In the midst of the Queensland construction industry preparing for the most significant changes to security of payment (SOP) laws since they were introduced, the Federal Government has released the national review of security of payment laws (the Review), which primarily recommends uniform SOP legislation for Australia across all States and Territories.
The Review makes a total of 86 recommendations for SOP law reform, and importantly, recommends:
- nationally consistent SOP legislation; and
- a system of statutory deemed trusts to apply throughout the contractual payment chain to secure payment for lower tier subcontractors.
Shortfalls identified in the current laws
The Review identified that the major issues with current SOP laws and the construction industry are:
- There is no effective SOP where a party higher up the contractual chain becomes insolvent.
- SOP regimes are unduly complex.
- The adjudication appointment process is questionable, as is the adequacy of the qualifications, training and grading of adjudicators.
- There is an imbalance of power in the contractual chain resulting in unfair contract terms that operate to prevent payment.
- It is not uncommon for head contractors to use intimidating or retributive conduct to discourage subcontractors from pursuing their contractual entitlements.
- Late payment continues to be a major issue.
Uniformity in SOP legislation
The Review considered the current SOP laws of each State and Territory in determining a ‘best-practice legislative model’. It concluded that uniform national SOP laws should be closely aligned with the East Coast model, predominantly based on the NSW regime.
Deemed statutory trusts
Despite the fact that Queensland’s project bank account (PBA) provisions may soon be rolled out to the private sector, the Review considered that ‘deemed statutory trusts’ would be a more effective method of securing payment for lower tier subcontractors.
A deemed statutory trust is proposed to operate such that each contractor or subcontractor holds funds down the line, on trust, for the person with whom they are in contract. On the other hand, a PBA only provides protection to first-tier subcontractors (i.e. those who entered into a contract with the head contractor).
Other key points
Other key recommendations of the Review include:
- Payment claims should be required to include a breakdown of items claimed including a description, quantification and outline of how the claimed amount has been assessed
- Respondents to adjudication applications should be able to request an extension of time of up to 10 business days for providing an adjudication response
- The time for adjudicators to make a decision should be able to be extended to 30 business days if the parties agree
- The adjudication system should be improved. In particular:
- Authorised Nominating Authorities should be confined to referring nominations of suitable adjudicators, with regulators being responsible for the actual appointment of adjudicators
- All adjudicators should be trained, registered and graded by the regulator
- In appropriate circumstances, parties should be permitted to agree on their own adjudicator
- In certain circumstances, a party aggrieved by an adjudication decision should be permitted to apply for review of the decision by another adjudicator
- The legislation should void contractual terms that purport to make a right to claim or receive payment, or a right to claim an extension of time, conditional upon giving notice, where compliance with the notice would be unfair (i.e. unreasonably onerous time bars)
- A claimant should be able to claim for work undertaken up until the date of termination (not only up until the last unused reference date)
- All retention monies and bank guarantees should be held on trust
- The legislation should extend to the residential housing sector
- A party in liquidation should not be permitted to make a payment claim
What next?
In light of the findings and recommendations of the Review, Minister for Small Business, Craig Laundy, said “the Government will consult with industry to consider the report’s recommendations and explore ways to improve the protections for individuals and businesses involved in subcontracting in the construction industry.”
The Federal Government must first decide whether it has the power to make laws in relation to SOP. If it determines that it lacks the power to legislate, it will have to go down the arduous path of extended consultation and negotiations with the States.
In any event, we anticipate that the recommendations of the Review will be influential moving forward, thus shaping the future of SOP in Australia.
Key contacts:
