Australia: Overhaul of Security of Payment regime in WA

Who should read this

All construction industry participants in Western Australia (WA).

What you need to know

The Building and Construction Industry (Security of Payment) Bill 2021 (Bill) was passed by the WA Parliament on 22 June 2021, bringing significant reforms to the current security of payment laws in WA.

The reforms will align the WA security of payment process more closely with the existing 'East Coast' models, including by introducing a statutory right to make monthly payment claims and a requirement for respondents to issue payment schedules to avoid liability for the full amount of payment claims they receive. The new adjudication process will only permit the adjudication of claims 'up' the contractual chain. The Bill also introduces a retention trust scheme to try to protect those monies in the event of insolvency, and other measures designed to protect claimants. These include the ability for claimants to have notice-based time bars declared ineffective on the basis of 'unfairness' and the introduction of a mandatory notice procedure as a condition to having recourse to security.

The new security of payment scheme will apply to construction contracts entered into after proclamation of the main operative parts of the new Act (which is yet to occur), meaning that any construction contracts entered into prior to that time will continue to be subject to the Construction Contracts Act 2004 (WA) (CCA).

What you need to do

Familiarise yourself with the new security of payment laws and consider how they might affect your future contracts, risk profile and contract administration procedures.

The purpose of the bill

The Bill is a key part of the McGowan Government's agenda to protect subcontractors in the construction industry in WA and represents a significant shift from the current security of payment model under the CCA. The new regime aligns more closely with the 'East Coast' security of payment models and introduces robust protections for claimants (including some that will be unique to WA).

WA's new security of payment regime: the highlights

One-way traffic for claims for payment

Under the CCA, either party to the construction contract could apply to have a payment dispute adjudicated. However, under the new regime, only payment claims made 'up' the contractual chain can be adjudicated. The best outcome a respondent can obtain is a nil-value determination.

Statutory entitlement to claim progress payments ¹

The new regime introduces a statutory entitlement to make payment claims for progress payments for construction work and related goods and services provided under a construction contract. The default position is that payment claims may be made on or after the last day of each month (commencing the month that the construction work was first carried out), unless the construction contract provides for an earlier date. Only one payment claim per month may be made, but if a construction contract is terminated, a payment claim may also be made on or after the date of termination. Limitation periods apply and can differ depending on the type of payment claimed. Payment claims must indicate the claimed amount, describe the items and quantities of construction work or related goods and services for which a progress payment is being claimed, and importantly, state that they are made under the new Act.

Requirements for payment schedules ²

If a respondent wishes to dispute the amount claimed in a payment claim, it must give the claimant a payment schedule within the earlier of the time required by the construction contract or 15 business days after the payment claim is made. A payment schedule must identify the payment claim to which it relates, indicate the scheduled amount that the respondent proposes to pay (including if that amount is nil) and if the scheduled amount is less than that claimed, it must indicate the reasons why. It is important for respondents to include all such reasons in their payment schedules because they cannot include any new reasons in their adjudication responses. ³

There are significant consequences if a respondent, who wishes to dispute a payment claim, fails to provide a payment schedule within the time required. These include:

• the respondent becomes liable to pay the full claimed amount;
• the respondent is not permitted to make an adjudication response to an adjudication application;
• the respondent is not entitled to make an adjudication review application; ⁴
• the claimant may either apply to the Court to recover the claimed amount as a debt due, or make an adjudication application in relation to the payment claim;
• the claimant may suspend work or supply under the construction contract; ⁵ and
• the claimant is entitled to exercise a lien in relation to the unpaid amount over any unfixed plant or materials supplied by the claimant.⁶

Changes to the adjudication process and timeframes (including extension of Christmas 'black-out' period) ⁷

The period for making an adjudicatation application is reduced from 90 business days under the CCA to 20 business days. The period for applying for adjudication generally runs from when a payment schedule is received, but in some instances, runs from when the due date for payment passes. Under the CCA, the definition of business day only recognised a Christmas 'black-out' period between 25 December and 7 January. This is extended under the new regime to run from 22 December to 10 January (aligned with other East Coast models).

Companies in liquidation cannot use the new security payment regime ⁸

A company in liquidation is not permitted to make, or take action to enforce, a payment claim or adjudication application.

'Mining work' exemption narrowed ⁹

The mining exemption in the CCA was broader than its East Coast counterparts, excluding from the operation of the CCA the fabrication or assembly of items of plant used for extracting or processing oil, natural gas or any derivative of natural gas, or any mineral bearing or other substance. The Bill contains a narrower mining work exclusion, meaning it potentially has broader application in the mining sector.

Notice-based time bars of no effect if declared 'unfair' ¹⁰

Unique to WA's new laws is the ability for notice-based time bars to be found to be of no effect if declared 'unfair' in the case of a particular entitlement under a contract. A notice-based time bar provision in a construction contract is any that makes the following contingent on the provision of notice by a party to the contract:

• an entitlement to payment for construction work or related goods and services under the contract; or
• an extension of time for doing a thing that affects an entitlement to such payment.

An adjudicator, review adjudicator, court, arbitrator or expert appointed by the parties may declare a notice-based time bar provision to be unfair in the case of a particular entitlement under the contract if compliance is not reasonably possible or would be unreasonably onerous. If such a provision is declared unfair, it is only of no effect in the case of the particular entitlement that is the subject of the proceeding in which the declaration is made. It otherwise continues to have effect in other circumstances or challenges arising under the same or related contract.

The party alleging that a notice-based time bar provision is unfair has the onus of establishing it is unfair. Relevant factors include:

• when the party required to give notice would reasonably have become aware of the event;
• how and when notice was to be given;
• the parties' relative bargaining power; and
• the irrebuttable presumption that the parties have read and understood the terms of the contract.

Expansion of prohibited terms in construction contracts 11

Provisions in a construction contract which make the liability of a party to pay contingent on that party being paid by another remain prohibited and of no effect (i.e. 'pay when paid' provisions). However, the scope of what is a 'pay when paid' provision will be expanded under the new regime to include, for example, provisions in construction contracts that purport to make the release of security under a subcontract dependent on the achievement of a specified event under a head contract.

Fines for threatening or intimidating claimants ¹²

If a person directly or indirectly threatens or intimidates, or attempts to threaten or intimidate, a claimant or person entitled to make a payment claim in relation to:

• their entitlement to, or claim for, a progress payment; or
• their exercise of any other rights under Part 3 of the Bill, the penalty is a fine of $50,000. This is in addition to the usual anti-avoidance provision that prohibits 'contracting out'. ¹³

New requirements and rights in respect of security ¹⁴

A party under a construction must provide at least five business days' written notice of its intention to have recourse to the performance security, otherwise that party is not entitled to have recourse (despite any term to the contrary in the underlying construction contract).

In addition to the new notice requirements, under the new regime, a claimant will be able to seek substitution of performance security in a payment claim (i.e. it may seek to substitute retention money with a performance bond and vice versa). ¹⁵

Retention money trust account ¹⁶

A deemed trust scheme for retention money is introduced under the new regime for certain construction contracts. ¹⁷ It will require retention money to be held on trust in a 'retention money trust account' by the party under the construction contract who retains such money (usually the principal or owner, and in the case of subcontracts, the head contractor). The retention money trust account must be established within 10 business days after the parties enter into the construction contract and there are strict requirements relating to the establishment of that account and withdrawals that must be followed. It is an offence to fail to pay retention money into the trust account (where one is required), which may attract a penalty of $50,000.

Insolvent 'building service contractors' ¹⁸

The Bill also contains provisions amending the Building Services (Registration) Act 2011 (WA) to address the issue of insolvent building service contractors under that legislation and 'phoenixing'. Those amendments will enable the Board to declare that an individual or corporation is excluded (either temporarily or permanently) from being registered as a building service contractor following an insolvency event.

Further information

WA's new security of payment regime represents a significant departure from the current CCA, and requires participants in the WA construction industry to carefully consider to how they manage risk and administer their contracts (especially those unfamiliar with other East Coast models).

Footnotes

¹ Refer to sections 17, 20, 22, 23 and 24 of the Bill.

² Refer to sections 25, 26 and 27 of the Bill.

³ Refer to section 34(3) of the Bill.

⁴ Refer to sections 39 to 48 of the Bill.

⁵ Refer to sections 62 and 63 of the Bill.

⁶ Refer to section 64 of the Bill.

⁷ Refer to section 28 of the Bill.

⁸ Refer to section 68 of the Bill.

⁹ Refer to section 6(3) of the Bill.

¹⁰ Refer to section 16 of the Bill.

¹¹ Refer to section 14 of the Bill.

¹² Refer to section 65 of the Bill.

¹³ Refer to section 111 of the Bill.

¹⁴ Refer to sections 56 to 60 of the Bill.

¹⁵ Subject to compliance with the requirements in section 59(4) of the Bill.

¹⁶ Refer to Part 4 of the Bill.

¹⁷ It will not apply to construction contracts with government, construction contracts with a value under the 'prescribed retention money threshold', certain contracts for home building work or contracts excluded by the regulations (refer to section 70(2) of the Bill).

¹⁸ Refer to Part 7 of the Bill.

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.