The National Review is announced

On 21 December 2016 the Federal government announced a national review of security of payment laws in the building and construction industry. The Federal Minister for Employment appointed Mr John Murray AM to conduct the Review which is intended to resolve the conflicting approaches taken to Security of Payment Act (SOPA) laws across Australian jurisdictions. Mr Murray will need to liaise with various businesses, government entities, unions and other parties within the building and construction industry in order to advise on best practices moving forward. A progress report which is to be issued to the Minister of Employment is due 30 September 2017 and the final report by no later than 31 December 2017.

Why the Review?

Since its inception, the ongoing issues that arise concerning security of payment legislation have varied between matters of principle and details. The lack of consistency across different Australian jurisdictions is evident by the two different models of security of payment laws across Australia providing different levels of protection to contractors. These are known as ‘the East Coast Model' and ‘the West Coast Model'.

Problems with the East Coast Model

As a matter of principle, there appears to be a denial of justice in the adjudication process under the East Coast Model in the following sections of the of the New South Wales Act:

  1. Section 15(4) states that a respondent who does not respond to a payment claim within 10 business days, is not entitled to raise any defence in relation to matters arising under the construction contract, if sued for the total amount claimed.
  2. Section 20(2A) prevents a respondent from putting in any defence in the adjudication if they did not submit a payment schedule during those 10 business days.
  3. Section 25(4) states that when the claimant enters a judgment following a determination, the respondent is not, in seeking to set such judgment aside permitted to raise any defence in relation to matters arising under the construction contract.

While there have been a number of cases that have challenged the constitutionality of the legislation, it must be noted that none have resulted in a declaration of invalidity as of yet, but this is a matter that we are hoping will be addressed in the Review.

What does the Review aim to achieve?

The aims of the Review have been set out in the Terms of Reference as follows:

  • examine security of payment legislation of all jurisdictions to identify areas of best practice for the construction industry
  • take into account any reviews and inquiries that have recently been conducted in relation to security of payment, including the December 2015 report by the Senate Economic References Committee on insolvency in the Australian construction industry and the draft legislation developed by the 2003 Cole Royal Commission into the Building and Construction Industry
  • consult with business, governments, unions and interested parties and the Security of Payment Working Group
  • consider how to prevent various types of contractual clauses that restrict contractors in the construction industry from obtaining payments for work that has been completed.

Australian Legislation Reform Subcommittee of SoCLA Draft Submissions

In June 2014, the Australian Legislation Reform Subcommittee of the Society of Construction Law Australia (SoCLA) completed its Report on Security of Payment and Adjudication in the Australian Construction Industry (2014 Report). Since the announcement of the national review, SoCLA have expanded on the 2014 Report and drafted an updated submission dated 5 June 2017 (Draft Submissions). This has already been shared with John Murray to assist in his national Review.

The key issues and recommendations that remain unaddressed since the 2014 Report are summarised as follows:

  1. Harmonisation/ Federal Legislation relating to the adjudication of construction disputes, either by Commonwealth legislation, or by means of all States adopting a model law.
  2. The Default Judgment feature of the East Coast Model should be abandoned as it penalises a paying party who fails to respond to a payment claim within a very short time frame by way of payment schedule under the legislation.
  3. The parallel Statutory Right to Payment of the East Coast Model (which refers to the right to a progress payment) should be abandoned as it is running parallel to contractual rights to payment. It is recommended that the adjudicator have power to overreach all valuation and certification mechanisms provided for in the contract.
  4. Time limits for Adjudication Applications for adjudication should be made promptly after the right to payment arises. This is suggested to be within 3 months. It is recommended that the time for the adjudicator to make a determination should be proportionate to the amount being claimed. For example where the amount claimed is less than $10,000 then the timeframe should be 10 business days, whereas an amount claimed of more than $10,000,000 should allow 40 business days.

Time bar restraints

The current review by John Murray will not just focus on the issues arising within adjudication and denial of justice for respondents, it will also attempt to prevent contractual clauses that restrict contractors in the construction industry from obtaining payments for work that has been completed, and the problem of unreasonable time-barring provisions. This is explored under question 16 of the Draft Submissions to Mr Murray as follows:

Should time bars that operate to exclude a contractor/subcontractor’s right to claim for an extension of time (“EOT”), delay costs and/or variations be codified? If so how? For example, should contractual terms which set an unreasonable time frame for notification of EOT or for notification of variations, be stated to be void?

At present there is a multitude of legal strategies to combat the unfair reliance on such clauses such as reading down, estoppel and protection for small business through the small business unfair contracts legislation. However, the Subcommittee seeks to determine on what basis should such timeframes be regarded as unreasonable? Concepts such as whether the new legislation should restrict unreasonable time-barring provisions by setting a statutory benchmark to delineate between clauses that are acceptable, and those that are not, will be explored, amongst other topics.

How can you influence the Review?

Lawyers, and other professionals, across various jurisdictions, who are members of SoCLA have been welcomed to submit their input to these Draft Submissions by email prior to 15 June 2017.