On 1 August 2022, Stage One of the WA Government’s 3-year Action Plan for the Building and Construction Industry (Security of Payment) Act 2021 (WA) (SOPA) commences and will redesign the security of payment landscape in the building and construction industry in WA.
The substantive provisions of the SOPA that come into force on 1 August 2022 will, subject to certain exclusions, apply to contracts for the carrying out of ‘construction work’ or supply of ‘related goods and services’ (as those terms are defined under the SOPA) entered into after that date. The Construction Contracts Act 2004 (WA) (CCA) will continue to apply to ‘construction contracts’ entered into prior to 1 August 2022.
The key areas of reform under the SOPA include regulating contractual terms, reforming the payment dispute adjudication process (including the creation of a review adjudication process), creating deemed trusts for retention money, enhancing the powers of the Building Services Board to manage conduct and behaviour of registered building service providers under the Building Services Registration Act 2011 and introducing penalties which may be pursued by the Building Commissioner.
- The SOPA wholly replaces the Construction Contracts Act 2004 (WA) (CCA), although it only applies to contracts entered into after 1 August 2022. The CCA continues to apply to contracts entered into before this date.
- The scope of the ‘mining exclusion’ has been significantly narrowed, resulting in a broader application of the SOPA to the mining and resources industry than the CCA.
- ‘Time-bar’ clauses will be unenforceable if it is declared that the time-bar requirement is not reasonably possible to comply with or unreasonably onerous.
- Contractors/Sub-Contractors now have a statutory right to issue payment claims for progress payments.
- The period for payment to a Contractor has been reduced to 20 business days after a payment claim is made (and 25 business days in the case of Sub-Contractors).
- A more friendly contracting landscape will exist for Contractors/Sub-Contractors by imposing significant limitations on existing contracting freedoms typically favourable to Principals.
- A rapid adjudication process and new adjudication review procedure (not previously provided for in the security of payment legislation of any other State or Territory).
- From 1 February 2023, there will be a mandatory 5-days’ notice prior to having recourse to performance security.
Statutory Payment Process
The SOPA creates a separate and additional right of Contractors and Sub-Contractors to issue payment claims for progress payments (this is largely consistent with the East Coast model).
Unless the contract provides for a shorter period, payment from a Principal to a Contractor must now be made within 20 business days (28 calendar days) after a payment claim is made (and within 25 business days (35 calendar days) in the case of Sub-Contractors). This is a significant reduction from the 42 calendar days provided for under the CCA.
While a respondent has the option of issuing a payment schedule in response to a payment claim, if a respondent does not issue a payment schedule within 15 business days, the respondent:
- becomes liable to pay the claimed amount to the claimant on the due date for the progress payment;
- is not entitled to defend an adjudication application or apply for review of an adjudication determination; and
- is not permitted to raise any submissions in response to any adjudication application (or adjudication review application) which were not included in a payment schedule.
Reduction in scope of ‘mining exclusion’ for Processing Plant
The existing ‘mining exclusion’ under the CCA is significantly narrowed as ‘fabrication or assembly of items of plant used for extracting or processing oil, natural gas or any derivative of natural gas, or any mineral bearing or other substance’ is no longer excluded from the definition of ‘construction work’ under the SOPA, resulting in a broader application of the SOPA to the mining and resources industry than the CCA.
Restriction on ‘time-bar’ clauses
Clauses which make an entitlement to payment or an extension of time contingent on the provision of notice by a party to the contract can be held as unenforceable if the Contractor/Sub-Contractor can demonstrate that, in the circumstances of a particular claim compliance with the time-bar requirement is ‘not reasonably possible’ or is ‘unreasonably onerous’.
The ‘time-bar’ clause may be declared unfair by an adjudicator (or review adjudicator), the Court, an arbitrator or an expert appointed by the parties for the purposes of determining a dispute (e.g. pursuant to expert determination).
This means that Principals/Contractors will be substantially limited in their ability to confidently rely on ‘time-bars’ in refusing Contractor/Sub-Contractor claims, given the ever-present risk that a Contractor/Sub-Contractor could ultimately have the provision held unenforceable.
If the respondent does not pay the claimed amount (or the amount stated in the payment schedule) by the due date, the claimant may either commence Court proceedings to recover the debt due or make an adjudication application.
The complexity exclusion continues to exist, whereby an adjudicator must determine whether the adjudication application is too complex for the adjudicator to make a determination within the time available. What is new however, is that under the SOPA an adjudicator is now also able to determine that no amount is payable where the adjudicator considers that the adjudication application is ‘frivolous or vexatious’.
The Christmas blackout period for making an application has been extended to the period 22 December to 10 January.
Adjudication Review Regime
The SOPA introduces a new adjudication review regime not presently available in any other State or Territory whereby either party has broad rights for review where the adjudicated amount differs from the amount in the payment claim or schedule by $200,000 or, where the adjudicator determines they have no jurisdiction and the claimed amount exceeds $50,000.
A respondent who does not provide a payment schedule or an adjudication response within time, or at all, is not entitled to apply for a review of the determination. Further, a respondent will not be entitled to apply for a review of a decision that the adjudicator had jurisdiction to determine an application.
The parties have 5 business days from the date of the original adjudication determination to make an application for review and the review adjudicator has 10 business days to make a determination.
Whilst the merits of the determination can be reviewed, it is not a review de novo, meaning it is limited to the material that was before the original adjudicator.
Stages Two and Three
Deemed Trust Schemes and recourse to performance security
The SOPA will require a party who retains retention money under a construction contract valued at $1,000,000 or more from 1 February 2023 and $20,000 or more from 1 February 2024 to pay that money into a trust account with a recognised financial institution within 10 business days of the parties entering into the contract.
From 1 February 2023, Principals will be required to give at least 5 business days’ notice prior to having recourse to contract security. Whilst this to some extent undermines the very purpose of the security, which is often intended to serve as an unconditional risk allocation device pending resolution of a dispute between contracting parties, this time can also give parties time to reach an agreement.
What does this mean for you?
Companies in the building and construction industry in WA need to prepare for the commencement of Stage One, this includes by familiarising themselves with the new Act and considering whether their contracts and/or services fall within the ambit of the SOPA, and if so, whether these contracts entered into post 1 August 2022 are compliant with the SOPA. It is important to note that you cannot contract out of the operation of the SOPA in ‘construction contracts’ entered into from 1 August 2022.
Note that the SOPA will not apply to contracts for construction work carried out outside WA. Other exclusions include contracts between residential homeowners and contractors for ‘home building works’ valued less than $500,000, contracts between employers and employees for construction work or related goods and services, construction loan contracts, guarantees or indemnities which give separate rights to claim payment and contracts for the construction or fitting out of ‘watercraft’.
Looking forward, Stage Two is due to commence 1 February 2023 which will see the implementation of provisions relating to the Retention Trust Scheme (for high value projects), new Regulatory Powers and notice requirements prior to recourse to security. Stage Three commences 1 February 2024, extending the retention trust scheme to low value projects.