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Western Australia security of payment reforms set to create subcontractor uncertainty

Out-Law Analysis | 28 May 2021 | 4:54 pm | 4 min. read

A proposed new security of payment regime in Western Australia would not improve on existing legislation designed to ensure construction subcontractors are paid in a timely fashion for the work they carry out and protect them in the event of an insolvency higher up the supply chain.

Instead, the Building and Construction Industry (Security of Payment) Bill 2021 is likely to increase legal uncertainty in the construction sector, spur an increase in contractor claims and add to the administrative burdens associated with major projects.

Why are reforms proposed?

The Western Australian (WA) government plans to introduce new security of payment regime in the wake of the collapse of a local building company whose creditors are owed millions of dollars.

The Building and Construction Industry (Security of Payment) Bill 2021 would replace WA’s current Construction Contracts Act 2004 (CCA), and would apply to construction contracts entered into after it is enacted.

It is not the WA government’s first attempt at introducing security of payment reforms. The Bill was previously introduced in an attempt to "harmonise" the Australian states' security of payment regimes and has been re-introduced to parliament now following the voluntary administration of building company the Pindan Group, which owes an estimated A$70-80 million to its creditors. The collapse, which was foreseen by many industry insiders, has hit the Australian headlines amid claims that subcontractors had not been adequately protected from losing money in similar situations.

The government said the bill has two main aims. Firstly, to enhance protection for subcontractors working in WA’s building and construction industry and to “ensure they get paid on time, every time”. Secondly, to provide an effective, rapid dispute resolution process to speed up the receipt of outstanding payments, ensuring that subcontractors are not left with outstanding invoices or as severely impacted in the event of an upstream insolvency.

Although portrayed as a panacea, the Bill is merely re-writing the existing system under the CCA, which works perfectly well.

Australia’s security of payment laws

In Australia, each state and territory has enacted its own version of security of payment legislation, which provide processes to resolve payment disputes arising under a construction contract.

The term “East Coast Model” has sometimes been used to collectively describe the New South Wales, Victorian, Australian Central Territory, Tasmanian, South Australian and Queensland security of payment regimes.

While similar provisions exist across the various security of payment systems on the East Coast, there are differences in operation, processes and timeframes. As such, there is no one uniform East Coast model.

WA’s CCA and the Northern Territory’s Construction Contracts (Security of Payments) Act 2004 have been termed the “West Coast Model” and are based on the UK's adjudication system

The provisions of the new Bill seem to bring the WA security of payment system broadly into line with the so called “East Coast Model”. However, once enacted, the Bill will likely create uncertainty because it will effectively discard the last 17 years of jurisprudence in relation to the existing system under the CCA.

The uncertainty is further heightened because the Bill is not identical to other East Coast models – because there is no single East Coast model – and will effectively “set the meter back to zero” in relation to the industry’s understanding of this important legislation. Accordingly, there are likely to be unnecessary complexities to the resolution of payment disputes.  This will not necessarily achieve the outcome that the government is trying to achieve.

Time bars

In addition to re-writing the statutory adjudication regime, the Bill contains provisions that, once enacted, will allow a decision maker such as a judge, arbitrator, expert determiner or adjudicator to declare that a time bar provision in a construction contract is “unfair”, and will have no effect, if compliance with the provision is not reasonably possible or would be unreasonably onerous. This is the first time such a provision has been included in security of payment laws in Australia.

Time bar clauses, which create a condition precedent to a contractual entitlement, are a common feature in Australian construction contracts and are typically enforced by Australian courts.

While the prohibition on such clauses, which are sometimes criticised as being "harsh" or unfair, is well meaning, it will likely create unintended consequences. These could include an increase in litigation to determine whether the proposed act’s jurisdiction has been enlivened.  More concerningly, the proposed prohibition may create issues during construction because contractors are more likely to store up claims to run them at the completion of a project if they form the view that “the time bar doesn’t apply so we are   allowed to do this”. That behaviour will undermine the very purpose, being improved cash flow, of the proposed legislation. 

Retention trust schemes

The Bill would introduce a retention trust scheme where retention money is placed into a dedicated trust account with an approved financial institution for the benefit of the party who provided the money. It provides that money from the trust account can only be withdrawn when there is a contractual entitlement to do so.

The purpose of the scheme is to reduce the risk to subcontractors in the event of an upstream insolvency. However, the operation of the regime may fall short of this objective as it has not gone to the extent of introducing cascading statutory trusts that mimic the subcontracting approach common in the Australian construction industry. 

Although the scheme will have some effect in increasing cash flow, it will also add to the administration costs on bigger construction jobs.

The Bill is a substantial departure from common practice in WA and once enacted will likely lead to numerous issues for all contractors – both head contractors and subcontractors – including administrative burdens, an increase in resorting to solicitors for advice and a growth in litigation.

Contributions from construction law expert Alina Andres of Pinsent Masons.