A new era for Security of Payment in WA

8 minute read  04.08.2022 Tom French, Alex Lowe, Candice Lamb, Ljubica Petrovic, Zubayr Abrahams, Sally Ross, and Penny Bond.

Since 1 August 2022, new security of payment provisions for Western Australia (WA) are in operation under the Building and Construction Industry (Security of Payment) Act 2021 (WA) (Act).

 


Key takeouts


  • The Act applies to construction contracts entered into on or after 1 August 2022.
  • The Act fundamentally changes security of payment in WA and introduces a statutory right to payment.
  • The key changes include: the requirement to issue payment schedules with reasons; the ability for claimants to apply directly to court as an alternative to adjudication in some circumstances; and the potential voiding of unfair time-bars.

The new security of payment provisions apply to construction contracts for construction work, or the supply of related goods or services, in WA, with a contract value of $20,000 or more, and entered into on or after 1 August 2022. The Act does not affect construction contracts entered into before this date. For those contracts, the Construction Contracts (Former Provisions) Act 2004 (WA) (CCA) will continue to apply.

The remaining provisions of the Act will come into operation on later dates, being 1 February 2023 or 1 February 2024, and will only apply to construction contracts entered into after those dates. Those provisions largely relate to retention money trusts, the requirement to give notice before calling on security, and other miscellaneous provisions.

Key changes

The Act introduces a number of key changes regarding rights to payment, payment schedules, due dates for payment and recovery of unpaid amounts. The Act also contains an adjusted procedure and timeframes for adjudications. Parties will need to be aware of these changes to effectively and efficiently draft and manage their contracts moving forward.

A parallel statutory right to payment – Section 17 of the Act

The Act provides a statutory right to payment, in addition to and separate from any contractual right to payment. This aligns WA more closely with the 'East Coast Model' for payment and is a significant departure from the previous position under the CCA which did not contain such a right.

The effect is that the payment terms of the Act will apply regardless of whether or not the contract has a different payment regime. For that reason, it is important to ensure contracts are consistent with the Act.

Due dates for payment– Sections 20, 27, 62 and 63 of the Act

The Act prescribes timeframes for payment by principals or head contractors of payment claims made under the Act. Those timeframes are as follows:

  • 20 business days from when the payment claim is made to a principal from a head contractor, or on any earlier date provided for by the contract; and
  • 25 business days from when the payment claim is made to a principal or head contractor from a subcontractor, or on any earlier date provided for by the contract.

If no payment schedule is issued, and the claimed amount is not paid in full within these timeframes, the claimant can apply directly to a court to recover the claimed amount as a debt due and payable. Similarly, if a payment schedule is issued certifying an amount payable, but that amount is not paid within these timeframes, the claimant can also apply directly to court to recover any scheduled amount.

The claimant will also have a statutory right to suspend works and recover its losses arising from any suspension in the event of non-payment of the claimed amount or scheduled amount.

The importance of payment schedules – Sections 14, 25 and 34 of the Act

Under the Act, payment schedules must be issued within 15 business days after the payment claim is made, or within any earlier time required by the contract.

From a practical perspective, assuming the contract does not provide an earlier date, this means that in the case of a payment to a head contractor, the principal must pay the scheduled amount 5 business days after it issues its payment schedule. Similarly, in the case of a payment to a subcontractor, the principal or contractor must pay the scheduled amount 10 business days after issuing the payment schedule.

If the full amount claimed will not be paid, the payment schedule must include reasons for why less or no payment is proposed or why payment is withheld. If the claimant commences an adjudication, the adjudication response cannot include any arguments beyond the reasons included in the payment schedule. This is a significant change from the CCA and will require parties to carefully consider payment schedules from both the claimant's and respondent's perspective during the works or supply.

The responding party will also not be able to rely on any 'pay-when-paid' or 'pass-through' provisions if they appear in the contract, as those have no effect in relation to any payment under the Act.

A revised adjudication process – Sections 28, 30 and 34 of the Act

At a high-level, the adjudication process is similar to the process under the CCA, however, there are a few procedural and timing changes.

First, the Act changes who may apply for adjudication. The Act only permits adjudication applications to be made up the contracting chain if the claimed amount or scheduled amount has not been paid in full before the due date. This is unlike the CCA which permits 'reverse adjudication' down the contracting chain (for example, an application may be made by a principal against a head contractor).

Second, the Act also reduces the time for making an adjudication application from 90 business days to 20 business days. The days are calculated from the first date the claimant becomes entitled to make the application as follows:

  • If a payment schedule has been given, the time to make an application will start running from the date on which the claimant receives a payment schedule certifying less than the claimed amount (including nil payment); or
  • If a payment schedule has been given with a scheduled amount, which is not subsequently paid, the time to make an application will start running from the date on which the scheduled amount was due to be paid; or
  • If no payment schedule was given within the time required, the claimant must give the respondent written notice of its intention to apply for adjudication within 20 business days after payment of its claim was due. On receiving notice, the respondent has 5 business days to provide a payment schedule, following which the claimant can apply for adjudication if there is an amount which remains unpaid.

Unfair time-bars may be voided – Section 16 of the Act

In an Australian first, the Act introduces a mechanism by which 'unfair' notice based time-bars can be voided by decision makers (an adjudicator, court, arbitrator or an expert during expert determination) if compliance with the time-bar in a particular case is not reasonably possible or would be unreasonably onerous. This represents a potential departure from the common law position which strictly enforces time-bars.

The Act defines a notice based time-bar as a provision of a contract that makes entitlement to be paid for work, goods or services, or an extension of time for doing a thing that affects an entitlement to be paid, contingent upon a party giving notice.

If a time-bar is declared unfair by a decision maker, it will have no effect in respect of the particular entitlement in which it was declared unfair, but will continue to apply in other circumstances, including under the same contract. We anticipate that this new provision will be the subject of considerable argument during adjudications, arbitrations, court proceedings and expert determinations.

The Act sets out the factors that a decision maker must have regard to when determining if the time-bar is unfair, which include:

  • when the party giving notice would reasonably have become aware of the event;
  • when and how notice was to be given;
  • the relative bargaining power of the parties;
  • the irrebuttable presumption that the parties have read and understood the contract;
  • the rebuttable presumption the party required to give notice possesses the commercial and technical competence of a reasonably competent contractor; and
  • if the matters in the notice are final and binding.

We anticipate it will take some time for the law to develop and clarify the operation of this provision.

Future changes in the Act - Notice to call on security

Looking forward, we note the Act will introduce a statutory requirement for parties to give notice before calling on security under construction contracts entered into after 1 February 2023. Parties will be required to give at least 5 business days written notice before calling on security.

The notice will need to:

  • identify the contract and the contractual provisions relied on to have recourse to the performance security; and
  • describe the circumstances entitling recourse to security.

This statutory provision will then be read into every construction contract regardless of any contrary terms of the contract.

Adapting to the Act

Given the extent of the key changes we have identified, we appreciate that this will affect parties' businesses, projects, contracts and personnel, and it will take some time to adapt to the new provisions of the Act.

If you would like to know more about how the new security of payment laws may impact you, please get in touch with our WA Construction team.

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