INSIGHT

Extensive recommendations on security of payment released

By Nick Rudge , David Donnelly
Infrastructure Property & Development

In brief

The Federal Government has released John Murray AM's report into Australian security of payment regimes. The Review includes an extensive range of recommendations aimed at achieving legislative best practice and balancing the often competing interests of stakeholders. Importantly, it makes the case that security of payment is best dealt with at a national level, in a cohesive and co-operative manner. Partners Nick Rudge and David Donnelly and Associate Rami Marginean report.

How does this affect you?

The Review of Security of Payment Laws (the Review) supports the continuation of an appropriate and efficient security of payment system to maintain cash flow in the building and construction industry. It recognises and identifies some of the problems commonly faced by the building and construction industry participants, and makes recommendations that aim to address them. Key drivers of the Review are the need to reduce complexity commonly associated with security of payment legislation and achieve a consistent national scheme. If adopted, the Review would:

  • pave the way to a uniform national security of payment regime, which would be a positive development, and
  • eliminate some of the complexities associated with the operation of the security of payment legislation.

Future legislative change will, critically, depend on the extent to which the states support a cohesive national scheme.

Genesis of the Review

The lack of consistent security of payment regimes across Australian jurisdictions has been identified as an ongoing issue in the building and construction industry over the past 15 years.

The Review follows previous commissions and inquiries, including:

  • the 2003 Cole Royal Commission into the Building and Construction Industry;
  • the 2012 Collins Inquiry into insolvency in the New South Wales Construction Industry; and
  • the 2015 Senate Economics References Committee Inquiry into Insolvency in the Australian Construction Industry.

Outcome of the Review

The Review makes 86 recommendations covering every aspect of the security of payment regime.

It is largely underpinned by three policy considerations:

  • preserving cash flow;
  • providing an efficient adjudication process; and
  • protecting payment made for a progress claim.

The Review identifies the East Coast Model (ie the legislative regimes that operate in NSW, Victoria and Queensland) as more appropriately achieving the object of preserving cash flow within the building and construction industry. Twenty-eight recommendations in the Review are based on East Coast Model legislation.

Importantly, the Review makes a careful argument for a national, cohesive and co-operative approach to security of payment legislation, and acknowledges the important role that the Federal Government plays in achieving a nationally consistent and effective set of security of payment laws.

A summary of the Review's main recommendations is below.

A recommended best practice model

The Review identifies the East Coast Model as more effectively achieving the objective of promoting prompt payment. The legislation should not create a distinction between 'complex' and 'standard' claims, and should enable a respondent, in appropriate circumstances, to request additional time to respond to an adjudication application. This is an opportunity many principals will welcome (Recommendations 1-2).

The objects of the legislation

The Review suggests that the objects of security of payment legislation be to provide a party with a statutory right to progress payments for work undertaken and a procedure of enforcement of this right (Recommendation 3).

Definitions

The Review recommends appropriate definitions for key legislative terms.

The South Australian definition of 'Business Day', which excludes public holidays and the period between 22 December and 10 January, is noted as suitable. This is a practical recommendation that would be welcomed by principals and their legal advisers. It would also provide relief to respondents to an adjudication who are served with adjudication applications on the eve of the end-of-year public holidays.

The Review also recommends that the definition of 'construction work' be drafted in the broadest terms, and notes that the NSW legislation provides a suitable model. It also goes further by recommending that the legislation be extended to apply to the residential housing sector. While the Review discusses the general exclusion of mining works from the application of security of payment legislation, the recommendations do not include changes to the mining activities exclusions (Recommendations 4-8).

Application of the legislation

The Review proposes that security of payment legislation apply to any construction contract, but exclude construction contracts that form part of a loan agreement, a contract of guarantee, a contract of insurance, or situations where the work is undertaken by an employee of the party for which the work is being done. This recommendation is largely consistent with the present approach in NSW. The Review also recommends that the security of payment legislation not apply to claimant corporations in liquidation. There is no proposed exclusion for high-value contracts (Recommendations 9-13).

Rights to progress payments

The right to progress payment would be clarified under the Review's recommendations. An important recommendation is to abandon the expression 'reference date'. Instead, the Review recommends that the legislation provide that a person undertaking construction work under a construction contract be able to make a payment claim for every named month, or more frequently, if so provided under the construction contract (Recommendations 14-21).

Process for recovering progress payments

The 13 recommendations on drafting an effective process for recovering progress payments include more comprehensive payment claim requirements. The Review favours the Singaporean security of payment approach to payment claims – that they contain a breakdown of the items claimed, including a description of the item, quantification of the item, and an outline as to how the claimed amount has been assessed. While this is consistent with market practice for larger contracts, it is likely that, if adopted, these proposed amendments to payment claim requirements will require a change in practice for some smaller contracts and the residential housing sector, if extended. The Review also endorses the NSW requirement to include a supporting statement in payment claims submitted by head contractors to principals (Recommendations 22-34).

Adjudication of disputes

Among the recommendations relating to the process of adjudicating disputes, the Review notes that the responsibility of appointing adjudicators rest with the Regulator. As to the timeframes that apply to adjudications, the Review favours a more lenient approach, with two important changes:

  • a respondent to an adjudication should have the opportunity to apply to the adjudicator to request an extension of time of up to 10 business days for providing an adjudication response; and
  • the timeframe for an adjudicator to finalise a determination, proposed to be 10 business days, should, with the agreement of the parties, be extended to 30 business days.

In order to avoid some unnecessary delays and costs associated with challenges to adjudication determinations, the Review recommends the express provision in the legislation that, where the adjudicator committed jurisdictional error of law in part of the decision that does not affect the whole decision, the court sever the affected part and allow the remainder of the decision to be enforceable (Recommendations 35-59).

General provisions relating to adjudicators

The Review proposes the introduction of a robust system of regulation of adjudicators. One of the recommendations is the introduction of specific provisions requiring an adjudicator to decide jurisdiction (Recommendations 60-74).

Miscellaneous recommendations

The Review includes a number of general recommendations. These include that the legislation simplify the method of serving notices under the legislation, and. that the Regulator publish an annual report on the operation and effectiveness of the legislation (Recommendations 75-83).

Unfair contract terms

The Review recommends that the legislation void contractual terms relating to claiming or receiving payment, or rights to claim an extension of time upon giving notice, where compliance with the notice would be unfair (Recommendation 84).

Statutory trusts

The Review recommends the establishment of a nationally consistent statutory trust model, which would apply to all parts of the contractual payment chain for construction projects of more than $1 million. The Review refers to the deemed statutory trust model outlined in the Collins Inquiry as a suitable basis model (Recommendations 85-86).