New South Wales has introduced sweeping changes to its security of payment ('SOP') legislation (Building and Construction Industry Security of Payment Act 1999 (NSW)).
Many of those changes implement recommendations from the 2017 review by John Murray AM of the various SOP regimes around Australia (known as the 'Murray Review').
New South Wales is the first State or Territory to act on the Murray Review. Commentators are paying close attention to the NSW amendments, because they may form a model for ‘harmonised’ national legislation that will address longstanding concerns about SOP.
The amendments are also likely to be influential in South Australia, where amendments to SOP legislation have been under development for some time.
What is SOP legislation all about, anyway?
SOP legislation is designed to help ensure the cash flow of contractors in the construction industry (and especially subcontractors who sit further down the ‘payment chain’ on construction projects).
SOP legislation does so by giving persons who perform construction work or provide related goods and services (called ‘claimants’) a statutory right to regular progress payments.
To help claimants to enforce this right, the legislation also provides an expedited process for independent ‘adjudicators’ to resolve disputes about payment claims. This process features tight timeframes. In particular, it imposes ‘drop dead’ dates after which respondents lose their opportunity to dispute a payment claim.
It is commonly said that SOP is a ‘pay now, argue later’ system. An adjudicator’s decision is interim only – payment is effectively on account. But a determination by an adjudicator that payment is owing is immediately binding, and can only be reviewed by the Court in very limited circumstances. This makes SOP a powerful tool for maintaining cash flow – SOP can ‘cut through’ complex factual and technical disputes much quicker and much more cheaply than alternatives such as Court proceedings.
Over the past two decades, each State and Territory has enacted its own SOP legislation. The legislation in each jurisdiction is not uniform but generally follows one of two models. The ‘east coast’ model is based on the original NSW Act and has been followed by all States and Territories except for WA and NT, where a different model known as the ‘west coast’ model has been adopted.
Criticism of the legislation
SOP legislation has been criticised by industry and the Courts. Ensuring compliance with the legislation can be difficult – especially for businesses that operate around Australia – because each State and Territory’s legislation differs. The SOP regimes have also been criticised for being highly legalistic and overly complex. What was effectively intended to be a ‘self-help’ option for claimants has instead become a ‘lawyer’s picnic’.
It is for these reasons that the Murray Review was commissioned. The Review made 86 different recommendations for reform of SOP regimes across Australia.
Broadly, the Murray Review recommended that a single, harmonised SOP regime apply across Australia, and that this harmonised regime be based on the East Coast model.
Action taken by NSW
NSW has passed amendments to its SOP regime which implement some of the recommendations from the Murray Review.
These amendments will come into force on 21 October 2019 and will apply to contracts entered into in NSW after that date.
The key amendments include:
1. Abolition of reference dates
Previously, a claimant under the east coast model could only make a payment claim on and from each ‘reference date’ under the relevant contract.
The Murray Review found the concept of the reference date to be confusing for many industry participants. In our experience, that observation is correct. Even very experienced construction industry participants (including lawyers, adjudicators and courts) sometimes struggle with the complexities involved in identifying the relevant reference date.
The NSW amendments removes the term ‘reference date’ from the NSW Act altogether. Instead, the NSW Act now provides that a payment claim can be made on and from the last day of each month (beginning when the relevant construction work was first carried out, or the relevant related goods and services were first supplied). The parties still have some flexibility – if the contract provides for an earlier date for serving a payment claim each month, that date applies instead.
2. Re-introduction of the requirement to state that a payment claim is made under the SOP Act
The amendments re-introduce the requirement that, in order to make a payment claim under the SOP Act, a payment claim must state that it is made under the Act.
In 2014, NSW had removed this requirement. That change had been widely criticised.
NSW has declined to adopt the further Murray Review recommendation that a payment claim should include a notice stating when a responding payment schedule is to be provided and the potential consequences for failing to provide that payment schedule. We think an amendment of that nature would be worthwhile, especially to protect owners and other recipients of payment claims who are unfamiliar with construction practices.
3. Withdrawal of adjudication applications now possible
It is now clear that a claimant can withdraw an adjudication application before an adjudicator is appointed, or before an adjudicator makes their determination. If an adjudicator has already been appointed, the respondent can object.
This gives the parties more flexibility to resolve disputes after starting the SOP process. It has been a longstanding provision in other SOP legislation (including South Australia’s).
4. Severance of adjudication determinations
The amendments clarify that the Supreme Court will be permitted to set aside an adjudicator’s determination in whole or in part where it is found that a jurisdictional error occurred in relation to the determination.
This means that adjudicator’s determinations will not need to be wholly set aside if such jurisdictional error does not change the overall result of the determination. This will make it easier for Courts to cure errors efficiently where they do not impact the entirety of an adjudicator’s decision.
5. Insolvent claimants can no longer use the SOP Act
The amendments clarify that an insolvent party cannot use the SOP Act.
This has recently been the subject of conflicting decisions between NSW and Victorian Courts. Justice Vickery of the Supreme Court of Victoria had taken the position (in Façade Treatment Engineering Limited v Brookfield Multiplex) that insolvent parties could not use SOP legislation. More recently, in Seymour Whyte Constructions Pty Limited v Ostwald Bros Pty Limited, the NSW Full Court of Appeal had found that the Victorian approach was ‘plainly wrong’, and accordingly did not follow the Victorian decision.
In other States and Territories, such as South Australia, the position is unclear, though the NSW decision is likely to be influential.
Some commentators had been critical of insolvency practitioners being able to use SOP legislation, because the purpose of SOP legislation is to maintain cash flow for businesses that are still operating as going concerns, rather than to assist liquidators and bankruptcy trustees in recovering debts after a business has wound up. Of course, liquidators can still take other types of legal action to recover debts.
The Murray Review recommended that the SOP regime not be available to insolvent claimants. The NSW amendments reflect this, overriding the decision in Seymour Whyte.
6. Higher penalties for failure to include a supporting statement
NSW has increased penalties for failure to include a ‘supporting statement’ with a payment claim showing that all of the claimant’s subcontractors have, in turn, been paid.
Jurisdictions other than NSW do not currently require supporting statements. The Murray Review recommended that NSW’s requirement for supporting statements be implemented nationwide, and that making a false or misleading supporting statement be an offence.
Other States may follow the NSW reforms.
7. Trust accounts for retention money – subcontractors may now inspect records
Subcontractors in NSW may now be able to inspect the records of the trust account holding its retention monies.
The NSW SOP Act had already implemented such a statutory trust scheme. This additional right will make it easier for subcontractors to monitor the funds held on trust.
Many other States and Territories have implemented or are considering implementing statutory trust accounts. However, this remains a controversial issue.
8. Expansion of the residential building exemption
Jurisdictions that use the east coast model (other than Tasmania) currently do not permit residential builders to make a payment claim under the Act against a home owner.
However, subcontractors of residential builders can make a payment claim against a residential builder.
The NSW amendments mean a subcontractor will no longer be permitted to do so. This is because, under the amendments, the Act will not apply to any construction contract which 'is connected with' a residential building contract.
Home builders who work as head contractors have long complained that the status quo is unfair, and will welcome this change. However, subcontractors who work for residential builders will now have less options to ensure that they are paid.
This amendment departs from the Murray Review. The Murray Review actually recommended that residential builders be able to make payment claims against home owners (provided appropriate safeguards for home owners were put in place). In this regard, Mr Murray approved of the Tasmanian Act allowing homeowners a longer time period to respond to payment claims.
However, some commentators maintain that it is not reasonable to require home owners to understand and deal with SOP legislation.
9. New compliance and regulatory powers
The amendments provide a detailed regime for the appointment of ‘authorised officers’ under the Act. These authorised officers are granted various investigative and enforcement powers, and have duties to monitor and ensure compliance with the SOP Act.
The amendments also allow the Minister to implement new codes of conduct for authorised nominating authorities, which are the bodies that appoint adjudicators to decide payment disputes.
These amendments generally align with the Murray Review recommendations.
10. Shorter due date for payment on payment claims
The NSW Act now requires that subcontractors be paid within (at most) 20 business days after a payment claim is made, whatever the relevant contract provides. Previously the due date was (at most) 30 business days after the payment claim was made.
11. Payment claims can be made after contract termination
The amendments now make it clear that claimants can serve a payment claim even after a contract is terminated (for works performed up to the date of termination).
That has been a vexed issue in some circumstances and has been considered by the courts in a number of cases (including the first High Court case about SOP).
It is likely that some, if not all, of these amendments will be reflected in future amendments to other States’ SOP legislation.
We recommend that all participants in the construction industry who make or receive claims for payment be aware of the new amendments to the NSW SOP Act. More generally, it is critical that the construction industry participants understand the current operation of the SOP Act relevant to their projects in each State. The consequences of not following the process under the Act to make or respond to a payment claim can be severe.