What amendments do developers need to make to construction contracts as a result of the October 2020 legislative changes, COVID-19 and recent case law?

No endorsement

1. Payment claims will not need to be endorsed as being made under the BIFSOPA. Under the new definition of payment claim, a letter, tax invoice or email that describes the work and requests payment of an identified amount, will be a valid payment claim, and therefore principals:
   • need to be vigilant of failing to identify that an invoice or document that requests payment of an amount is a payment claim, and consequently failing to respond with a payment schedule (which, in addition to creating a liability to pay the claimed amount, is grounds for disciplinary action and could also result in fines of up to 100 penalty units, which currently equates to approximately $13,000); and
   • should consider implementing an (email) address for specific service of all claims for payment.

Payment claim content

2. In KDV Sport v Muggeridge Construction, Justice Brown made it clear that a payment claim must still purport in a reasonable way to identify the particular work in respect of which the claim is made. Providing a percentage of work carried out is not enough – there needs to be a description of the work. In respect of variations – the particular construction work must be identified.

Time for payment schedules reduced

3. Payment schedules must be issued within the earlier of the period stated under the contract or 15 business days after the payment claim was served. Where a principal fails to issue a payment schedule or pay the claimed amount by the due date for payment, the contractor may make a judgement application or an adjudication application without notice, with no defence or cross-claim. Contractors and subcontractors must still be paid at 15 business days and 25 business days respectively.

No new reasons for withholding payment

4. Principals will no longer be permitted to raise new reasons for withholding payment at adjudication, that were not included in the payment schedule (even for complex payment claims). Accordingly, if you are scheduling an amount that is less than the claimed amount, you should ensure that every reason for withholding payment is included in the payment schedule.

Conversion of security

5. Amending the conversion of security clause:
   • to allow security to be converted “immediately” following the provision of notice;
   • to allow conversion for any amount “claimed to be” due; and
   • to survive termination,

so that recourse to security is as broad as possible and not limited to claims certified by the superintendent as not paid when payable, so as to minimise the right to an injunction.

Termination for convenience

6. Ensuring that:
   • a termination for convenience clause exists; and
   • any termination for convenience clause survives termination.

This will allow a principal to terminate for any reason, including without fault and limit any future BIFSOPA claims.

This 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 allows a party to terminate in the event that the counterparty becomes insolvent, has a managing controller appointed, or goes into administration.

Keep in mind that BIFSOPA now legislates for one further reference date to exist after any termination.

Adjudication  awards  and Set Offs

7. Amending contracts to ensure a principal can, in effect, immediately convert security after receiving an unfavourable adjudication decision. This strategy can negate an adverse adjudication decision. To do this, the principal will need to set-off monies owing from progress claims and keep the security alive.

Preconditions to Payment

8. Since the Leanfield decision it is necessary to review carefully 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 under BIFSOPA will be normally be invalid.
9. For example, in the recent decision of East End Projects Pty Ltd v GJ Building and Contracting Pty Ltd [2020] NSWSC 819 (please see CDI’s update), Justice Ball held that a contractual clause was void because it made the occurrence of the reference date under the SOP Act contingent on the Contractor serving a draft payment claim on or before a specified date (i.e. the 25th of each month).
10. From 1 October 2020, Head Contractors in Queensland are required to provide a “supporting statement” with any payment claim that “declares” that all subcontractors have been paid all amounts owing. However, a failure to provide the declaration does not invalidate the claim.

Release at PC

11. Requiring a signed deed of release as a precondition to a contractor achieving PC and FC, to prevent contractors from lodging a payment claim after PC.

Time Bars

12. Amend the contract so that the 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 the discretion (of the superintendent) in favour of the contractor to award time-barred EOT claims.

Liquidated Damages

13. Excluding the operation of the prevention principle, as an additional safeguard of the entitlement to liquidated damages. This means that if a contractor does not lodge an EOT on time and the superintendent rejects it, the principal can apply liquidated damages even if it is alleged, they have caused the delay.

Warranties

14. 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 the contractor to provide a warranty in their favour at PC. This is important because a body corporate, subsequent purchasers and lessors are unlikely to be able to sue the builder in negligence for economic loss and will look to recover from the principal.

Claims after PC

15. Amending the reference date clause in the contract so there are no reference dates between PC and FC and so no right to lodge an adjudication after PC, other than at FC.

Set off

16. Amend the set off clause to:
    • include amounts “claimed” to be due;
    • include monies owing under other contracts between the parties; and
    • to survive termination.

This gives a wider right to set off any “claimed” amounts which is not restricted to a claim certified by the superintendent or a single project.

17. The BIFSOPA provides at s67 NB that it is an offence to fail to release ‘retention’ (not security) in accordance with the contract unless the retention is the subject of a dispute. Amend the contract by including as a dispute in the dispute resolution clause any alleged failure to release retention.

Warranties

18. The Lucas Fluid case showed developers that it will be very difficult for a builder to rely on precontractual discussions or documents if the builder gives a warranty as to fitness for purpose.

Superintendents

19. Also, we now know from the Lucas Fluid case that, irrespective of what the contract says, a superintendent will have an implied duty to act honestly and impartially when assessing, valuing and determining under the contract.

COVID 19

20. Be ready for Contractors to request these amendments :
    • “force majeure” (including COVID )events as a qualifying cause of delay and a compensable cause of delay;
    • a broad definition of “force majeure”, which includes an “outbreak of an infectious disease” and “any other matter reasonably beyond the control of either party”;
    • “any industrial conditions caused by force majeure beyond the reasonable control of the contractor” as a qualifying cause of delay and a compensable cause of delay;
    • a clause that entitles a contractor to an EOT and/or additional costs caused by “a legislative change that could not have been anticipated by a reasonably competent contractor”; and
    • that notice periods for time bars are longer and can be met in the event of force majeure.

BIFSOPA Amendments

21. On 1 October 2020, the BIFSOPA was amended and introduced a number of changes to Queensland’s statutory adjudication regime and provide additional avenues for contracted parties to recover monies owing, including:
    • a head contractor can serve a payment withholding request (‘PWR’) on a financier of the developer to withhold the sum of unpaid adjudication amounts from the developer;
    • a subcontractor can serve a payment withholding request on a developer to withhold monies from payment to the head contractor for unpaid adjudication awards; and
    • a head contractor can register a charge over property of the developer for unpaid adjudication amounts. In circumstances where the respondent to an adjudication application is the registered owner of the property on which the construction work was carried out or to which the related goods and services were supplied, a successful claimant may request that a charge be registered over the relevant property, providing security for payment of the adjudicated amount.

Project bank accounts replaced with ‘statutory trusts’

22. The Queensland Government has now introduced into Parliament the Building Industry Fairness (Security of Payment) and Other Legislation Amendment Bill 2020 (the Bill). If passed, the Bill will amend the Building Industry Fairness (Security of Payment) Act 2017 (BIF Act) by:
    • Replacing project bank accounts with ‘statutory trusts’, which comprise project trusts and retention trusts for contracts over $10million in the private sector from 1 July 2021.
    • A single project trust account must be established by head contractors within 20 business days of entering the first subcontract for the project (a failure to do so will attract a fine of up to $333,625).
    • Both the principal and the head contractor must establish a retention trust account.
    • All payments from the principal to the head contractor must be paid into the project trust account.
    • The subcontractors are the primary beneficiaries of the monies held in the project trust account and the head contractor is the trustee and secondary beneficiary, meaning that the monies liable to be paid to subcontractors must be paid before the head contractor pays itself.
    • Project trusts will be required for:
      • State government and Hospital and Health Services’ building contracts valued at $1 million or more (ex GST) from 1 July 2020;
      • private sector and local government building contracts valued at $10 million or more (ex GST) from 1 July 2021;
      • private sector and local government building and construction contracts valued at $3 million or more (ex GST) from 1 January 2022; and
      • all building and construction contracts valued at $1 million or more (ex GST) from 1 July 2022.

• • Head contactor claimants may have a charge registered over the principal’s property on which the construction w1ork the subject of an adjudicated amount was carried out.

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