In this article we provide our analysis of some of the key features of the new reforms, some practical concerns with aspects of the legislation and some recommendations for how principals and head contractors should prepare.
- The new regime is designed to enhance the flow of cash through the supply chain and to start the faster flow of cash from the top of that contractual chain. It is designed to alleviate some of the financial pressure on subcontractors by removing the widespread practice (as found by the Collins Inquiry) of unacceptably long payment terms to subcontractors (often 90 or more days after the work is completed).
- The new time periods for payment commence running from the date a claim is ‘made’. The amending legislation is not clear whether this is the date that a claim is ‘served’ by a claimant or the date that it is ‘received’ by a respondent – an important distinction under the SOPA. Hopefully this ambiguity will be resolved in draft regulations.
- The Government has, sensibly, opted for ‘business days’ rather than ‘calendar days’ for its prompt payment amendments. This should ensure some breathing space, albeit limited, between a principal serving a payment schedule on the 10th business day after receiving a payment claim under the SOPA and the obligations for payment of the scheduled amount arising.
- Principals should consider the impact the new timing may have on their accounts departments and financing arrangements (for example, the timing of loan drawdowns and repayments) which are likely to have longer accounting periods.
- Similar prompt payment requirements have been operating in Queensland since 2004 and builders and developers that are familiar with the regulatory regime in that jurisdiction will be in a good position to adjust their internal systems and contract precedents in NSW.
- As a result of the new payment timeframes (15 business days to be paid from principal, 30 business days to pay subcontractors), head contractors will have the option to achieve, in effect, a “pay when paid” style arrangement provided they can dictate and manage when claims are received from subcontractors to ensure that payment cycles downstream and upstream are streamlined. This will enable head contractors to maximise the ‘buffer period’ built into the new provisions (to allow claims to be made to principals and monies received prior to payment obligations being triggered in respect of earlier claims from subcontractors). Importantly, however, this is at the head contractor’s risk and they will be required to pay subcontractors within 30 business days, regardless of whether they have claimed and received money on time from the principal. This proposed system therefore does not infringe on section 12 of the SOPA which renders ‘pay when paid’ provisions of no effect.
- The payment deadlines will only apply to the extent the amount of the progress claim is not disputed. For example, if a principal or head contractor issues a payment schedule certifying a lower amount than the amount claimed, it is the scheduled amount that will need to be paid by the due date.
- The payment cycle operates as a maximum mandatory payment term and the legislation removes the right for parties to agree on longer payment cycles in contracts. Note that any inconsistent contract terms will be declared void, but only in respect of contracts executed after the commencement of the amendments.
- The amendments create obligations for the timing of payments, but do not create an offence for contraventions. Instead, the existing rights that are available to claimants in circumstances where the respondent has failed to pay the scheduled amount by the due date under the contract remain available (ie suspending works, exercising a lien over unfixed goods, obtaining summary judgment from Court for the debt due or making an adjudication application).
Removing the ‘magic words’ on payment claims
- The removal of the requirement that a payment claim must include the endorsement that it is made under the Building and Construction Industry Security of Payment Act 1999 (NSW) is designed to alleviate what the Collins Inquiry found to be a widespread practice of commercial pressure (in terms of restricting future workflows) and sometimes openly threatening behaviour to dissuade those down the subcontracting chain from issuing payment claims under the SOPA.
- Under the changes, every progress claim issued under an eligible construction contract will be capable of being a payment claim under the SOPA (with adjudication rights and rights to summary judgment where no payment schedule is issued within time). The only remaining requirements are that the claim identifies the construction work being claimed and the amount claimed to be due.
- This very simple amendment is likely to empower claimants to utilise their rights under SOPA on the interim basis that the legislation was intended to be used and without the need to clearly signal an impending adjudication.
- Respondents are not able to rely upon defences and arguments in an adjudication unless these defences and arguments have been properly identified in a payment schedule. With the new changes meaning any progress claim could be taken to adjudication, Respondents should take greater care to ensure that all defences and legal arguments in relation to disputed amounts are included in any payment schedules.
- In the Second Reading Speech for the amendments, it was noted that “this change addresses a key finding of the Collins Inquiry that statutory declarations made by head contractors under the Oaths Act for the purpose of securing a progress payment from a client [a common contractual requirement], are often false, not enforced and frequently amended to convey the appearance that was due and owing to a subcontractor was no longer an amount owed by the Head Contractor”.
- In December, the Department intends to consult with industry stakeholders on the content and format of the supporting statement (which is to be prescribed in regulations). The prescribed form should hopefully provide some clarification as to what is meant by the reference in the legislation to a declaration of payment of all amounts that have become “due and payable in relation to the construction work concerned”. Presumably this simply related to the construction work concerned in the project generally and not the construction work that is the specific subject of the payment claim being issued to the principal. Otherwise, the need for a supporting statement could entrench a system whereby head contractors are required to pay subcontractors before they have had an opportunity to claim from principals. This would place unnecessary financial burden on head contractors and is an inflexible operation that is contrary to the operation of the 15 business day and 30 business day payment cycle reform that was intended by Collins QC in his report.
- The reforms make it a statutory offence if a head contractor submits a payment claim without a supporting statement (maximum penalty $22,000), or if a head contractor signs a statement knowing that it is false or misleading (maximum penalty either $22,000 or 3 months imprisonment).
The cash-flow cops
- The creation of legal requirements for supporting statements under the Act (as opposed to contractual requirements for statutory declarations) means that police officers no longer have the primary responsibility of investigating claims of false declarations under the Oaths Act.
- Instead, Authorised Officers appointed by the Department of Finance and Services will be given investigative power to ensure compliance. These powers extend to issuing notices to the head contractor (or to persons believed to be employed or engaged by the head contractor) for the disclosure of relevant information and for the inspection, copying and seizure of relevant documents.
- Interestingly, whilst the powers of prosecuting offences are highlighted in the second reading speeches, the amendments themselves do not bestow the Authorised Officers with any powers of prosecution such as issuing infringement notices or otherwise levying penalties and it is unclear how any infringements will be prosecuted past the investigation stage.
Statutory retention trust
- The Bill did not originally deal with the trust account requirements for retention money and the new section 12A (which is to be inserted into the SOPA once the amendments commence) was a late amendment proposed by the opposition and accepted in the Legislative Council.
- The reform is the second tranche of the Government’s proposed reforms in response to the Collins Inquiry which identified disturbing reports of retention money being squandered by head companies in distress or improperly withheld on the basis of confected disputes.
- The NSW Department of Finance and Services has also released a consultation paper on the retention trust proposal for discussion and is accepting submissions until 22 January 2014.
The new section 12A doesn’t provide for any detailed regime for the creation of a statutory trust for retention money and instead simply lays the foundation for such a scheme to be established with the regulations to make provision for such matters including:
- the payment of retention money held by the head contractor into a trust account
- whether the trust account is established with the head contractor’s bank or a trust account established and operated by the Small Business Commissioner;
- the procedures for authorising payments, the keeping of records and the resolution of disputes; and
- the creation of an offence up to a maximum of $22,000 for failure to comply.
- The preferred model is for a statutory trustee rather than the trustee obligations falling to the head contractor. The Government has promoted this model as being simpler and more cost effective although head contractors will be unlikely to be overjoyed with the interest earned on retention money now the property of the NSW Government and to be utilised for administration costs and education measures in respect of the new reforms.
- It is anticipated that a dual authorisation process will be required for any release and, in the event of a dispute over release, the Office of the Small Business Commissioner playing an early dispute resolution role (in a mediator’s capacity), but with the parties able to utilise contractual dispute resolution regimes and adjudication under the SOPA as is currently the case for cash retentions.
- Whilst the costs of bank guarantees might be prohibitive for most subcontractors, there is a potential for head contractors to shift away from cash retention requirements in downstream contracts to avoid the new regime. It is intended that the legislation will therefore provide subcontractors with the option of utilising the statutory retention trust model. The Consultation Paper also asks for contributions on whether the trust fund should be extended to cover bank guarantees and to regulate security between principals and head contractors generally, something which will send a chill down the spines of developers around the state.