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25 Jun 2020

The WA Government's move to national consistency on security of payment takes another step with new exposure draft Bill

By Clive Luck, Dougal West and Alexis Hall

If adopted, the Building and Construction Industry (Security of Payment) Bill 2020 (WA) would more strictly regulate the process for claiming and certifying amounts due under construction contracts.

The Building and Construction Industry (Security of Payment) Bill 2020 (WA) (Proposed SOPA) has been released to "key industry stakeholders" for comment. It is intended to replace the Construction Contracts Act 2004 (WA) (CCA) and, broadly speaking, bring WA's regime more closely into line with the East Coast security of payment model.

In many respects, the Proposed SOPA represents a significant change to the current regime under the CCA. Below we discuss the proposed procedure for payment and dispute resolution, highlighting some key areas of change that are relevant to principals and contractors.

The Proposed SOPA will:

  • effect greater alignment with the "East Coast" model;
  • require timely engagement in the payment process and impose significant consequences for failure to do so;
  • provide for the review of adjudication determinations by an experienced adjudicator in limited circumstances; and
  • only apply to contracts executed after the proclamation date.

Applicability of Proposed SOPA

A "construction contract" means a contract, agreement or other arrangement to carry out construction work, or to supply related goods and services. The definition of "construction work" is different to that in the CCA, but remains broad.

Interestingly, the Proposed SOPA maintains a "mining exemption", though the exemption has been narrowed. For example, construction works would no longer exclude "fabricating or assembling items of plant used for extracting or processing oil, natural gas or any derivative of natural gas, or any mineral bearing or other substance".

Progress payments

A party must make progress payments within 20 business days (for a payment due to a head contractor) or 30 business days (for a payment due to a subcontractor), unless an earlier date is agreed in the contract. This would slightly amend the situation from the CCA regime, which imposes a maximum payment period of 42 days for any construction contract.

Payment claims and payment schedules

The concept of a payment claim is broad. The process for claiming payment is summarised below.

A party to a construction contract (a claimant) is entitled to make a payment claim on or after the last day of each month during a project, unless an earlier date is agreed. However, the Proposed SOPA also introduces a sunset date on the ability to claim payment - the later of any contractual date, and 6 months after the works the subject of the payment claim being completed. This limit is not included in the CCA.

Following receipt of a payment claim, a party (the respondent) has two options:

  • pay the claim in full by the due date (see above); or
  • issue a payment schedule within 15 business days of the payment claim, unless an earlier date is agreed in the contract.

The payment schedule must identify the respondent's proposed response to the payment claim, ie. whether it intends to pay it in full, pay in part, or pay nothing. The payment schedule is a critical document under the Proposed SOPA. It must include detailed reasons for any proposed part or non-payment, as a respondent is limited to whatever is stated in the payment schedule when responding to an adjudication application.

Consistent with the East Coast model, failure to issue a payment schedule has serious consequences: the respondent becomes liable to pay the amount claimed on the due date, and is not entitled to file a response in any adjudication application. However, the adjudicator will still have the discretion to determine the actual amount payable by the respondent.

Failure to pay: the consequences

If a respondent does not pay the amount set out in a payment schedule, or fails to issue a payment schedule, a claimant may either make an adjudication application or recover the unpaid amount as a debt due in Court. If the latter approach is taken, a respondent is not entitled to bring any cross-claim or raise any defence in relation to matters arising under the construction contract.

The adjudication process

If enacted, the adjudication process under the Proposed SOPA will be similar to that under the CCA, but can be curtailed where the respondent fails to issue a payment schedule. It also reverts to a shorter period to bring an adjudication application (ie. a revision to the pre-2016 CCA amendments).

If a payment schedule is received from the Respondent, the following process applies:

  • a claimant must now make an application for adjudication within 20 business days of receipt of the payment schedule or the due date for the progress payment (as the case may be), as opposed to 90 business days under the current CCA; and
  • the respondent then has 10 business days to provide a response to that application (where the content of that response is limited (see above)).

If a payment schedule is not provided and the Respondent does not pay the full amount owed before the due date for the progress payment, the following process applies:

  • a claimant must give notice of their intention to apply for adjudication of the progress claim within 20 business days after the due date for the progress payment;
  • the respondent is then given a grace period of 5 business days after the date of that notice to provide the claimant with a payment schedule. As noted above, if the respondent does not, it cannot file a response in any subsequent adjudication; and
  • an adjudication application must be made within 20 business days of the end of the 5 business day grace period.

The adjudicator must issue a determination within 10 business days of the adjudication application (if no payment schedule is received), or within 10 business days of any adjudication response provided by a claimant.

Review of an adjudication determination

Any review of an adjudication determination will be conducted by a senior adjudicator in a strictly limited scope of review, instead of the State Administrative Tribunal (SAT).

The prior limited right for a party to appeal to the SAT is removed. Instead, either party has broad rights for review where the adjudicated amount differs from the amount in the payment claim or schedule (as the case may be) by an amount yet to be specified by the regulations ($200,000 being the proposed amount). In the case of a claimant, this includes where the adjudicator determined that no amount was payable.

Significantly, a respondent who does not provide a payment schedule as required by the Proposed SOPA has no right of review.

A party wishing to apply for a review must do so within 5 business days of the original adjudication decision, and requires the respondent to place the adjudicated amount in a trust account prior to review.

In conducting the review, the senior adjudicator must not consider any reasons that were not raised by either party in the original adjudication. However, a party is allowed to provide submissions. Accordingly, it is likely that these will be permitted only to clarify any relevant aspects of the original submissions made. The extent to which additional supporting evidence may be included in a review application is currently unclear, and further clarity may be provided in subsequent drafts.

The senior adjudicator must made a determination within 10 business days.

The Christmas blackout

The CCA was amended in 2016 to introduce a blackout period over Christmas, and prevent last minute applications having to be responded to over that period. The CCA gives effect to this by excluding 25 December to 7 January from the definition of "business day". Sensibly, this has been maintained and extended, to the period 22 December to 10 January in the Proposed SOPA.

Which construction contracts will be affected?

The Proposed SOPA will only apply to contracts entered into after commencement. Parties currently negotiating contracts should therefore take note of the changes that may be implemented and ensure that drafting adequately provides for the proposed changes where a contract is to be executed at or following the time of proclamation. Further changes to the draft legislation may be made following consultation.

Conclusion

If adopted, the Proposed SOPA would more strictly regulate the process for claiming and certifying amounts due under construction contracts. It would also place an emphasis on the respondent to any payment claim providing a meaningful response, with a view to resolving all payment disputes at the earliest stage possible. However, the consequences of not engaging with a claimant as intended are severe - a respondent is limited to reasons it originally gives for rejecting claims (meaning subsequent set offs are unlikely to be able to be brought in an adjudication), and if it does not issue a payment schedule it cannot participate in the adjudication whatsoever.

If you would like to discuss the Proposed SOPA, require more information, or if you are interested in making a submission, please get in touch with Clive Luck or Dougal West.

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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.