Change in security of payment (SOP) legislation was a hot topic in December 2015 with the release of discussion papers in both New South Wales¹ and Queensland² (see our previous update on the discussion papers in the footnotes below) Coinciding with these discussion papers, the federal Senate Economics References Committee (the Committee) released a report which makes 44 recommendations for improving SOP legislation (the report). The report was aimed to investigate the high rate of insolvency in the construction industry.
Whilst the report heavily focuses on dealing with insolvency issues the construction industry, it also considers the positive and negative aspects SOP legislation nationwide. Specifically, the report identifies that whilst SOP legislation has had an overall positive impact on the construction industry (particularly in terms of guaranteeing payment between parties), the report also identifies a number of other issues which have become prevalent, including:
- the prevalence of false statutory declarations being made in SOP disputes;
- the use of intimidation and retribution tactics by those wishing to enforce their rights;
- the costs of enforcing adjudication decisions;
- the lack of knowledge and understanding of SOP legislation;
- issues regarding the independence and appropriateness adjudicators who have been appointed through an Authorised Nominating Authority (ANA);
- the differences between each state and territory’s SOP Act (including the different timelines under each Act);
- the prevalence of head contractors becoming insolvent.
Recommendations
The report makes 44 recommendations in total, the most significant of which for the construction industry include:
- the use of project bank accounts; and
- a uniform nationwide SOP legislation.
Project Bank Accounts
Project bank accounts are separate accounts established by the principal and head contractor with funds held on trust for payment of both head contractors and subcontractors when amounts are certified. The key feature of these accounts is the trust status which provides additional protection for subcontractors in the case of head contractor insolvency.
Project Bank Accounts are presently being trialled in Western Australia and New South Wales. The Committee believes that these kind of bank accounts with trust status have strong potential to resolve payment problems currently in the construction industry by affording a higher level of protection to those down the payment chain. For more information on Project Bank Accounts please see our previous update on Queensland’s SOP discussion paper: https://cdilawyers.com.au/wp- content/uploads/2016/02/Update-11- February-2016-QLD.pdf
Uniform Legislation Nationwide
The report identifies that many of the problems listed above originate from a ‘fragmented approach’ to SOP legislation across Australia. Significant differences exist between each state and in particular between the east and west coast. There is a single principle which lies behind SOP legislation and that is the fundamental right for anyone to receive payment without delay for the work they have done. Currently, there are eight different SOP regimes nationwide. This inevitably results in parallel points of law being considered across eight jurisdictions. Accordingly, it is of little surprise that participants struggle to comprehend their rights, especially those who operate across multiple jurisdictions. The report advocates that construction is a national industry and that national SOP legislation would create a single set of rules for more effective adjudication of disputes.
What next?
The recommendations made in the report are nothing new and resemble the recommendations previously made in the final report by the Cole Royal Commission back in 2003. Project Bank Accounts have received negative feedback from a number of construction companies due to the negative impact on their cash flow. Despite these concerns the committee has recommended a two year trial of Project Bank Accounts. This trial would involve Commonwealth funding of over $10 million and on no less than 20 construction projects and to be commenced no later than 1 July 2016.
Even though the report makes a recommendation for uniform SOP legislation, this recommendation is not for immediate implementation, the proposal comes after a two year trial of project bank accounts. Therefore even if this recommendation is embraced it is unlikely to be on the agenda until at least 2018.
A copy of the report can be found here: http://www.aph.gov.au/Parliamentar y_Business/Committees/Senate/Econ omics/Insolvency_construction/Report