On 4 August 2022, we provided an outline of the new Security of Payment regime in Western Australia pursuant to the Building and Construction Industry (Security of Payment) Act 2021 (WA) (Act). Stage 1 of the Act came into force on 1 August 2022.
Stage 2 of the WA Government's reforms will come into effect on 1 February 2023.
A number of key provisions will be introduced which are addressed below, including the retention trust scheme, new regulatory powers, and a written notice requirement prior to recourse to security.
Key changes from 1 February 2023
- Minimum of 5 Business days' written notice to be given before a party may have recourse to performance security (including performance bonds such as bank guarantees and retention moneys).
- First phase of new retention money trust scheme will apply to construction contracts over $1,000,000.
- Parties risk fines if they threaten or intimidate claimants or persons about their rights and entitlements.
Notice to call on security
Section 57 of the Act will require parties to give at least 5 business days' (or longer if the contract provides a longer period) notice of intention to have recourse to performance security prior to calling on security.
This provision overrides any contrary term in a construction contract.
The notice will need to:
- be in writing and in the approved form (if any prescribed by the regulations);
- identify the construction contract and the provisions of the contract that the party relies on to have recourse to the performance security; and
- describe the circumstances that entitle the party to have recourse to the performance security.
The mandatory minimum 5 business days' notice may be considered to alter the function of security as an 'unconditional risk allocation device'.
The mandatory period of notification will allow contractors an opportunity to negotiate with the principal in respect of the prospective recourse to security and may result in an increase in the number of injunction proceedings initiated by contractors seeking to restrain parties from having recourse to performance security.
1st Phase of Retention Trust Scheme
Part 4 (retention money trusts) of the Act introduces a retention trust scheme aimed at protecting retention money in the event of insolvency.
Under this scheme, retention money is to be held on trust by the party under the construction contract (who retains such money) until the 'retention money trust end date' (subject to some limited exceptions).
Whilst the Act prescribes the circumstances under which the party holding retention money may have recourse to it, those circumstances include where recourse is in accordance with the relevant construction contract or as agreed between the parties. Therefore, parties to a construction contract retain the ability to determine the circumstances under which recourse to security can occur.
Pursuant to the section 72 of the Act, the retention money is held for the beneficial interests of:
- the party to the construction contract who is entitled to have recourse to it in accordance with the contract; and
- the party to the construction contract who carries out the construction work, or supplies related goods and services, under the contract and who is entitled to its release.
The first phase of the retention scheme will come into effect from 1 February 2023 and will apply to all construction contracts over $1,000,000. The second phase will commence from 1 February 2024 (Stage 3) and will apply to all construction contracts over $20,000.
As to timing, the retention money trust account must be established within 10 business days after the parties enter into the construction contract.
However, if the retention money will not be money retained from money otherwise payable but money separately paid as security, the retention money trust account must be established before the money is paid as security under the contract (Section 74 of the Act).
Section 70 of the Act sets out exclusions to the scheme, which includes home building work where the principal is an individual and the value of the contract does not exceed $500,000.
Other provisions
The following will also take effect on 1 February 2023:
- Parties risk fines of up to $50,000 for directly or indirectly threatening or intimidating claimants or persons entitled to make claims (section 65 of the Act).
- New powers for the Board to refuse registration of persons and businesses with a history of insolvency and to discipline builders and other providers who fail to pay debts to subcontractors (Part 5A).
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.
Many provisions in contracts entered into from 1 February 2023 will need to be revised in light of these changes. Specifically, security provisions should be revised to provide for the applicable written notice requirements to avoid the risk of contract administrators invalidly seeking to have recourse to security.
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.
For further information regarding Stage 2 of the SOP Act in WA, contact Tom French or Alex Lowe. Our team offers extensive experience in security of payment matters. Please do not hesitate to contact us if we can assist you.