Alignment across the States: A fundamental overhaul of security of payment regulation in Western Australia
On 23 September 2020, the Parliament of Western Australia (WA) introduced the broad-ranging Building and Construction Industry (Security of Payment) Bill 2020 (WA) (SOP Bill) to the Legislative Assembly. It proposes a fundamental overhaul of security of payment regulation in WA by replacing the existing regime under the Construction Contracts Act 2004 (CC Act) with one closely-aligned with the ‘East Coast’ jurisdictions. The SOP Bill is the first radical change to WA’s security of payment regime in over a decade and, if passed, will gradually replace the current CC Act. In this focus alert, we unpack the key features of the SOP Bill.
The SOP Bill is the product of industry consultation which began earlier in May this year, when the Government invited key stakeholders to provide comment on an exposure draft version of the SOP Bill.
In its current form, the SOP Bill bridges the long-standing divide between the ‘East Coast’ and the current ‘West Coast’ security of payment model in WA, bringing WA’s security of payments laws into substantial alignment with the regime used in the ‘East Coast’ jurisdictions (that is, Queensland, New South Wales, Victoria, Tasmania, South Australia and the Australian Capital Territory).
The SOP Bill draws heavily on the recommendations of the WA Fiocco Report (October 2018) and Commonwealth Murray Report (December 2017). It comes as no surprise then that the SOP Bill contains similar statutory mechanisms for receiving and recovering payment as its East Coast counterparts.
At a high-level, there are three key aspects of the SOP Bill:
- Security of payment: It replaces WA’s security of payment regime with a model similar to what is in operation in the ‘East Coast’ State and Territory jurisdictions.
- Retention money trust accounts: It establishes a scheme for retention money to be held on trust.
- ‘Phoenixing’: It introduces new protections intended to address unlawful ‘phoenix’ activity.
Each of these three key aspects are summarised briefly below.
As noted above, this Bill follows an earlier exposure draft. There are several new clauses introduced in this Bill, since the earlier exposure draft, as summarised in the attached document.
Security of payment
The first key area of reform is a complete overhaul of the current security of payment framework. The current CC Act provides claimants with a means of adjudicating ‘payment disputes’ under construction contracts. The SOP Bill removes this system, and replaces it with the ‘East Coast’ model under which a respondent to a payment claim must issue a payment schedule, if it does not intend to pay the full claimed amount. If a payment schedule is not issued within the prescribed time (15 business days, or the time required by the construction contract, if earlier), the respondent is liable to pay the whole of the claimed amount.
If the dispute progresses to adjudication, a respondent is limited to the reasons contained in the payment schedule. This gives primacy to the payment schedule, and to its role in defining the dispute on any one particular payment claim. Based upon the second reading speech to Parliament, this is intended to provide an early warning system where all or part of a payment is being withheld by a respondent.
However, the SOP Bill contains its differences. For instance, in a departure from other ‘East Coast’ models, the SOP Bill introduces a mechanism under which an adjudicator, court, arbitrator, or expert may declare a notice-based time bar provision of a construction contract to be unfair if compliance with the provision:
- is not reasonably practicable; and
- would be unreasonably onerous.
This is evaluated on a case-by-case basis: the inquiry is whether it would be unfair in the case of a particular entitlement that is the subject of the proceedings. If found to be unfair, the notice-based time bar provision has no effect in that particular case.
The SOP Bill also introduces a procedure for the appointment of a ‘review adjudicator’ to affirm or quash an earlier adjudication determination or make a new decision. This is a limited right of review. A claimant or respondent may apply for a review of the adjudicator’s determination if the difference between the adjudicated amount and the claimed amount (where a claimant is applying for review) or the scheduled amount (where a respondent is applying for review) exceeds the minimum amount prescribed by the regulations. A claimant may also apply for a review of the adjudicator’s determination if the adjudicator decided that he or she did not have jurisdiction where the claimed amount exceeds the minimum amount prescribed by the regulations. While the regulations are yet to be released, the earlier exposure draft of the SOP Bill proposed a prescribed minimum amount of $200,000.
An adjudication review application must be made within 5 business days after the claimant or respondent making the application is given the adjudicator’s determination. A review adjudicator then has 10 business days to make a determination.
Retention money trust accounts
The second key area of reform is the introduction of a scheme for retention money to be held on trust by the party to the construction contract who retains the retention money and deposited into a retention money trust account with a recognized financial institution. Per the second reading speech, this framework is aimed at preventing retention trust money being used by the holder as part of its working capital.
This concept is currently drafted to have a broad application. Under the SOP Bill, there are specific exemptions where the requirement for retention money trust accounts do not apply, namely:
- if the party for whom construction work is carried out, or to whom related goods and services are supplied, is a government party;
- if the value of the construction contract does not exceed the ‘prescribed retention money threshold’ (which is yet to be defined, but was proposed at an amount of $20,000 in the exposure draft);
- if the construction contract is for excluded home building work; or
- if the construction contract is of a kind excluded by the regulations (yet to be defined).
The SOP Bill makes it an offence for a party to fail to, without reasonable excuse, ensure that retention money is paid into a retention money trust account, or fail to allow the other party to the construction contract to inspect and take copies of accounting records relating to the retention money. If a company commits either of these offences, an officer of the company is also guilty of the offence if the officer failed to take all reasonable steps to prevent the commission of the offence.
Regulation against ‘phoenixing’
The third key area of reform is the introduction of measures which are intended to protect against ‘phoenixing’, that is, where assets are stripped from one company (which is left with its debts), and used to ‘re-birth’ a new company. The SOP Bill introduces a concept whereby both companies and individuals may be declared an ‘excluded contractor’ because of an insolvency event. Such a declaration prevents a company or individual from being registered as a building services contractor. Declarations may be either temporary (three years) or permanent. Before a declaration is made, the Building Services Board must give the person (i.e. company or individual) an opportunity to show cause as to why they should not be declared to be an excluded contractor.
Where to from here?
The SOP Bill is currently before the Legislative Assembly. If the SOP Bill is passed by the Legislative Assembly (which may be with or without amendments), it will be then be referred to the Legislative Council. We are following the SOP Bill closely and will continue to bring you updates as it progresses through Parliament.
While substantially similar to the ‘East Coast’ model, there are a number of differences which make the SOP Bill, in its own way, unique. We will provide further coverage on the particular areas where security of payment regime under the SOP Bill departs from other ‘East Coast’ regimes.
If you have any questions on how the SOP Bill is likely to affect you or your business, we welcome you to contact our Construction and Infrastructure team.
For further information on any of the issues raised in this alert, please contact members of our team below.
This publication covers legal and technical issues in a general way. It is not designed to express opinions on specific cases. It is intended for information purposes only and should not be regarded as legal advice. Further advice should be obtained before taking action on any issue dealt with in this publication.