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24 May 2018

Review of Security of Payment Laws released, national alignment with East Coast model advocated

By Frazer Moss, Kath Hallpike and Clare Maguire

The Review recommendations, if implemented, will bring about Australia-wide reforms aimed at preserving cash flow, facilitating a more expedient and efficient adjudication process and protecting payments from misuse.

A nationally consistent security of payment approach is critical to addressing the limitations of the existing divergent legislative landscape, according to the 400-page report of the national review of security of payment laws by John Murray AM, which makes 86 recommendations designed to achieve this goal. 

The Review is now being considered by the Australian Government in conjunction with the Building Ministers' Forum, including industry consultation, and may well precipitate significant reform, so construction industry participants will need to understand the recommendations' impact on their business. 

We highlight the main reforms below, and we'll explore them in more depth in the coming weeks.

Problems with security of payment laws across the nation

The Review comprehensively addresses what has been a longstanding challenge in the construction industry: improving cash flow through nationally uniform legislation. It identifies certain key deficiencies common to both the so-called "East Coast" and "West Coast" models, including:

  • ineffectual protection of lower tier contractors when a party higher in the contractual chain becomes insolvent;
  • undue complexity;
  • the competency and expertise of adjudicators;
  • the imposition of unfair contractual terms where there is unequal bargaining power; and
  • the persistent problem of late payment.

The Murray recommendations at a glance

The national approach advocated in the Review is premised on the East Coast model, in particular the NSW security of payment legislation. The findings and conclusions of the Review broadly derive from three key policy considerations: preserving cash flow, facilitating a more expedient and efficient adjudication process and protecting payments from misuse.  Wide-ranging recommendations for reform include:

  • a claimant in liquidation should not be permitted to make a payment claim under the legislation;
  • in what would constitute a significant change, extending coverage to the residential housing sector;
  • the abolition of the two-tier "complex" and "standard" claim system in Queensland;
  • removing the carve-outs of amounts that are claimable, as Victoria currently allows;
  • tempering the emphasis on the speed of an adjudication process with the need for procedural fairness;
  • ensuring the security of downstream payments to subcontractors by implementing a cascading statutory trust;
  • where a construction contract has been terminated, enabling a claimant to make a payment claim for construction work up to the date of termination;
  • stipulating a maximum payment period of 25 business days after a payment claim has been made;
  • new requirements for a breakdown of amounts claimed, based on the Singaporean security of payment regime;
  • mandating that each payment claim include a supporting statement of amounts paid to subcontractors;
  • the establishment of a Regulator to appoint adjudicators;
  • a party should not be entitled to make application for a review of an adjudication decision if the parties agreed on the adjudicator (where the dispute relates to a payment claim exceeding $250,0000);
  • unless a statutory trust is adopted, the implementation of a payment withholding request system;
  • regulation of authorised nominating authorities (ANAs) (together with a statutory indemnity of ANAs);
  • all cash retentions are to be held on trust; and
  • increased regulation of unfair contract terms, including unreasonably onerous time bar provisions.

The next steps for security of payment reforms – industry and State Government consultation

The next step is for the States, the Territories and the Commonwealth to consider the Review's comprehensive recommendations and for the Building Ministers' Forum to co-ordinate its response to the Review.

As part of that consideration, Minister for Small Business Craig Laundy has said that "the Government will consult with industry to consider the report’s recommendations and explore ways to improve the protections for individuals and businesses involved in subcontracting in the construction industry."

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.