solution involves the use of Project Bank Accounts – these quarantine all monies that a principal pays its contractor on account of a particular project in three special purpose trust accounts. They prescribe, step-by-step, precisely what is to be done with that money, by whom, under what conditions and when.

In WA, Project Bank Accounts are currently only used in certain Building Management and Work projects. Proposals to apply these more broadly have been met with widespread criticism across all sectors of the construction industry. It is generally considered that Project Bank Accounts:

  1. are expensive and inefficient to administer;
  2. would increase the cost of construction project delivery by tying the contractors that would be bound to administer the regime, in unnecessary red tape; and
  3. ironically, would cause further insolvencies by tying up money that would otherwise be available to contractors to fund other projects, thereby disrupting cash flow when contractors need it the most.

We agree generally with these observations, but only as they apply to Project Bank Accounts, as distinct from the statutory, deemed trust accounts proposed in the Fiocco Report. The latter, we see as striking the right balance between administrative efficiency and subcontractor protection, with industry education largely filling the gap over time.

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Daniel Morris
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions