The proposed introduction of the Building Industry Fairness (Security of Payment) Act 2017 (BIFSOPA), project bank accounts and a number of new cases mean that it is critical for contractors to update their subcontracts to provide maximum protection. Some of those changes include:
Security
Amending the conversion of security clause in standard subcontracts:
- to allow security to be converted “immediately” following the provision of notice in writing;
- to allow conversion for any amount “claimed to be” due and not just by any amount “not paid when due”; and
- to survive termination.
This will allow a contractor to convert security immediately for any LDs or other losses and after receiving an unfavorable adjudication decision.
“Pay-when-paid” release of security
To enable release of the subcontract retention/security on release of head contract retention/ security, link the release to a statutory requirement to practical completion such as a certificate of classification under the head contract (which in effect has the same result).
Termination for convenience
Ensuring that:
- a termination for convenience clause exists; and
- any termination for convenience clause survives termination.
This will prevent adjudications after termination as no more reference dates exist. However, it is likely the BIFSOPA will legislate a final reference date for the contract, which will be the date of termination.
Notwithstanding, this clause is particularly important in view of reforms to the Corporations Act 2001 (Cth) taking effect from 1 July 2018 which will render ineffective any clauses in a construction contract that allow a party to terminate in the event that the counterparty becomes insolvent, has a managing controller appointed, or goes into administration.
Preconditions to payment
Obtain legal advice on the validity of any preconditions on the right to lodge a payment claim, or to reference dates arising (for example, the provision of a statutory declaration or other documentation required to assess the claim). Preconditions as to the validity of a claim or a reference date under BCIPA will usually be invalid. Under BIFSOPA, a payment claim will no longer need to state that it is made under legislation in order to trigger the statutory payment regime.
Time bars
Amend the subcontract so that:
- the subcontract superintendent has the right to grant EOTs at the superintendent’s absolute discretion (whilst being under no obligation) so that an adjudicator or court cannot exercise a discretion in favour of a subcontractor to award time-barred EOT claims; and
- the contractor’s entitlement to liquidated damages is preserved.
Liquidated damages
Excluding the operation of the prevention principle to prevent a subcontractor from arguing that a contractor is not entitled to apply liquidated damages in circumstances where the contractor has caused the delay but the subcontractor has failed to claim an EOT in accordance with the subcontract.
Warranties
Protect and define the parties’ rights (especially those belonging to body corporates, lessees and subsequent purchasers) and liabilities in relation to pure economic loss for latent defects by requiring subcontractors to provide a warranty in their favour at PC for the subcontract works. This is important because subsequent purchasers and tenants are unlikely to be able to sue the builder in negligence for economic loss.
Release at PC and FC
Amending the subcontract so that a subcontractor is required to supply a deed of release as a precondition to practical completion and a deed of release after final completion as a precondition to release of the subcontractor’s final security. This will assist the contractor not being ‘ambushed’ by any previously unknown BCIPA claims after practical completion.
Set off
Amend the set off clause to:
- include amounts “claimed” to be due;
- include monies owing under other subcontracts between the parties; and
- to survive termination.
This broadens the right to set off substantially beyond any limitation of claims certified by the superintendent, or to one project.
“Back-to-back” with head contract
Ensure that all relevant obligations in the head contract are “back-to-back” in the subcontract, and in particular any subcontract design obligation.
Unfair terms
Understand when the Unfair Contract Terms Legislation will apply and its implications. Where a subcontractor has less than 20 employees and the subcontract sum is less than $1million with a contract period including DLP of at least 12 months, “unfair terms” will be unenforceable.
Project bank accounts
The project bank account regime will be implemented in two phases commencing with a limited roll out to Queensland Government projects (excluding engineering projects) valued between $1 and $10million from 1 January 2018 to evaluate the effectiveness of the new regime. The Government’s intention is that the second phase will extend the legislation to the private sector from 1 January 2019.
Contractors should be aware of the possible application of PBAs and the associated obligations and risks.
This publication does not deal with every important topic or change in law and is not intended to be relied upon as a substitute for legal or other advice that may be relevant to the reader’s specific circumstances. If you have found this publication of interest and would like to know more or wish to obtain legal advice relevant to your circumstances please contact one of the named individuals listed.
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