INSIGHT

WA Government passes Security of Payment reforms

By Tristan Iredell , Fiona Potter, Charles Smith, Emma Mclaughlin
Manufacturing & Construction Mining Property & Development

In brief 6 min read

WA Parliament has fast-tracked legislative reforms for securing payments under construction contracts in the building and construction industry.

The renewed focus on securing payment for subcontractors comes after the collapse of the Pindan Group last month. The Building and Construction Industry (Security of Payment) Bill 2021 (WA) (the new Act), seeks to overhaul the current WA approach in favour of the East Coast model and provide more robust protections for subcontractors. The new regime also introduces a retention trust scheme designed to prevent subcontractors' retention money from being misappropriated or lost should an insolvency event occur.

In this Insight we outline each of the key changes, discuss their likely impact and highlight the requirements for compliance.

Key takeaways

  • The new Act has passed through WA Parliament (without any further consultation process or significant amendments) after the collapse of the Pindan Group pushed the protection of subcontractors to the top of the McGowan Government's agenda.
  • The new regime introduces a legislative model based on the East Coast security of payment laws (specifically, the security of payment regimes in New South Wales, Victoria, Queensland, Tasmania, South Australia and the Australian Capital Territory).
  • The statutory right to make payment claims, receive progress payments and employ the rapid adjudication process, amongst other changes introduced by the new Act, will govern construction contracts entered into after its proclamation.
  • The new Act is expected to receive Royal Assent within 5-10 days, with the lion's share of operative provisions coming into force upon proclamation, which may take up to 12 months. Associated regulations are also contemplated and are awaited.
  • Building and construction contracts entered into prior to assent and proclamation of the new Act will continue to be governed by the security of payment provisions in the Construction Contracts Act 2004 (WA) (CCA).

Background

As we reported last year, these reforms were previously tabled and advanced to the Legislative Council before being put on ice when the state election was called in December 2020. The new Act is largely the same as the bill previously introduced (with some minor drafting changes), and has been fast-tracked through WA Parliament after the collapse of the Pindan Group pushed the protection of subcontractors to the top of the McGowan Government's agenda.

The new Act incorporates many of the recommendations of John Fiocco in his Final Report to the Minister for Commerce, 'Security of Payment Reform in the WA Building and Construction Industry' (October 2018) (Fiocco Report). The Fiocco Report set out 44 recommendations to improve security of payment for subcontractors in WA's building and construction industry. The new regime will provide more consistency of security of payment laws across Australia since – in addition to other key changes (set out below) – it introduces a statutory payment process similar to that of the East Coast model.

New security of payments regime

The new security of payment regime includes the following key features:

  • Statutory payment right: it introduces a statutory right to make payment claims and receive progress payments. Progress payments are to be made by a principal within 20 business days of a payment claim being made by a head contractor, or 25 business days if made by a subcontractor. For home building work, payments are to be by the date under the contract or – if the contract does not provide any date – 10 business days after a payment claim is made.
  • Payment schedules introduced: a respondent may give a 'payment schedule' to a claimant in response to a payment claim. While responding with a payment schedule is optional:
    • if a payment schedule is not duly given by a respondent, the respondent becomes liable to pay the claimed amount to the claimant on the due date for payment;
    • giving a payment schedule is a condition precedent to the respondent's entitlement to respond to an adjudication application; and
    • the respondent cannot include in its adjudication response any reasons for withholding payment unless those reasons have already been included in the relevant payment schedule given to the claimant.
  • Application to offshore projects: the regime could apply to projects located off the coast of WA. Its application extends to water adjacent to WA that is:
    • within WA territorial limits; or
    • outside territorial limits if the particular contract is governed by the laws of the state.
  • Narrower 'mining exception': the application of the new Act is broader than the CCA as it includes more types of construction work, meaning a broader application of the regime to the mining and resources industry. Mining activities that are excluded from the definition of 'construction work' are now limited to:
    • drilling for the purposes of discovering or extracting oil or natural gas, whether on land or not; and
    • constructing a shaft, pit or quarry, or drilling, for the purposes of discovering or extracting any mineral or other substance.
  • Notice-based time bars prohibited if declared unfair: notice-based time bar provisions in construction contracts will have no effect if declared unfair. Such provisions may be declared unfair if compliance with the provision is not reasonably possible or would be unreasonably onerous.
  • 'Pay-when-paid' prohibition expanded: the pay-when-paid prohibitions in the CCA will be extended to include terms in a construction contract that make:
    • liability to pay an amount owing;
    • the due date for payment of an amount owing;
    • the making of a claim for an amount owing; and
    • the release of retention money or of a performance bond;

    contingent or dependent on the operation of another contract.

  • Rapid adjudication process: the new Act provides for a 'pay now - argue later' adjudication process in circumstances where the respondent is not entitled to provide an adjudication response (where it has not given the claimant a payment schedule).
  • Time reduced for adjudication application: the time period for bringing an adjudication application is reduced from 90 business days under the CCA to 20 business days. This time period starts from when the claimant receives a payment schedule or after the due date for payment passes.
  • Christmas 'blackout' extended: the exclusion of the Christmas period from the definition of 'business day' is expanded, with any day that falls between 22 December in a year and 10 January in the following year (inclusive) being excluded.
  • Recourse to performance security: a party to a construction contract will only be entitled to have recourse to performance security under the contract if it gives the other party five business days' written notice of its intention to have recourse to the security.

New retention trust money regime

The new Act also introduces a deemed trust scheme. Under this scheme, retention money is to be held on trust by the party to a construction contract who retains the money. That party must ensure the money is paid into a trust account within 10 business days of contract formation and only withdrawn in limited circumstances.

If a party fails to fulfil its obligations as a trustee of the retention money, general law remedies can be pursued and, in some cases, a statutory right to suspend ongoing construction work may apply.

The new retention trust money regime is a diluted version of the initially proposed cascading trust scheme – which would have required most of the value of a contract to be held in trust - but faced backlash from stakeholders.

Next steps

The new Act will become law once it receives Royal Assent (usually within five to ten days of being passed), however commencement of the substantial provisions such as the security of payment and retention trust money schemes will be staged for a later date. The CCA will continue to apply to contracts entered into before commencement of the new Act.

Parties should consider:

  • which legislative regime, the new Act or the CCA, will cover their construction contracts;
  • whether the activities under their contract will be construction work for the purposes of the new Act;
  • whether changes to payment and notice protocols are needed for contracts under negotiation;
  • in the case of a principals, ensuring responses to payment claims meet the requirements of a 'payment schedule' under the new Act; and
  • if other contractual risk management strategies should be provided for in their contracts.

Allens will monitor the new Act's assent, proclamation and Regulations implementation. We can help you navigate the changes to ensure your compliance under the new regime as they take effect.