Articles

SUBMISSION ON THE SECURITY OF PAYMENT ACT REVIEW

A.  INTRODUCTION

  1. This submission is made by Kreisson.
  2. Kreisson has been providing legal services to builders, owners and other participants in the construction and building industry for over 10 years.
  3. Kreisson’s lawyers have a considerable number of years of experience providing legal services to the construction industry and some either hold building industry qualifications or having in-house experience with construction firms.
  4. Kreisson has also been involved in numerous court and tribunal proceedings involving security of payment claims and adjudications in various jurisdictions.
  5. We are therefore well placed to provide a considered opinion on many of the questions raised in the Discussion Paper relating to this submission.
  6. We have elected to limit our submission to a number of specific issues.

B.  OVERVIEW

  1. The Building and Construction Industry Security of Payment Act 1999 (the Act) has been in place since 2000.
  2. Modeled loosely on the UK model, the New South Wales legislation formed the basis of the statutory adjudication schemes enacted in all other Australian States and Territories.
  3. The legislation enacted by Western Australia and the Northern Territory incorporates key differences which are not found in the other six Australian jurisdictions.
  4. Commentators have classified the legislative schemes of Western Australia and Northern Territory as the ‘West Coast’ model of statutory adjudication, while the legislative schemes of the remaining Australian jurisdictions are referred to as the ‘East Coast’ model.
  5. NSW is the leader of the East Coast model. The model is heavily compliance-based and ostensibly based on securing cash flow, with severe consequences if the parties do not comply with the time requirements.
  6. The West Coast model is an evaluative system, the key feature being that adjudication is available for the resolution of construction payment disputes.
  7. The East Coast model provides a process for the adjudication of disputed “progress claims” as opposed to “construction payment” disputes.

The objects of the Act

  1. The Act deals with what became known as the “security of payment” problem, which was the consistent failure in the building and construction industry to ensure that participants in a construction project are paid in full and on time for the work they have done. Late payment (or even no payment) was becoming increasingly common, even though contractors had a contractual right to be paid.
  2. One of the significant changes made by the Act was the prohibition of “pay when paid” clauses.
  3. The problem with pay when paid clauses was that they effectively obliterated the right of a party to receive payment unless, and until, the party above in the contractual chain had been paid.
  4. The Act attempts to remedy the above security of payment problem by aiming to “reform” payment behaviour in the construction industry and preventing hard payment practices by ensuring that any party that carries out construction work is provided with:
  • a statutory right to receive progress payments in respect of that work, regardless of whether the contract is silent on the matter; and
  • access to a “fast track“ adjudication procedure where the amount of such payments can be determined  by an Adjudicator on an interim basis and enforced without prejudice to the right of parties to have contractual disputes ultimately determined in accordance with ordinary court or arbitral processes.
  1. Some of the key characteristics of the Act are:
  • the Act is about ensuring cash flow; built on a pay now fight later regime;
  • the Act provides statutory rights and remedies that generally run in parallel to the rights that are set out in the contract;
  • for the Act to have any application there must be a construction contract.;
  • although the Act and the contract co- exist there are points where the two do converge;
  • that means that any payment obtained under the Act is on account with final accounting, adjustments and reconciliations being achieved under the Contract;
  • the Act operates in rough and tumble “high pressure cooker environment” with high risks of prejudice being suffered by the uninformed and ill prepared; and
  • the Act has been criticised for providing rough justice as the processes of the Act often result in outcomes which are unfair and can provide for windfalls and outcomes which are simply not available under the contract.
  1. Critical to the operation of the Act are the deadlines and default provisions in the event that there is a non-compliance with the time frames.
  2. The most well-known default provision is the failure of a Respondent to submit a Payment Schedule within the prescribed 10 day period. Delays in responding to Payment Claims can be (and almost always are) disastrous.
  3. The key to a party’s effective participation with the provisions of the Act is good internal administration and procedures that are responsive to the demands of the Act.

 Some lessons learned

  1. A number of matters or themes have come to us over many years of dealing with the Act in various contexts.

Use of the word “security”

  1. Despite the reference to the word “Security” in the title of the Act; the Act does not provide security.
  2. At best the Act provides a process to assert an entitlement to payment and to the determination of disputes with respect to payment.
  3. There is no guarantee or assured outcome.

The term “adjudication” is misleading

  1. Adjudication has historically been used to explain a process where decisions with respect to disputed issues are determined by an impartial Adjudicator or adjudicated upon with some comfort that the adjudicated determination would have some remnant of finality to it.
  2. Strictly, a determination of an Adjudicator under the Act is not final and is subject to final reconciliations under the contract or, if parties remain in dispute, some final and binding determination by arbitration or litigation.

Although not technically final, a result of an Adjudicator can in effect become final

  1. Once the parties have had a third party form a view as to issues of entitlement and quantum, the mere existence of that independent opinion can often assist the parties to close the gap on disputed items and may assist the parties to have sensible discussions and reach a negotiated outcome.
  2. An adjudication determination could also become final simply because the costs spent in obtaining the outcome and/or costs that would be required to be spent in correcting what could be perceived to be a wrong outcome are disproportionate to the benefits that could be gained and therefore the parties simply accept the cards where they fall and a final result is achieved by way of default.

The Act is more than just about cash flow.

  1. While the Act can assist in facilitating cash-flow in meritorious claims, the Act can conversely deprive a party of cash flow if a party has to pay for unmeritorious claims by reason of some default in compliance with the Act or because the decision of an Adjudicator is completely incorrect on the merits.
  2. At the same time, the Act forces parties to reality test their expected outcomes as the compressed time frame in which to prepare claims or replies forces the parties to look at the merits of their claims.
  3. As a consequence, the Act focuses on the contract administration. Weaknesses in the tendering as flawed records, incorrect assumptions or disentitling conduct are all exposed under the microscope of the Act.

Process at the expense of substance

  1. Unlike the West Coast model, the NSW model has a greater focus on the process rather than the substance to ensure that all the requirements under the Act are satisfied.
  2. Throughout the process, there has been, and still is, a lack of understanding as to what needs to be prepared to prove entitlements. This is evidenced by the number of matters that have had to be addressed by the NSW Supreme Court.
  3. Records need to be maintained which are reliable, accurate and detailed to ensure positions can be established at the end of the project where security of payment issues generally spike.

The Act can reallocate contractual risk.

  1. The Act introduces statutory rights governed by compliance with time frames.
  2. Non-compliance with time frames in NSW is catastrophic.
  3. Although the point of the Act is that the statutory rights displace contractual positions, it is not always cheap or rapid, especially if there are court challenges to determinations by the adjudicator where the spotlight is on what the adjudicator did or did not do.
  4. It is well known that security of payment is rough and tumble on the East Coast and the time frames are unforgiving but, irrespective of whether the NSW Act or a more moderate form of adjudication is provided, security of payment is rough justice because it is quick and not paced at the refined tempo of arbitration.

 C.          SPECIFIC ISSUES

5.1 Is clarification of reference dates warranted?
5.3 Are fee rights to payment claims clearly set out?

1     The Potential for claims after 12 months

Background
  1. It is generally perceived by those who regularly engage with the Act that the Act allows payment claims to be submitted throughout the duration of the contract and for a period of up to 12 months following the completion of work, at a rate of no more than once per month.
  2. Although the above perception appears to be in line with the purpose and intent of the Act, our experience suggests that the position is not clear-cut and further consideration of the concept of reference dates and the time within which a payment claim may be submitted after work is completed may be warranted.
  3. Section 3 of the Act indicates that the Act is generally directed at ensuring steady cashflow for a contractor undertaking construction work throughout the duration of the contract work.
  4. The time in which a payment claim may be issued under the Act expires 12 months after the work relating to the claim has been completed, or a later time if the parties expressly agree to a contractual term to such effect.
Recent Experience
  1. Our firm recently dealt with a matter which revealed that, on a particular construction of certain sections of the Act, it may be possible for a claimant to claim payment for construction work well beyond the time period in which the Act intends for such a claim to be made.
The Act and the Contract
  1. The relevant extract of the Act for the purposes of this discussion are set out below:

Section 4:        claimed amount means an amount of a progress payment claimed to be due for construction work carried out, or for related goods and services supplied, as referred to in section 13”

Section 4:        progress payment means a payment to which a person is entitled under section 8, and includes (without affecting any such entitlement):

  • the final payment for construction work carried out (or for related goods and services supplied) under a construction contract, or
  • a payment that is based on an event or date (known in the building and construction industry as a “milestone payment”)

Section 8:              (1) On and from each reference date under a construction contract, a person:

(a) who has undertaken to carry out construction work under the contract, or
(b) who has undertaken to supply related goods and services under the contract,

is entitled to a progress payment.
 

(2) In this section, reference date, in relation to a construction contract, means:

(a) a date determined by or in accordance with the terms of the contract as the date on which a claim for a progress payment may be made in relation to work carried out or undertaken to be carried out (or related goods and services supplied or undertaken to be supplied) under the contract, or

Section 13:      (1) A person referred to in section 8 (1) who is or who claims to be entitled to a progress payment (the claimant) may serve a payment claim on the person who, under the construction contract concerned, is or may be liable to make the payment.

                                                (2) A payment claim:

  • must identify the construction work (or related goods and services) to which the progress payment relates, and
  • must indicate the amount of the progress payment that the claimant claims to be due (the claimed amount), and

 (3) The claimed amount may include any amount:

  • that the respondent is liable to pay the claimant under section 27 (2A), or
  • that is held under the construction contract by the respondent and that the claimant claims is due for release.

(4) A payment claim may be served only within:

  • the period determined by or in accordance with the terms of the construction contract, or
  • the period of 12 months after the construction work to which the claim relates was last carried out (or the related goods and services to which the claim relates were last supplied),

whichever is the later.

 (5) A claimant cannot serve more than one payment claim in respect of each reference date under the construction contract.

(6) However, subsection (5) does not prevent the claimant from including in a payment claim an amount that has been the subject of a previous claim

  1. In the matter in which we recently acted there was no controversy as to the existence of a contract or the fact that the claimant had carried out work and was entitled to make one or more payment claims under the Act. The Contract made no provision for a final payment claim.
  2. Although the contract did contain a clause in relation to the concept of a “reference date” for the purposes of section 8(2) of the Act (claims were to be submitted by 20th of each month), there was no express contractual provision dealing with the time within which a payment claim may be served for the purposes of section 13(4) of the Act.
  3. The contract contained a mechanism that allowed for the respondent to withhold retention money from time to time throughout the contract period, together with a corresponding mechanism allowing the withheld retention money to be released to the claimant upon the completion of the defects liability period.
  4. It is of interest to note that the contract mechanism for the release of the final retention money was not expressed to be based on any claim made by the claimant. Rather, the phrasing of the particular clause was as follows:

“2.5% retention to be released when 12 month DLP (defects liability period) certificate is achieved with all defects that are subcontractor’s responsibility rectified…DLP is to commence on handover of building and…duration of the DLP is 12 months”.

Relevant Facts
  1. It was common ground that the building was handed over and the 12 months defects liability period (“DLP”) commenced. There was no controversy between the parties as to the start and end dates of the DLP.
  2. During the 12 month DLP period, the claimant issued a number of purported payment claims under the Act, relating to work performed under the contract during the period before the DLP commenced.
  3. For various reasons that are not critical to the current discussion, all of those payment claims were invalid and the claimant’s attempts to have the claims determined at Adjudication under the Act were not successful.
  4. What is relevant is that the last of that series of purported / unsuccessful payment claims was issued in the 12th month of the DLP. It is also relevant to note that the last of those claims was identical in content and value to the previous payment claim issued by the claimant and was held by an Adjudicator under the Act to be an invalid claim, on the basis that the claim related to the previous reference date and only one payment claim may be issued in respect of each reference date.
  5. As the contract made no express provision to the contrary, it was the respondent’s view that at the conclusion of the 12 month DLP (that is, 12 months after work had last been carried out under the Contract), the claimant’s right to issue any payment claim under the Act would expire pursuant to clause 13(4)(b) of the Act.
  6. The DLP did in fact come to an end and the contractual mechanism for release of final retention money was therefore triggered.
  7. Before the retention money was released by the respondent to the claimant, the claimant issued a purported payment claim under the Act claiming the amount of remaining retention money together with a large claim for work carried out under the contract. The claim for work performed was identical in value and content to the previous two payment claims (that is, the only difference between the payment claims was the addition of an amount for retention).
  8. The respondent issued a payment schedule asserting as a primary position that:
  • the right to receive the retention payment did not create a fresh reference date and therefore the payment claim was not made in a respect of a valid reference date;
  • the amounts claimed in the Payment Claim for construction work (and related goods and services) were in contravention of Section 13(4)(b) of the Act;
  • the Payment Claim was invalid by operation of Section 13(5) of the Act because of the inclusion of previous identical claimed amounts; and
  • the Payment Claim was an abuse of process.
  1. The respondent also asserted that if, as part of a payment claim for retention submitted outside the 12 month period identified in section 13(4)(b) of the Act, a Claimant (by reason of section 13(6) of the Act) could include an amount that has been the subject of a previous claim, the following mischief would ensue which section 13(4) of the Act operates to expressly avoid:
  • the release of retention at the end of an extended defects liability period may enliven an entitlement for a claimant to include amounts that were claimed in previous payment claims years earlier; and as a result; and
  • there would be no terminus or limitation on the ability of a claimant to reinvigorate the operation of the Act despite the operation of section 13(4)(b) and/or section 13(5) of the Act and the entitlement to submit a progress claim for payment for construction work may extend well beyond the time frame that is at least impliedly, if not expressly, excluded by the Act.
  1. The payment claim was submitted for Adjudication under the Act.
  2. The claimant asserted that the claim was valid under section 13(4)(a) of the Act because the contractual provision relating to the release of final retention had created a new reference date for the purposes of section 8 of the Act.
  3. The claimant succeeded at Adjudication and was awarded not only the final retention payment but also a substantial amount incorporating:
  • payment for works performed during the contract and outside the 12 month period provided by Section 13(4); and
  • amounts claimed in respect of earlier reference dates despite the operation of section 13(5) of the Act.
Analysis
  1. Although at first glance the payment claim appeared to have been issued outside the time allowed by the Act, the following reasoning suggests that the payment claim was in fact valid:
  • The definition of “progress payment” includes any “final payment” for work and any payment that is “based on an event or date”. The final retention money could arguably fall into one or both of those categories.
  • It is further arguable that a “reference date” was created for the purposes of section 8(2)(a) of the Act, because at the expiry of the DLP the claimant became capable of making a claim for the release of the final retention money (bearing in mind that the final retention money on its own is capable of being considered a “progress payment” under the definition of that term in section 4 of the Act).
  • Considering the definitions of “progress payment” and “reference date” in sections 4 and 8 of the Act, respectively, the claimant at the expiry of the DLP likely became “entitled to a progress payment” for the purpose of section 8(1) of the Act and was therefore entitled to serve a payment claim under section 13(1) of the Act.
  • The “claimed amount” for the purposes of the payment claim and under section 13(3)(b) of the Act “may include any amount that is held under the construction contract by the respondent and that the claimant claims is due for release”.
  • The claimant issued a payment claim under section 13 of the Act and that claim included the amount of final retention together with a substantial claim for construction works allegedly carried out under the contract.
  • Notwithstanding that the work to which the payment claim related had been carried out in excess of 12 months prior to service of the payment claim, section 13(4)(a) of the Act, when read together with the definitions of “progress payment” and “reference date” in sections 4 and 8 of the Act, respectively, arguably provided the claimant with one further opportunity to submit a payment claim.
  • Although on one view, the claimant at the expiry of the DLP only became entitled to “receive” the final retention money (as opposed to “making a claim” for it), there is nothing in the Act preventing a claimant from:
  1. issuing a payment claim under section 13 of the Act in respect of that final retention; and
  1. including within that payment claim various other claims for work allegedly carried out under the contract.
  1. Although in the above scenario the practical outcome may not have been material (that is, a payment claim was issued only fractionally outside the 12 month period following construction work), it is easy to imagine a scenario where final retention is to be released under a contract 18 or 24 or more months following the completion of work under the contract in the case for example of a second or subsequent defect liability period.
First issue for consideration – creation of additional reference date outside 12 month period
  1. The intent of section 13(4) of the Act appears to be to set a 12 month limit of time following completion of construction work within which a payment claim may be served, with such period to be extended by contracting parties should they wish to do so.
  1. For the sake of further analysis, assume the following scenario:
  • the contract allows a 24 months defects liability period following completion of work, with a final retention payment of $20,000 to be released at the completion of the defects liability period;
  • the defects liability period expires at 5pm on a Monday, thus the claimant becomes entitled to receive the retention payment; and
  • at 9:01am on Tuesday, before the respondent has had any reasonable opportunity to release the $20,000 retention, the claimant issues a payment claim under section 13 of the Act seeking recovery of the $20,000 retention money together with $1 million for contract work and variations.
  1. Although the claimant in the above exaggerated scenario appears at first glance to have issued a claim outside the time allowed by the Act and contrary to the intent and purpose of the Act, if the reasoning set out earlier in these submissions is sound, the claimant has issued a valid payment claim.
Second issue for consideration – possible circumvention of section 13(5) of the Act
  1. Section 13(5) states that “a claimant cannot serve more than one payment claim in respect of each reference date”.
  1. Although it has not been generally adopted, the following position stated by Allsop P in Dualcorp Pty Ltd v Remo Constructions Pty Ltd (2009) 74 NSWLR 190 at 194 holds some weight:

“I see no warrant under either the contract or the Act, s8 for permitting a party … to create fresh reference dates by lodging the same claim for the same completed works in successive payment claims. That is not the intended operation of the last phrase of s8(2)(b) (“and the last day of each subsequent named month”).”

  1. If the analysis set out elsewhere above in this submission is correct and the right to receive a retention payment gives right to an entitlement to issue a payment claim under the Act some considerable time outside the time period contemplated by section 13(4)(b) of the Act, then a claimant may on that basis be able to revive a payment claim which might otherwise be “identical” to an earlier claim by including the retention payment as a component of the claim.
  1. Such activity would amount to a circumvention of the apparent intention of the Act, at least in respect of the interpretation of section 13(5) expressed by his Honour Allsop P, extracted above.
Conclusion
  1. Given the intention of the Act to set a time limit within which the Act may be utilised by a claimant, It may be appropriate for the Act to be amended to:
  • create a category of claims relating to retention money and similar matters so that such claims stand alone and cannot be used as a way to claim for construction work long after that work has been completed; and/or
  • set a strict time limit (e.g. 12 months after the completion of work) for the making of any claim under the Act (whether for payment for work or release of retention or both).

 5.1 The Clarification of reference dates warranted.

5.3 Are risks to payment claims clearly set out?

2     The Implications of the Strata Schemes Management Act 2015

  1. The scenario presented above provides the circumstances where the contract may allow for a 24 month defects liability period.
  2. We are of the opinion that this type of scenario will be common once the provisions of the Strata Schemes Management Act 2015 (SSM Act) commences on 1 July 2016.
  3. The provisions of the SSM Act will apply to residential building contracts between the developer and the builder and the contract is not an exempt residential contract.
  4. The SSM Act provides for the introduction of a defect bond and inspection regime for new strata schemes which is to be carried out within the first two years after the building work is completed.
  5. A developer will be required to lodge a 2% bond (based on the value of the contract) to a Owners Corporation Secretary to cover rectification of defective building work should the developer or builder not attend to rectification of the defective building work.
  6. The building bond must be claimed or realised within 2 years of the date of completion, or within 60 days after a final report on the building work.
  7. An authorised inspector retained by the developer inspects the building and provides an interim report on any defective work by no earlier than 15 months after completion and no later than 18 months after completion.
  8. A final report is to be provided no earlier than 21 months and no later than 2 years after completion.
  9. Developers will likely take into consideration the fact that under the SSM provision a builder may be required to attend to rectify defects up to 24 months after completion. The developer will adjust their contracts accordingly to extend the builders defect liability period to 24 months.
  10. In addition, the retention period is likely to be extended to the end of the 24 month defect liability period.
  11. In these circumstances, where the provisions of the Act are unclear, payment claims may be made for contract works after the 12 month period provided for in the current legislation.
  12. Given the above, we repeat our recommendations set out at paragraph 71;
  • create a category of claims relating to retention money and similar matters so that such claims stand alone and cannot be used as a way to claim for construction work long after that work has been completed; and/or
  • set a strict time limit (e.g. 12 months after the completion of work) for the making of any claim under the Act (whether for payment for work or release of retention or both).

4.14 Should the Act be extended to cover contracts between builders and owners/occupiers?

3     Residential Building and Security of Payments

Vulnerability of Homeowners
  1. The application of security payment legislation to residential construction appears to engender little commentary when compared to commentary on the legislations application to the commercial construction industry.
  2. This may seem to be justifiable considering the complex nature and size of commercial projects and the potential for high value claims for payment.
  3. Arguably however, serious consideration should be given to the impact of the legislation on the primary stakeholder in the residential sector, namely the home owner.
  4. We are concerned that homeowners will be caught up in a system purely by default, as industry stake holders with the resources to pursue their agendas, push for the removal of exemptions on residential construction.
  5. The political fall-out from homeowners on the receiving end of default judgements and automatic payment orders, as provided for in the East Coast model, would arguably be a public concern.
  6. It appears a contradiction to open up the vulnerable homeowner to a legislative process which is primarily aimed at the commercial industry when so much effort is put into strengthening building legislation to improve consumer protection.
  7. The removal of exemptions would not align with attempts to improve consumer protection in home building relating to disputes and payments, such as the strengthening of progress payment provisions in section 8A of the Home Building Act 1989 (HBA), removal of compulsory arbitration provisions and the addition of dispute mechanisms such as rectification orders.
The intent of SOPA legislation is not conducive to residential projects
  1. It is recognised that the intention of the Act legislation is primarily to provide a speedy means by which small contractors can recover payment for work undertaken [1] and to prevent reoccurring problems with the subcontractor and insolvency in the building industry.
  2. Stakeholders in the industry have therefore recognised that there is a trade-off between speed and at times contractually or precision.[2]
  3. As the legislation process lends itself to error, then the potential for costly litigation is more likely.
  4. While the Discussion Paper[3] claims that there is concern about the rising level of bad debts in the residential sector, no evidence has been provided to support this proposition and this argument does not support a call for removal of exemptions.
  5. There is evidence however for the opposite, in that there is a significant issue with the number of builders undertaking defective building work and claiming progress payments above the value of the work.
  6. This was borne out in the recent Discussion Paper on the Reform of the HBCF which provided statistics showing the significant loss the NSW government is incurring for the cost of rectifying defective building work.[4]
  7. The NSW government also claims that there is an issue with a large number of builders who over charged for building work before becoming insolvent.
  8. There is therefore a strong argument that the residential construction industry should be considered on its own merits as it is a distinctly different industry from commercial construction.
  9. Should security of payment legislation cover all residential building contracts then we consider there will be several areas that will have a negative impact on homeowners, they are:
  • Difficulty to meet the strict time limits imposed;
  • Confusion due to a system of statutory payment claims and contract payment claims;
  • Conflicts with the existing payment provisions and building legislation;
  • The significant costs for preparing payment schedules or adjudication responses;
  • The increased potential for litigation; and
  • Conflict with low cost dispute mechanisms already in place, such as the Fair Trading inspection provisions.
  1. The Discussion Paper also gives the impression that where residential building work is subject to Security of Payment legislation, there is little impact on homeowners. This is a misconception as the Paper does not explain that the security of payment legislation in those jurisdiction is different to that of the NSW.
  2. For example the Paper notes that Tasmania, Western Australia and Northern Territory already cover all residential projects. These jurisdictions, in contrast to NSW, have security of payment legislation as a default provision which only applies where a contract does not allow for a payment regime.[5]
  3. The contract payment regime therefore is not displaced and the homeowner is largely protected from the strict compliance of the security of payment legislation by the contract provision
The numbers of homeowners impacted if exemptions are lifted is too severe
  1. There is no consideration in the Discussion Paper given to the number of homeowners that will be impacted by removal of the residential exemption.
  2. The Finity Report[6], a publication issued by NSW Fair Trading, shows that in the last half of 2013 and first half of 2014 there were around 55,000 project home warranty insurance certificates issued.
  3. Insurance certificates are required for residential projects over $20,000.00.[7]
  4. While these figures may not cover all of the residential building work undertaken, and some may be exempt already, conservatively there are around 50-55,000 persons a year who would fall under the security of payment  legislation if the exemption is removed.
  5. This of course would be a significant boon for the adjudication industry however it would create an enormous number of potentially vulnerable homeowners that may fall foul of the legislation each year in NSW.
  6. In our opinion, the impact would be too dramatic under the current legislation.
The Act already applies too many residential contracts, why increase it?
  1. At present the Act does not apply to contracts for residential building work within the meaning of the HBA.
  2. Section 7(10B) of the HBA states that the act does not apply to:

“….(construction contract carrying out of residential building works) within the meaning of the home building act 1989 (on such part of any premises is the party for whom the work is carried out proposes or resides in or proposes to reside in…”.

  1. Residential building works defined at Section 3 of the HBA as:
  • “The construction of a dwelling; or
  • The making of alterations or additions to a dwelling; or
  • The repair and renovation or decoration or protective treating of a dwelling. “
  1. Whether a person is exempt relies on mainly on whether the person “resides or intends to reside” at the premises where the building works, subject to the claim, takes place.
  2. NSW Courts have determined that in residential construction there are some areas where parties are already not exempt from the provisions of the Act such as:
  • multi dwelling contracts where the owner only resides in one dwelling;[8]
  • one dwelling with separate residences where the owner does not reside in or use the other residences even though they may own all the units or receive rent for the units;[9]
  • where a party has no intention of residing in the premises[10]
  1. Any contract relating to residential building work that is not the primary contract between the builder and the homeowner also falls under the provisions of the Act .
  2. NSW Courts also confirm that corporations cannot reside in premises as companies cannot reside. Companies therefore entering into an arrangement to have residential building work undertaken will be subject the Act.[11]
  3. Based on the above, therefore there are already an extensive number of exemptions in residential construction which allow the Act to apply, they include contracts between;
  • Subcontractor and builder;
  • Supplier and builder;
  • Parties building investment for rental and builder;
  • Company entities undertaking residential work and the builder;
  • Residential Owners Corporations/Body Corporates and the builder.
  1. We see no valid argument therefore for the extension of the legislation to cover all contracts between homeowners and residential builders and believe that in its current from the legislation applies where there are parties who are financially and structurally capable of managing the risk and provisions of the legislation.

4     Response to Further Questions

5.1 Is clarification of reference dates warranted?

  1. Yes
  2. In our view the Act does not provide sufficient or adequate clarity as to whether a party is able to issue repetitive and identical claims.
  3. The right to progress payments under a construction contract is established by section 8 of the Act. The foundation to that right is the concept of ‘reference date’.
  4. The existence of a valid and available ‘reference date’ is a fundamental pre-condition to a claimant’s entitlement to serve a progress claim under the Act.
  5. Without a reference date, the payment claim will not be a claim under the Act.
  6. Reference dates arise in one of two ways as provided by section 8(2) of the Act.
  7. Section 13(5) of the Act states:

A claimant cannot serve more than one payment claim in respect of each reference date under the construction contract.

  1. There are cases that hold that where a payment claim is served in defiance of section 13(5), it is a nullity. Dualcorp Pty Ltd v Remo Constructions Pty Ltd 74 NSWLR 190, is the main case dealing with this issue
  2. There have been decisions at first instance that also deal with this point.[12].
  3. All members of the Court of Appeal in Dualcorp considered that the Act manifested an intention to confer a degree of finality on an adjudicator’s determination[13]
  4. Allsop P put it this way:

…the Act was not intended to permit the repetitious use of the adjudication process to require an adjudicator or successive adjudicators to execute the same task in Respect of the same claim on successive occasions. A party…should not be able to Re-ignite the adjudication process at will in order to have a second or third or fourth go at the process provided for by the Act merely because it is dissatisfied with the result of the first adjudication.

  1. Macfarlan JA and Handley AJA considered that the prohibition in re-visiting an adjudicated claim emerged out of the fact that an adjudication under the Act has the characteristics which attract the principles of res judicata and issue estoppel, and also probably the principles of ‘abuse of process’
  2. Allsop P considered the primary mechanisms to give effect to this prohibition were the operation of section 13(5) and section 22(4).
  3. On Allsop P’s analysis, a payment claim did not have to be adjudicated for section 13(5) and section 22(4) to operate to invalidate the second payment claim.
  4. In our view , Allsop P’s decision in Dualcorp depended on the court being satisfied that there was,in essence, the same payment claim being served on more than one reference date.
  5. Although there are some cases that make it clear that the Act can permit successive payment claims to be made for the same work, and that service of successive payment claims for the same work on a later reference date is permitted[14]; there is still a degree of uncertainty as to how section 13(5) of the Act is to apply in all cases where repetitive claims have been issued or where repetitive claims have been issued a part of a claim for retention well after the period contemplated under section 13(4)(b) of the Act has expired as detailed in the earlier discussion in section C of this Submission
  6. We recommend that amendments be made to the Act to clarify the status of repetitive claims and as to whether they are permissible in all circumstances having regard to the statements of Justice Allsop in Dual Corp v Remo referred to above and the discussion set out in section C of this Submission.

5.6 Should payment claims be able to be made both up and down the contracting chain?

  1. The Act in its current form provides for payment claims to be made upstream.
  2. This is a feature that is entrenched in the East Coast model.
  3. The West Coast model provides for payment claims to be made upstream and downstream,
  4. The two lane highway in the West Coast model is consistent with the evaluative approach of that model for the resolution of construction payment disputes. The East Coast model however is a default system which provides a process for the adjudication of disputed progress claims as opposed to construction payment disputes.
  5. The establishment of a two lane highway in the Act will require an expansion of the current approach of the adjudication of disputed progress claims to a broader approach involving the resolution of construction payment disputes.
  6. In our view it will not be possible to make amendments to the Act to enable upstream and downstream claims without major change and adoption of substantive elements of the West Coast Model.

5.21 Is suspension of work an effective means to obtain payment?

  1. No.
  2. The ability of being able to reply on the suspension provision depends on the proper and valid service of a payment clam under the Act.
  3. If a payment claim is invalid or invalidly served a suspension of the work under the Act is not only invalid under the Act ; but repudiatory under the contract
  4. Properly advised a claimant would need to ensure and be satisfied as to the validity and service of the payment claim to mitigate against the risk of repudiating the Contract.

6.23 Should mediation be introduced for disputes under the Act?

  1. No
  2. Mediation as a step is likely to prolong the period of time until a binding decision can be made through adjudication, thus delaying sub-contractors being paid.

8.1 Are supporting statements effective in helping subcontractors to get paid?

  1. This obligation to provide a supporting statement to a principal rests only with the head contractor.
  2. The requirement addresses a key finding of the inquiry that statutory declarations made by head contractors under the Oaths Act for the purpose of securing a progress payment from a client, are often false, not enforced and frequently amended to convey the appearance that what was due and owing to a subcontractor was no longer an amount owed by the head contractor.
  3. There are practical advantages in establishing a legal requirement under the Act rather than police officers having the primary responsibility of investigating claims of falsely sworn statutory declarations under the Oaths Act.
  4. Authorised officers from agencies such as the Department of Finance and Services will have powers to investigate and prosecute breaches of the provisions relating to supporting statements.
  5. There will be a maximum penalty of $22,000 for not complying with section 13 (7).
  6. The penalties for not complying with these new laws are significant – a maximum penalty of either $22,000 or 3 months imprisonment.

8.4 Should retention money trust accounts be required for contracts worth less than $20 million?

  1. Yes
  2. The $20 million threshold leaves open the possibility of head contractors structuring their contracts to avoid the new requirements.
  3. For example, a head contractor and a principal could enter into a contract with a project value of (just) less than $20 million, but agree that additional work to the value of, say, $5 million be identified as a separable portion in the contract, which is to be performed as a variation at the future direction of the principal.
  4. The principal could later give the direction that the separable portion be performed, bringing the value of the contract to $24 million and thereby exceeding the $20 million threshold.
  5. The application of the new trust requirements would then be triggered, but would apply only to any subcontracts entered into between the head contractor and subcontractors afterthis point in time.
  6. The additional works could simply be directed as a variation under each relevant subcontract. In such a case no new contracts between the head contractor and the subcontractors would be required, and the application of the new retention money trust requirements could be completely avoided.

8.5 Should the retention money trust accounts be required for all contracts regardless of value?

  1. From a policy perspective, the purpose of the new trust account scheme is to ensure that subcontractors’ retention money is secure in the event of head contractor insolvency, so that they are eventually paid the amounts to which they are entitled for work that has been completed in accordance with the terms of their subcontract.
  2. However, the Regulation appears to leave a loophole for head contractors wishing to avoid the costs and administrative burden of the new trust account requirements.
  3. In our opinion, the object of the changes would be better achieved by removing this loophole, and reframing the provisions to apply prospectively to all moneys under all subcontracts, whether or not already let, that are retained after the $20 million threshold is reached.
  4. This solution would make compliance by head contractors more practical and achievable (and far reaching) in situations where the threshold value is only reached through variations ordered after execution of the initial contract.

Download the submissions

[1] Robert McDougall, ‘The Court view of security of payment legislation in operation’ 1 at 2, 28 March 2012, www.austlii.edu.au/au/journals/NSWJSchol/2005/12.pdf

[2] Ms A.J.Teirnan MLA, Second Reading Speech: Legislative Assembly, WA Parliament (3 March 2004) 275; Matthew Bell and Donna Vella, ‘From Motley Patchwork to Security Blanket: The Challenge of National Uniformity in Australian “Security of Payment” Legislation (2010) 84 Australian Law Journal 7; and above n 1.

[3] Building and Construction Industry Security of Payment Act 1999: Discussion Paper – December 2015.

[4] Reform of the Home Building Compensation Fund Discussion Paper – December 2015 15-16.

[5] Construction Contracts Act 2004 s13-23 (WA); Construction Contracts (Security of Payment) Act s16-25 (NT); Building and Construction Industry Security of Payment Act 2009 s 12-16.

[6] NSW Home Building Compensation Fund Information on the Scheme as at December 2014, 7.

[7]

[8] Shorten v David Hurst Constructions Pty Limited (ACN: 107042688) [2008 NSW CA 134] (18 June 2008).

[9] Oppedisao v- Micose Alumunium Systems [2012 NSW SC 53] (12 January 2012).

[10] Cardiacos –v-Cooper consulting and constructions Services (AUST) (Pty Limited) [2009 NSW SC938] (10 September 2009).

[11] Advanced Earth Movements Pty Limited v Feubew Pty Limited [2009 NSW CA 337] (20 October 2009) at (57

[12]  [For example, the decision of McDougall J in The Trustees of the Roman Catholic Church for the Diocese of Lismore v TF Woollam & Son [2012] NSWSC 1559]

[13] Dualcorp, already cited, per Allsop at [16] and per Macfarlan JA at [50], [67] – [69].

[14] Broadview Windows Pty Ltd v Architectural Project Specialists Pty Ltd

[2015] NSWSC 955 at [36] – [44] and Falgat Constructions Pty Ltd v Equity Australia Corp

Pty Ltd (2006) 23 BCLR 292 and Allpro Building Services v C&V Engineering Services

[2009] NSWSC 1247.