W.A. – New Security of Payments & Retention Trust laws being introduced

The Western Australia Government has released an exposure draft Bill (the Bill) for a new security of payment regime to cover the State’s building and construction industry.

The Bill draws heavily on recommendations to the Commonwealth by the Murray Review in 2017¹ and the subsequent Fiocco Report commissioned by the WA government².

Work towards these reforms has progressed quickly with groundwork being laid by the appointment of Adjudicate Today as a Prescribed Appointer (known in the east coast as an Authorised Nominating Authority) under the existing Construction Contracts Act (CCA). Contracts made after the Bill’s commencement will be under the new provisions; while contracts made before commencement will continue being regulated by CCA.

This article describes the proposed reforms based on the government’s explanatory statement³. Stakeholders have until 1 July 2020 to provide comment. Adjudicate Today will provide analysis of the reforms in a later article.

The Bill introduces measures to improve fairness in contracting, including voiding unfair time-bars and a broader prohibition on ‘paid-when-paid’ provisions, as well as requiring certain contracts to be in writing and meet minimum standards.

Consistent with security of payment laws in other Australian states and territories, a party who carries out or undertakes to carry out construction work or to supply related goods and services will have a statutory right to receive payment and to make a claim for payment every month, or more frequently if provided for in the contract.

A payment claim can include a progress claim, final payment claim, single/one-off claim or milestone payment. Importantly, a payment claim can also seek the return of any performance security withheld under the construction contract (e.g. bank guarantee or retention money), or the substitution of retention money for other performance security.

Construction work and related goods and services are defined broadly, meaning the laws will apply to the vast majority of construction contracts entered into in the industry, irrespective of whether the contract is in writing, oral or a combination of both.

Unlike other States (not Tasmania), the Bill applies to contracts between residential homeowners and builders/contractors for works valued greater than $500,000.

Where a party to a construction contract who is entitled to payment (the claimant), makes a payment claim, the party who receives the claim (the respondent) will be required to either pay the claim in full within the stipulated time, or provide a payment schedule within 15 business days setting out any reasons for withholding payment.

Payment claims from builders/contractors to residential homeowners, where the value of the contracted works is greater than $500,000, will need to be accompanied by an additional notice advising the homeowner of the requirements to respond or make payment. All payment claims will need to be endorsed but can be invoices.

Progress payment claims can be made by the claimant up to 6 months after the day the works were last carried out or goods and services supplied.

The time for payment of the claim will depend upon the claimants’ position in the contracting chain. Claims from head contractors to principals/owners will now need to be paid within 20 business days of the claim (or any lesser period in the contract); claims by subcontractors to head contracts paid within 30 business days (or any lesser period in the contract); and claims involving certain types of residential works within the period specified in the contract, or 10 business days, if there is no period in the contract.

If a respondent fails to provide a payment schedule within 15 business days and make payment, the claimant will be entitled to elect to refer the matter for rapid adjudication, or recover the amount claimed as a debt in an appropriate court.

The rapid adjudication process remains a ‘pay now-argue later system’, where a registered adjudicator agreed by the parties, or appointed by an authorised nominating authority, can determine the payment claim within a truncated timeframe and issue a binding decision. However, the parties still retain their full rights to litigate or refer the matter to some other form of dispute resolution.

The rapid adjudication process will now be more consistent with those in other Australian states and territories and will be familiar to parties who operate across Australia.

Claimants will need to make an application for adjudication within 20 business days of receiving the payment schedule. If no payment is received by the due date, claimants will need to provide the respondent with a further opportunity to provide a payment schedule within 5 business days, before the application for adjudication can be made.

Respondents who fail to give a payment schedule will not be entitled to provide an adjudication response, but respondents that do provide a payment schedule will be limited to only the reasons for withholding payment that were included in the payment schedule. This will ensure claimants are fully aware of the all the reasons for withholding payment before seeking rapid adjudication.

Once the adjudication application is made, the registered adjudicator (appointed by the parties, or by an authorised nominating authority) can make a decision within as little as 10 business days, if no adjudication response is provided or permitted, or within 10 business days if a valid adjudication response is provided.

Any payment to be made, including the return of performance security, is binding on the parties and can be enforced through the appropriate court. Claimants and respondent will be liable in equal shares for the registered adjudicator’s fees, unless determined otherwise. Neither party is entitled to any legal costs from the other.

Adjudication decisions are not amenable to appeal and can be enforced as an order of an appropriate court. However, the Bill introduces a new adjudication review mechanism for certain types of decisions. Reviews will be conducted by a senior adjudicator on the application of one of the parties within 5 business days of the original adjudication decision.

The new review mechanism is based on the recommendations from the Murray Review and replaces the existing limited right of review to the State Administrative Tribunal for adjudication decisions made under the CCA.

The Bill introduces a new deemed retention trust scheme in WA. This scheme will reduce the risks to builders, subcontractors and suppliers where their immediate contractual counterpart on a project becomes insolvent by ring-fencing retention money to ensure it is not available for distribution to general creditors. Often retention money can represent a business’s entire profit margin on a project.

The scheme will apply across the supply chain in WA whenever cash retention or security is withheld under a construction contract, despite any term in a contract to the contrary. Some minor exceptions will apply to contracts directly with government principals, homeowners, and for low-value works below the prescribed threshold.

Where a party to the construction contract is withholding retention money or cash security (the trustee), they will be obliged to hold those funds in a dedicated trust account with an approved financial institution (e.g. bank) for the benefit of the party who provided the money (the beneficiary). Trustees will have the option of opening one trust account, or multiple trust accounts for each beneficiary or project.

The trustee will only be entitled to withdraw the money from the trust account to the extent they have a contractual entitlement to do so (e.g. to fix defective works). The money cannot be withdrawn to cover the other debts of the trustee (e.g. business overheads, wages etc.) or invested. Unless agreed otherwise, the trustee will be entitled to any interest earned on the money held in the trust account to cover any additional account-keeping or administrative costs. Trustees will be required to maintain account records and make them available for inspection on reasonable notice by the beneficiary.

Where a trustee fails to fulfil their obligations under the scheme, they may be subject to prosecution, and beneficiaries will have access to existing general law remedies.

The Bill also enhances the powers of the Building Services Board (BSB) to manage the commercial conduct and behaviour of registered building service providers under the Building Services (Registration) Act 2011. The intent is to better protect the industry and consumers against incompetent and predatory operators.

Failure by a building service provider to pay a ‘building service debt’, being an unsatisfied court judgement debt or adjudication determination, will now be a disciplinary matter for which the BSB can take action against the provider. An applicant for the grant or renewal of registration will also need to demonstrate to the satisfaction of the BSB that they do not, at the time of making the application, have any unsatisfied judgment debt or adjudicated amount due to be paid.