A recent report commissioned by the Federal Government has made significant recommendations about Security of Payments (“SOP”) Legislation throughout Australia.
John Murray AM, a distinguished adjudicator and former head of Master Builders Australia, has performed a comprehensive review of Australia’s SOP laws. His review offers 86 recommendations to address the limitations of the current SOP regimes and recommends a nationally consistent approach to SOP.
The Australian Government and Building Minister’s Forum will consider the review and conduct industry consultation. As a result, the Review may spark significant reform in the area of Security of Payments across Australia and so construction industry participants should be aware of the recommendations and their potential impacts.
SOP as It Is Now
Over the past 19 years, each State and Territory has enacted SOP legislation with the objective of facilitating prompt progress payments. Each operates differently and there is a discernible two regime divide of the ‘East Coast Model, based predominately off NSW’s SOP legislation, and the ‘West Coast Model.’
While each State and Territory’s SOP legislation is different, the Review found problems common to all:
- Current SOP legislation is complex and causes confusion;
- There are questions around the process of appointing adjudicators and the variable quality of adjudication decisions;
- There is an imbalance of power within the contractual chain that often results in the imposition of unfair contract terms;
- There have been acts of intimidation and retributive conduct by head contractors which is discouraging subcontractors from pursuing their lawful entitlements; and
- Late payment continues to be a major issue for the construction industry.
In light of these findings, the Review made a number of recommendations.
Three key policy considerations were the main drivers for the recommendations and conclusions of the Review:
- Preserving cash flow;
- Providing an adjudication process that is fast and efficient; and
- Protecting payments so that the party who receives the payment holds it for those to whom it is rightfully due.
One of the key recommendations was that SOP legislation should promote prompt payment to maintain a contractor’s cash flow. The Review deemed that such an outcome is most effectively achieved through adoption of a legislative regime broadly based on the ‘East Coast Model.’
Here are some of the other key recommendations of the review.
A Best Practice Model
- SOP legislation should be drafted and structured as simply as possible
- Legislation should not provide for a two-tier/composite system of ‘complex’ and ‘standard’ claims, as occurs in QLD.
Definitions in SOP legislation
- Definitions of ‘construction work,’ ‘related goods and services,’ and ‘construction contract’ should be as wide as possible.
Application of SOP legislation
- Legislation should apply to any construction contract, whether written or oral;
- A claimant corporation in liquidation should not be permitted to make a payment claim under the legislation;
- Legislation should not include carve-out of amounts that a person is entitled to under a construction contract;
- Legislation should apply to the residential housing sector to enable a residential contractor/builder to make a progress payment claim against an owner occupier.
Rights to Progress Payments
- Use of the expression ‘reference date’ should be abandoned;
- Legislation should include specific provisions dealing with one-off milestone payments;
- ‘Pay when paid’ clauses should be prohibited;
- Legislation should provide for the due date for when a progress payment is to be paid.
Process for recovering progress payments
- Legislation should require better identification and breakdown of payment claims and payment schedule particulars;
- Legislation should require a payment claim to state that it is a payment claim made under the Act (which is interesting in light of the recent QLD amendments which remove this requirement).
Adjudication of Disputes
- Legislation should balance the need for speed of an adjudication process with the need for procedural fairness;
- Allow parties to agree on an accredited adjudicator to resolve their dispute if dispute relates to payment of more than $250 000;
- Establish a Regulator to register, grade and appoint adjudicators;
- Entitle parties to make an application to the Regulator for a review of an adjudication decision in some circumstances;
- Legislation should set out the relevant procedure for the conduct of adjudication review and the Regulator is to appoint the most senior registered adjudicator available to conduct the adjudication review;
- Adjudicator’s decisions should not be required to be published.
General provisions relating to adjudicators
- Legislation should have provisions dealing with an adjudicators disqualification due to conflict of interest;
- Legislation should establish that the adjudicators function is personal and non-delegable;
- Legislation should provide for adjudicator’s protection from liability.
- The legislation should provide that all cash retentions are to be held on trust and should expressly provide for an adjudicator to be able to decide whether a retention amount and/or security is to be returned;
- Trade credit insurance should not be made a legislative requirement.
Unfair contract terms
- The legislation should void unfair contractual terms as to be defined in the legislation.
- Legislation should establish statutory trusts for construction projects over $1 million.
What’s next for SOP reform?
Implementing the recommendations and achieving the adoption of a nationally consistent and effective set of security of payment laws will require the Commonwealth, the States and Territories to work together.
To that end, Minister for Small Business, the Hon Craig Laundy MP, noted the responsibility of the Commonwealth to work with the States and Territories. The Minister also committed the Government to consult with industry and to consider the report’s recommendations and explore ways to improve the protections for individuals and businesses involved in the construction industry.
Whether this will occur remains to be seen but one thing is clear- the current SOP regime needs greater consistency. Hopefully this Review is the impetus to achieve this.