The Western Australian Minister for Commerce, the Hon Amber-Jade Sanderson MLA, recently introduced the Building and Construction Industry (Security of Payment) Bill 2021 (WA) (Bill) to State Parliament. The Government appears to be prioritising the Bill and, given its majority in the Legislative Council, industry can expect the Bill to be passed imminently and without significant amendment.
The Bill is substantially the same as the Building and Construction Industry (Security of Payment) Bill 2020 (WA), which was introduced to Parliament last year but did not receive assent before the State election.
The Bill will repeal and replace Western Australia's existing security of payment regime, the Construction Contracts Act 2004 (WA) (CCA), however, the Bill will not apply retrospectively. The CCA will continue to apply to construction contracts entered into before the law commences.
The Bill introduces a number of significant changes to the construction industry, including:
- potential voiding of 'unfair' time-bars;
- requiring parties to give 5 business days' notice prior to calling on security;
- a broader prohibition on 'paid-when-paid' clauses;
- a tightening of time-frames for payment; and
- changes in respect of adjudication, in particular:
- reverse adjudication will no longer be permitted (i.e. adjudication from an applicant principal to respondent contractor, or applicant contractor to respondent subcontractor);
- failing to provide a payment schedule will bar a party from submitting an adjudication response (and entitles the claimant to recover the payment claim as a debt instead of applying for adjudication); and
- adjudication responses will be strictly limited to the reasons given in the payment schedule.
These key changes are discussed in more detail below.
Application to fabricating or assembling mining plant
Like the CCA, the Bill applies to 'construction contracts', meaning an agreement to carry out 'construction work' or supply related goods or services. Construction work is broadly defined in the Bill and shares commonalities with the definition in the CCA.
Also, like the CCA, the Bill contains a mining exclusion. The exclusion has been reformulated to remove the exclusion for works fabricating or assembling items of plant used for extracting or processing oil, gas or mineral. Accordingly, companies performing fabrication or assembly works on mine sites should be aware that those works will be captured by the new security of payment laws.
Voiding 'unfair' time-bars
One of the more novel changes is the concept of voiding 'unfair' time-bars in clause 16 of the Bill. The clause is a departure from the common law position, which strictly enforces time-bars.
The Bill provides that adjudicators, courts, arbitrators, or an expert (Decision Makers) may declare any notice-based time-bar to be unfair in relation to a particular entitlement if compliance is 'not reasonably possible' or would be 'unreasonably onerous'.
To assist Decision Makers, the Bill sets out the matters that must be considered when determining if a time-bar is unfair, being:
- when the party required to give notice would have reasonably become aware of the event;
- when and how notice was to be given;
- the relative bargaining power of each party to the contract;
- the irrebuttable presumption that the parties have read and understood the contract;
- the rebuttable presumption that the party required to give notice possesses the competence of a reasonably competent contractor – this provision may have unintended consequences for the contractor if, for example, the contractor has warranted that it has that competence; and
- whether the matters set out in the notice are final and binding.
Following a declaration that the time-bar is unfair, the time-bar will be void and have no effect in relation to the particular entitlement that is the subject of the proceedings. The time-bar will continue to have effect in other circumstances arising under the contract. We understand this to provide scope for a time-bar to be deemed unfair in the context of one event arising under the contract, but fair in the context of another event arising under the same contract. This will necessarily require a case-by-case analysis of the application of the time-bar.
We anticipate that the scope and impact of this provision will take some time to develop, as it will depend on what courts and tribunals hold to be 'unfair' in various cases.
Requiring notice to call on security
The Bill introduces a requirement that a party provide the other party with a minimum of 5 business days' written notice prior to having recourse to retention money or a performance bond, for example a bank guarantee or insurance bond. The party is also required to provide the reasons why it is entitled to have recourse.
This statutory requirement overrides any contrary provision in a construction contract. For example, a clause providing that a contractor was not required to provide notice to a subcontractor prior to calling on security would be overridden by the statutory provision.
A broader prohibition on 'paid-when-paid' clauses
While the Bill maintains the CCA's prohibition on pay-when-paid provisions, the Bill includes a broader definition of these prohibited provisions than the CCA.
The Bill prohibits clauses that:
- make the liability of a party ('first party') to pay an amount owing to another party ('second party') contingent on the first party receiving payment from a third party;
- make the due date for payment of an amount owing dependent on the date the first party receives payment from the third party; and
- make any of the following contingent on the operation of another contract (e.g. the Head Contract):
- the liability to pay an amount owing;
- the due date for payment of an amount owing;
- the making of a claim for an amount owing; and/or
- the release of retention money or performance security.
Changing the payment regime and tightening the time-frames for payment
The payment regime under the Bill is a change from the CCA. Claims can only be made up the chain from the party that is entitled to a progress payment (i.e. the head contractor to the principal, and subcontractor to the contractor).
The Bill also reduces the time for payment from a maximum period of 42 days in the CCA to:
- 20 business days after a claim is made for progress payments to a head contractor (i.e. payment by a principal); or
- 25 business days after a claim is made for progress payments to a subcontractor, or an earlier date if provided for in the contract.
The Bill requires:
- the claimant to make its payment claim:
- on or after the last day of the month in which the works were carried out; and
- on or after the last day of each subsequent named month, unless the contract provides that the claim may be made on or after an earlier date; and
- the respondent to provide a payment schedule the earlier of the date required by the contract or 15 business days after the payment claim is made.
Other than for a final payment, a payment claim may only be made whichever is the later of:
- the date provided in the contract; or
- the date which is 6 months after the construction work was last carried out.
A final payment claim may only be made whichever is the later of:
- the date provided in the contract;
- the date that is 28 days after the end of the last defects liability period, which is defined as the period starting on the day of practical completion and ending on the last day that any defect may be directed to be rectified under the contract and written law; or
- the date that is 6 months after completion of all works or supply of goods.
The major change in respect of payment and adjudication is the increased importance of payment schedules. Failing to provide a payment schedule will automatically entitle the claimant to the claimed amount as a debt due and payable.
What to expect from adjudications
The new adjudication process continues the 'pay-now-argue-later' approach of the CCA. In a CCA adjudication, an adjudicator will consider the application, the response and any attachments. The Bill changes this position and provides that an adjudicator cannot consider any reasons for withholding payment if those reasons were not included in the respondent's payment schedule.
Under the Bill, the claimant may make an adjudication application within 20 business days of receiving a payment schedule. If no payment schedule has been provided:
- the claimant must give written notice, within 20 business days of the due date for the progress payment, of its intention to apply for adjudication;
- the respondent has 5 business days from receipt of the notice to provide a payment schedule; and
- following expiry of the 5 business days, the claimant has 20 business days to make its application or, if no payment schedule was provided by the respondent, the claimant may recover the claimed amount as a debt.
Following receipt of an adjudication application, respondents have 10 business days to provide an adjudication response. If no payment schedule is provided, respondents will not be:
- entitled to provide an adjudication response; and
- entitled to apply for a review of the adjudication determination.
The adjudicator must determine the application within 10 business days, however, this time can be extended by the parties' consent by up to an additional 20 business days.
Introducing retention trusts
The Bill introduces a deemed retention trust scheme for all moneys held under construction contracts in Western Australia, except contracts to which the Government is the principal and contracts under the prescribed value threshold (no value is currently prescribed, however, the Explanatory Memorandum states that the intention is to exclude 'small value' contracts).
The scheme imposes two distinct deadlines depending on if the money is retention money or security:
- If the money is retention money, the party entitled to hold the retention money under the contract establish a retention money trust account with a recognised financial institution within 10 business days of entering into the contract.
- If the money is security, the account must be established before the security is paid under the contract.
The Bill prohibits:
- retention money from being used to pay third-party creditors; and
- the party holding the retention money from setting off against retention money any liability of the other party under a different contract.
The Bill only permits money to be withdrawn from the trust:
- in accordance with the terms of the contract;
- as agreed between the parties;
- in accordance with an adjudicator's determination, or an order of a court, tribunal or expert determination;
- to repay money paid into the trust in error;
- to transfer the money to another retention trust established under the Bill;
- after the retention money end date; or
- for the purpose of making any other payment authorised by the regulations.
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.