Milestone construction industry reforms en-route? Proposed Building and Construction Industry (Security of Payment) Bill 2020 (WA)

Sadly, it remains the case around the common law world that construction contractors are often not paid what they have earned by their labour, either on time or at all. Attempts have been made around the country to make it easier for construction contractors to recover payment for the work that they do, through security of payment legislation.

A variety of approaches have been implemented and proposed to improve construction contractors’ security of payment: some, quite orthodox; others, more innovative. Taking the United Kingdom and Canada as examples, such measures have included:

(a) the deeming of cascading trusts over both contractors’ and subcontractors’ earnings upon head contractor insolvency;

(b) the use of principals’ liens and surety bonds or guarantees to give subcontractors direct recourse in rem and in personam against their principals, unconstrained by privity of contract and the pari passu rule in insolvency; and

Perhaps the most recent of all such reforms appear in Western Australia’s Building and Construction Industry (Security of Payment) Bill 2020 (WA) (Bill), which is the subject of this article. The Bill represents the second attempt since 2016 (Construction Contracts Amendment Act 2016) to improve payment security and protections for construction contractors. The Bill was released for comment in May 2020 various construction industry stakeholders, following publication of John Fiocco’s final report on Security of Payment Reform in the WA Building and Construction Industry (“Fiocco Report”). If enacted, the Bill will apply in substitution for the Construction Contracts Act 2004 (“CCA”) to all construction contracts made after enactment.

Importantly, the Bill represents WA’s first move since enactment of the CCA, towards harmonising its security of payment regime with the “east coast” model that applies with minor, local variations in all other states and territories except WA and NT. The transition promises not only greater harmony between east and west but also, improved procedural certainty by prescribing a uniform process for making and responding to construction payment claims via the exchange payment schedules. This approach has always applied under the east coast model and experience has proven it easier for adjudicators to understand and apply than the disparate and often complex procedures that Western Australian construction contracts typically prescribe.

Other highlights of the Bill include:

Empowerment of adjudicators to avoid unfair time bars which are time limits prescribed under construction contracts for contractors:

(a) to give delay and variation notices; and

(b) to make claims for price variations and extensions of the time for completion of construction works,

where timely provision of such notices and claims is a precondition to:

(a) increasing the contract price on account of variations to the scope of construction work that the contractor is required to do under a construction contract; and/or

(b) extending the time for completion of construction works where those works have been delayed by circumstances beyond the control of the contractor.

reduction of the time to apply for rapid adjudication of a construction payment dispute from the 90-business day period that presently applies to 20 business days;
imposition of penalties – for example, offences for threatening or intimidating a claimant or for failing to comply with an obligation in respect of retention money;
prohibitions against enforcing security for performance (by, for example, seeking to cash in a bank guarantee or having recourse to retentions taken out of a contractor’s progress payments) without giving advance notice to the contractor that has given the security; and
further prohibitions against making a contractor’s right to be paid for their work conditional on what happens under a separate contract (‘pay when paid prohibitions’).

Some of these proposals are of such significance to the building and construction industry in Western Australia that they deserve further consideration.

Extension of ‘pay-when-paid’ prohibitions

Currently, the CCA prohibits what it defines as “pay-if-paid” and “pay-when-paid” provisions. These are provisions that would allow a construction contractor that has not been paid for their work to withhold payment to their subcontractor on account of the same work.

In addition to these pay-if-paid and pay-when-paid provisions, the Bill also proposes to prohibit any party to a Western Australian construction contract from making any of the following things dependent on what happens under another contract:

i) the obligation to make a payment on account of construction work;

ii) the time when a payment is to be made under a construction contract;

iii) a construction contractor’s right to make a payment claim; and

iv) the release of any security to a construction contractor in the form of retention money or a performance bond.

If enacted, we expect (and are hopeful) that this extended prohibition will stop the common practice in construction projects of withholding retentions and maintaining bank guarantees until the end of an often lengthy defects liability period under a head contract. Across the construction industry, widespread dissatisfaction has been expressed about this practice, which can cause construction contractors to be kept out of the money they have earned by their labour for up to several years.

The problem may be compounded for construction contractors that are engaged in the early stages of construction works: for example, earthmoving, compacting, subdivisional and other site works, foundation works etc.

Shortened time to bring a claim

The reduced time to apply for rapid adjudication of a construction payment dispute is proposed in item 28(3) of the Bill.

The construction industry may not be entirely supportive of this proposal (we can only speculate having heard no specific feedback) but in our experience, having short deadlines to meet can actually benefit users of rapid adjudication. For a start, having to get the application and response in quickly is more consistent with the rough-and-ready, pay-now-argue later spirit of rapid adjudication. It follows, in our experience, that where the time to apply is limited as now proposed, those who meet the deadlines are those most likely to be utilising adjudication services for their intended purpose of keeping cash flowing quickly down the chain of construction contracts. So, one benefit of short deadlines may be to protect the integrity of the adjudication process itself by setting up a high barrier to entry against those who, given enough time, might otherwise weigh the process down with excessive complexity or technicality. After all, as we all know, it is human nature to take all the time you have to get a job done. As anyone with a submission deadline can attest (including tenderers for construction work), human beings are infinitely creative when it comes to finding excuses to cram it all in at the last minute!

Reducing the time limit to seek adjudication back down to 20 business days (bearing in mind that under the original CCA from 2004 to 2016, it was 28 calendar days which is essentially the same period without the same regard for public holidays) seems to us to strike the right balance between oppressive (and therefore exploitable) deadlines on the one hand and protracted (and therefore perhaps equally exploitable) deadlines on the other. This is particularly so given the extended Christmas lockdown period proposed to be recognised under the Bill, where the time between 22 December and 10 January in the following year, when most construction contractors cease to operate, is excluded from the definition of ‘business day’ when calculating adjudication deadlines.

Unfair time bars

The courts have always enforced contractual time bars strictly, without regard for how harsh or onerous their requirements have been for subcontractors or how oppressive the consequences of missing a notice or claim deadline, in terms of:

(a) having to do substantial variation work for free; and

(b) having to pay substantial amounts in liquidated damages, that often represent a substantial portion of the entire contract price, for delays in the progress of construction works that were beyond the subcontractor’s control.

The tyranny of the time bar may well have had its day if clause 16 of the Bill is enacted. Clause 16 proposes to empower the various decision-makers empowered to determine construction payment claims, including judges, arbitrators, adjudicators and a new class of decision-maker called “review adjudicators” to strike down unfair time bars. For the purposes of the Bill, a time bar is to be considered unfair if it is “not reasonably possible” or is “unreasonably onerous”.

Clause 16(6) prescribes a variety of factors that a decision-maker would need to take into account which, by paragraph 16(6)(g), would include ‘any other matter the adjudicator, review adjudicator, court or arbitrator considers relevant’ (cl 16(6)(g)). In our view, both the breadth and the limits of this clause are to be applauded, as it both liberates and guides decision-makers in determining the kinds of time bars that are to be rejected as unfair. This, we expect, will allow the construction industry to develop its own norms of acceptable and unacceptable dealings, based on what are known to be the legitimate commercial interests of construction contractors and principals and appropriate measures to protect them. In this light, the proposed reform may be seen as representing a shift towards some measure of self-regulation by the construction industry.

Notice required before enforcing performance security & creation of deemed retention trust scheme – not quite enough

To some extent, the Bill promises to protect construction contractors and subcontractors from misuse of their security bonds and retentions, but it may be felt by some in the construction industry that these proposed protections do not go far enough.

The protections are twofold:

(a) a minimum of five business days’ notice required to be given before recourse can be had to any security given under a construction contract; and

(b) where security is given by way of retentions that are withheld out of a construction contractor’s progress payments, those retentions are to be held on trust for the contractor from whose payments they are withheld.

These are considered positive moves. Bear in mind that performance security is only that: cash that a construction contractor puts up as security for the proper and timely performance of their construction work. Obviously, if it is the contractor putting up that cash security then that cash must be the contractors to begin with. This may seem an obvious point, but it is one that still appears to be almost universally overlooked in the construction industry. In particular, when it comes to retention of sums out of the progress payments that construction contracts have already earned by the time the sums are withheld, there seem to be no reservations at all about taking that money and risking it on other ventures as if it were the secured party’s own money, and so, placing it permanently beyond the reach of the contractor that has earned it if there is an insolvency somewhere up the chain of contracts. Nor does there presently appear to be much in the way of accountability for secured parties whose contracts allow them to make immediate calls on construction contractors’ bank guarantees without having to give any prior notice, based only on an opinion (which does not need to be justified) that the contractor’s works are in some way defective or late.

We would welcome reforms that go some way toward recognising that a construction contractor gives security using cash that is theirs and remains theirs unless and until that contractor is liable for some breach of its obligations under a construction contract. Justice demands that the contractor whose cash it is be given at least some notice that their employer intends to take it. That way, a contractor who considers the underlying claims to be unjustified can negotiate a resolution and, if necessary, apply to the Court for an injunction to restrain their employer from taking their money in the meantime.

The justice of requiring cash retentions to be held on trust for the construction contractor that has earned them seems equally obvious. The retention is not an interest-free loan from the contractor to its employer; nor is it a tax. If the employer makes bad decisions with the contractor’s money and becomes insolvent, the construction contract gives the contractor none of the rewards and protections that lenders and taxpayers get for parting with their money. The money they have earned is simply gone forever.

Construction contracts do not typically even provide for the interest earned on retentions to be paid over to the contractor and that is where we consider the Bill is lacking: typically, where a private (non-government) party – for example, a borrower – is entitled to use someone else’s money to their own benefit, the price they pay for that is interest. It would be only fair in our view to legislate for construction contractors to take the benefit of interest that accrues on the retention monies they have earned for as long as that money is withheld from them.

No provision for deemed trust accounts and project bank accounts

The media has criticised the Bill for making no provision for deemed trust accounts or project bank accounts. The main complaint was that calls for deemed trust accounts, as a simpler and more practical alternative to project bank accounts, seemed to have been ignored. Both deemed trusts and project bank accounts had been proposed as a way to protect progress payments that construction contractors had earned from falling into the hands of other secured creditors (mainly banks) when someone up the contracting chain becomes insolvent.

HHG Legal Group has spent much time thinking about how, in practice, these two measures might safeguard contractors against insolvency. We then tested our thinking in discussions with civil and construction contractors, with some surprising results. Regarding deemed trust accounts, the feedback tended to indicate that the construction industry was generally not too concerned about missing out on the odd progress payment in the event of occasional upstream insolvency. We are advised that this has always been regarded as an ordinary risk of construction contracting and one that was easily managed through basic credit checks or absorbed in a contractor’s margins.

What, we are told, tends to be of much greater concern to contractors generally is the cash flow disruption caused by late payment in the ordinary run of contracts between solvent parties. As well as a well-regulated and administered system of rapid pay dispute adjudication, project bank accounts would seem to provide better redress for this concern by making only one party, the head contractor, responsible for making all certified progress payments, all the way down the contracting chain, out of the one project bank account. However, when asked about the experience under Building Management and Works contracts that already provide for project bank accounts, we were frequently told that no one actually takes any notice of them and contractors are still left waiting for payments well beyond their due date.

Perhaps, then, our legislature is right to keep the present focus on more fundamental proposals to improve security of payment in the construction industry and to defer more radical measures until the industry is ready to adopt a more compatible culture of fairness. We do consider that by drafting and circulating the Bill for discussion, WA’s legislature has taken a step in the right direction towards reforming the culture within the construction industry. However, we anticipate that ultimately, WA’s reform agenda will again lose its momentum without efforts to effect change from within through education. HHG Legal Group has for many years been at the forefront of driving change in the construction industry by providing practical legal training, including in legal information sessions hosted by the WA Building Commission and eagerly await whatever opportunities the proposed reforms present, to keep supporting the constructi