Security of Payment Regime Reform

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The Building and Construction Industry (Security of Payment) Act 2021 (WA) (Act) received royal assent on 25 June 2021. Limited provisions of the Act commenced on the date of royal assent. However, the date by which the Act applies to construction contracts and replaces the Construction Contracts Act 2004 (WA) (CCA) is yet to be set.

The Act will more closely align the Western Australian security of payment (SOP) regime with the regimes in place in other states.

The Act makes several significant changes to the CCA which we discuss below.

Payment claims and timing for payment

The Act provides applicants with a statutory right to make payment claims and to receive progress payments that will operate independently of the underlying contract between the parties.

Contractors may now make payment claims on or after the last day of each month (unless the contract prescribes an earlier date) and within 6 months of the works the subject of the payment claim being performed. The final payment claim must be made on or before the last to occur of:

  • 6 months after the completion of all works;
  • within 28 days after the defects liability period concludes; or
  • the prescribed date under the contract.

Contrary to the CCA, the Act now permits that a payment claim may be made after the date of termination of the contract.

The Act reduces the maximum period for payment of payment claims which was previously 42 days under the CCA. Unless the contract prescribes an earlier payment date, payment must be made within:

  • 20 business days after a payment claim is made by a head contractor to a principal; and
  • 25 business days after a payment claim is made by a subcontractor.

Payment schedules

The Act now provides that after receiving a payment claim, the respondent has 15 business days to respond to a payment claim (unless an earlier time is prescribed in the contract). If the respondent disputes the amount claimed, the respondent must issue a payment schedule which includes the reasons for not paying the amount claimed.

Under the Act, if the respondent fails to provide a payment schedule in time, it will become liable to pay the claimed amount on the date of payment and will be prohibited from providing a response to any future adjudication application (subject to the ‘second chance’ discussed below).

The CCA permitted payment claims and “reverse” adjudications to be made by principals to head contractors, or head contractors to subcontractors. This is no longer allowed under the Act.

Initiating adjudication

The Act reduces and streamlines the original adjudication process set down in the CCA. If the respondent provides a payment schedule and disputes the amount claimed or has not paid the certified amount in full:

  • the applicant will have 20 business days to make an application for adjudication (reduced from 90 business days under the CCA);
  • the respondent will then have 10 business days to provide a response to that application, which is limited to reasons provided in its payment schedule; and
  • the adjudicator must provide a determination within 10 business days (unless a longer period is agreed by the parties of up to 30 business days).

However, if the respondent has not provided a payment schedule and has not paid the amount claimed in full by the payment date:

  • the applicant must then, if it wishes to adjudicate, notify the respondent in writing within 20 business days of the date of payment that it intends to adjudicate;
  • the respondent then has 5 business days to provide a payment schedule (the ‘second chance’) and if the respondent does not provide a schedule, it loses the right to provide a response to any adjudication;
  • the applicant then has 20 business days to make an application for adjudication;
  • the respondent then has 10 business days to provide a response to the application (only if it provided a payment schedule), which is limited to reasons provided in its payment schedule; and
  • the adjudicator must provide a determination within 10 business days of receiving the response from the respondent or within 10 days of their appointment if the respondent was not entitled to give a response.

It is important for payment schedules to correctly identify the reasons why a payment claim is disputed so the respondent can raise those reasons in responding to an application for adjudication. The reasons must be sufficiently particular to enable the applicant to understand the real issues in dispute and to make an informed decision whether or not to pursue the claims.

Under the Act, parties to adjudication are not entitled to claim their legal costs and expenses incurred relating to the adjudication. Furthermore, parties may only make a single application for adjudication for each payment claim.

Review of adjudication determinations

The Act replaces the applicant’s right under the CCA to review an adjudication in the State Administrative Tribunal (SAT) with a limited right to review conducted by a senior adjudicator.

There are limited grounds on which a party can apply for a review of the adjudicator’s determination.

A party wishing to apply for a review must do so within 5 business days of receipt of the original adjudication decision (previously 28 days under the CCA to apply to SAT). The respondent may not apply for a review unless it has paid the adjudicated amount in a trust account.

A response to an application to review must be made within 10 business days with the determination of the review to be made within 10 business days of the response.

Wider application of the legislation

Under the CCA, many construction contracts for mining works and related goods and services were not eligible to utilise the adjudication procedures to resolve payment disputes due to the ‘mining exemption’. The Act narrows the ‘mining exemption’ by removing ‘fabricating or assembling items of plant used for extracting or processing oil, natural gas or any derivative of natural gas, or any mineral bearing or other substance’ from the list of exempted activities.  The result is a broader application of the SOP regime to the mining and resources industry and a likely increase in payment disputes previously excluded from the scope of the CCA being adjudicated.

Notice-based time-bar provisions

Many construction contracts include notice-based time-bar provisions which are provisions that make:

  • an entitlement to payment for construction work or related goods and services; or
  • an extension of time,

contingent on the provision of a notice by a party within a certain time.

Courts generally strictly enforce these notice of claim provisions. However, the Act now empowers decision makers (such as adjudicators, judges and arbitrators) to declare time-based notice provisions void if they consider the relevant provision is unfair in the circumstances.

A notice-based time-bar provision may be deemed unfair if compliance with the provision is not reasonably possible or would be unreasonably onerous.

Retention money trust

Unlike the CCA, the Act requires that cash retention and security be held on trust by the party to the contract that retains the security. The retention money trust must be established within 10 business days of the date the parties enter into the contract.

Failure to comply with the Act’s requirements relating to retention money trusts will be an offence and may result in a significant fine.

What you should do

  • Consider whether the changes introduced by the Act impact your business and whether your business activities could give rise to a SOP adjudication.
  • Consider whether the narrowing of the ‘mining exemption’ now captures your business’ activities within the scope of the Act.
  • Consider the new payment claim and payment schedule time and notice periods.
  • In the case of respondents, consider whether your current payment schedule procedures for responding to a payment claim are adequate (including setting out the reasons for not paying the amount claimed).
  • Consider whether your business has appropriate procedures in place to comply with the Act’s retention money trust policies and educate staff on the requirements of trust management.
  • Have your business’ construction contracts reviewed and amended to reflect the Act.

How we can help

Our Projects team is experienced in dealing with the CCA and SOP legislation.  We can help you navigate this new Act, provide practical advice, review your business’ contracts and propose amendments relevant to the Act.

Please get in touch if you would like further details regarding these changes and how they might affect your business or industry.

Matthew Lenhoff

Special Counsel

Email: mlenhoff@zafralegal.com.au  

 

Lachlan Rigg

Solicitor

Email: lachlan@zafralegal.com.au

 

Zafra Disclaimer: this article is intended to provide commentary and general information only.  It should not be relied on as legal advice.  Formal legal advice should be sought in the particular transaction or matters of interest arising from this article. 

 

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