The NSW Government is considering a suite of sweeping changes to the Building and Construction Industry Security of Payment Act 1999 (NSW) (SOP Actwhich regulates the timing of payments in construction contracts and the adjudication of payment disputes.

Fair Trading yesterday released a Discussion Paper and is calling for submissions by 26 February 2016.  In this article we highlight some of the key changes that are being considered for construction industry stakeholders in NSW to mull over during the industry shutdown.

Reasons for the review

The current root-and-branch review of the SOP Act fulfils a commitment made by the NSW Government at the time of reforms to the SOP Act in 2013.  Those reforms, whilst significant (see our previous updates here and here), only targeted a handful of the recommendations from the much-hyped Inquiry into Insolvency in the Construction Industry by Bruce Collins QC (Collins Inquiry).

The Discussion Paper reveals that the Government is presently canvassing options which, if implemented, would result in a major overhaul of the SOP Act in 2016.  The issues being considered impact all stakeholders in the commercial and residential construction sectors in NSW including small and large scale projects.

The highlights

Some of the more interesting options that are open for submissions include:

  1. Penalties: The introduction of specific penalties for attempts by any person to obstruct the lawful use of the adjudication and the SOP Act (eg. by threatening subcontractors with the loss of further or new contracts if they utilise the statutory regime).
  2. Penalties: Introducing offence provisions to address unconscionable conduct and predatory claims including:
  • extending the current 6 month time limit for taking action for offences
  • enhancing investigative powers (for a discussion of existing powers see our previous article in respect of the ‘cash-flow cops’ here)
  • vicarious liability on employers for actions of their employees
  • personal liability for directors

In the survey results appended to the Discussion Paper, 80% of survey respondents said there should be new measures to deal with unconscionable conduct or predatory behaviour and 64% supported direct liability for company directors.

  1. Residential Sector: Extending the scheme to the residential sector (potentially imposing a minimum project value ‘floor’ price of $1 million) to follow the approach taken in WA, Northern Territory and Tasmania.  This could involve greater flexibility and leeway being afforded to respondents.  In the survey results appended to the Discussion Paper, 64% of survey respondents said the SOP Act should no longer exempt owner-occupiers.
  2. Superintendents: Whether specific provisions are needed to cover projects where a superintendent is engaged.
  3. Reference dates: Clarification of the legislation regarding reference dates (a matter which continues to confuse and confound claimants and provide fodder for conflicting judicial approaches).
  4. Sunset date: Reducing the limitation period of 12 months from completion of work.  In the survey results appended to the Discussion Paper, 44% of survey respondents said the current 12 month period was too long.
  5. Claims to go both ways: Opening up the right to utilise the SOP Act to Principals and Contractors making claims down the contracting chain.  This is a feature of the West Coast Model
  6. Reintroducing the statutory endorsement: Reversing the rather controversial amendment which removed the need for a statutory endorsement from claims and replacing it with a requirement for all progress claims to include an endorsement and potentially even additional warnings to respondents as to timing etc to be included
  7. Prompt Payment: Review of prompt payment regime and possible reduction of time for payment to subcontractors to 10 business days
  8. Supporting statements: Exemptions for supporting statements where head contractor is insolvent/in receivership/ liquidation.
  9. Xmas/New Year Shutdown: Expanding the definition of Business Day to account for extended industry shutdown period
  10. Complex Claims: Adopting a dual system for simple and complex claims (consideration of new Queensland reforms and monetary vs non-monetary thresholds) with more flexibility in terms of timing and details of claims for complex claims.  In the survey results appended to the Discussion Paper, 69% of survey respondents said a dollar value threshold should be used to differentiate between simple and complex claims and responses ranged from $1,000 to $10 million.
  11. Retention Trust: Expanding the application of the Retention money trust accounts from projects of at least $20 million to all projects and a consideration of alternative security arrangements
  12. Project Bank Accounts (PBAs): Consideration of possible PBA scheme and aligning with the results and recommendations from a Government report (currently being drafted) on the two-year trial of PBAs
  13. West Coast vs East Coast Models: Considering the best aspects of the West Coast model and potentially cherry-picking from the legislation in these, and in other East-Coast jurisdictions, to improve the NSW regime
  14. Adjudicators and ANAs: Raising the standards of qualifications, registration requirements and enhancing disciplinary action in respect of errant adjudicators.  Regulating the fees of adjudicators and ANAs using a sliding scale and addressing “Adjudicator Shopping” by requiring Respondents a right to agree on the choice of ANA or creating a new and independent process for selecting an adjudicator or ANA (like the new public register system in Queensland).  In the survey results appended to the Discussion Paper, 57% of survey respondents said the Queensland model should be adopted with 24% being unsure and 19% saying it should not.
  15. Mediation: Introducing a mandatory mediation as a first step before an adjudication application can be made.
  16. Regulating Variations: The questions in the survey also asked respondents whether the SOP Act should ensure that contractors aren’t bound to vary their contractual obligations unless the Principal and the Contractor first agree on any variations and payments as a result.  75% of respondents supported this.  This would be a significant intrusion into the contracting rights of parties and is likely to prove controversial.  Interestingly, the Discussion Paper doesn’t otherwise address this issue and it isn’t listed as one of the questions for submissions, suggesting it may not be a focus of any suggested amendments. 

The opportunity and challenge of reform

The SOP Act in NSW is a powerful tool in the claimant’s arsenal and it has become an important part of the fabric of how payments and payment disputes are managed and resolved in the construction industry.  Efficiency has not however been without costn many respects it remains inequitable, inflexible and burdened by the complexity that comes with a piecemeal approach to reform over the past fifteen years. 

In a speech by the Hon. Justice Peter Vickery to the Building Dispute Practitioners Society in 2011, His Honour explained the unique “accident of recent history” whereby we have “a national scheme comprising 8 Acts” and called for uniformity: 

“We now have the luxury of more than a decade of experience derived from the ‘hard knocks’ of litigation and the practice of adjudication.  This is an excellent foundation to build upon.  Most of the problems, both practical and legal, one way or another have been exposed.  It is surely now time to capture the best from all jurisdictions and consolidate them into a coherent national framework.”[1]

Unfortunately a national uniform scheme does not seem a priority.  However, this review presents NSW with a unique opportunity to address some of the shortcomings in the regime by drawing upon the better elements of other jurisdictions and enhancing the better elements of the NSW system.   Striking a balance between enhancing flexibility and fairness and maintaining a system that still delivers quick and enforceable results will be crucial. 

Submissions are due by 26 February 2016.