Major projects & construction 5 Minute Fix 26

Review of security of payment reform for WA subcontractors released

The focus on cash flow challenges in the building and construction industry continues with the recent release of the Final Report to the Minister for Commerce on Security of Payment Reform in the WA Building and Construction Industry, by John Fiocco.

The Report's 44 recommendations were informed by a comprehensive review of the subcontracting sector, extensive consultation with industry stakeholders and other reviews into security of payment across various jurisdictions, including the most recent review by Mr John Murray AM on behalf of the Federal Government.

The Report concludes that there is no compelling reason why laws designed to protect participants in the Western Australian building and construction industry should differ from their eastern counterparts and advocates for national consistency in security of payment legislation. It echoes many of the Murray Report recommendations to close the existing divide, notably by adopting a legislative regime based on the east coast model to promote prompt payment to maintain a contractor's cash flow.

Other key recommendations centre around:

The registration framework for Building Service Providers, including: 

• amending the Building Services (Registration) Act 2011 (WA) (BSR Act) to provide that a disciplinary matter includes circumstances where a building service provider fails to pay either an undisputed judgment debt in full, an amount determined by an adjudicator or an amount determined by an arbitrator;
• making it clear that a disciplinary matter does not arise where a building service provider has commenced proceedings either to suspend or set aside an unsatisfied judgment debt, adjudicators determination, arbitrators award or finding by another person, or, in relation to an amount determined by an adjudicator as payable by the building service provider; and
• considering amending the BSR Act to record demerit points against building service providers who demonstrate poor payment practices and contractual deficiencies, which would, after the accrual of a prescribed number of points, result in suspension or cancellation of a building service provider's registration or the imposition of a fine by the State Administrative Tribunal.

Measures to provide fairer contracting practices in the industry, including introducing legislation that: 

• gives contracted parties a right to substitute the form of security provided under a contract, at any point during the contract term, provided the substituted security is of an equal value;
• provides an express term in all construction contracts that any security withheld is to be returned within 12 months of practical completion; and
• requires a principal to give a contractor 10 business days' notice before having recourse to any security under a contract, which notice must identify the reason(s) the security is being drawn upon and the rights of the contractor.

Project trusts, including:

• introducing legislation to establish a retention trust scheme, mirroring the Murray Report recommendations. Under this scheme, the party holding retention moneys under a construction contract would be deemed to hold those moneys on trust and would have a primary beneficial interest in the moneys, limited to its contractual right of recourse. The other party, from whose payments the retention moneys were deducted, would have a secondary beneficial interest, entitling it to any retention moneys remaining after satisfaction of the primary beneficial interest; and
• that the retention trust scheme should apply to construction contracts entered into on projects valued over $1 million, except where a party to the contract is a supplier, a residential occupier or the State or a government agency, instrumentality, trading corporation or Local Government Authority.    

Report card on the Building and Construction Industry (Improving Productivity) Act 2016 tabled

The building regulatory environment has again been critiqued in a recently released report commissioned by the Australian Government, "Review of the Building and Construction Industry (Improving Productivity) Act 2016", conducted by Rex Deighton-Smith, Jaguar Consulting Pty Ltd .

To recap, the Building and Construction Industry (Improving Productivity) Act 2016 replaced the Fair Work (Building Industry) Act 2012 and commenced on 2 December 2016. It reinstated the Australian Building and Construction Commission and, as a result of Senate amendments, created new functions for both the Federal Safety Commissioner (FSC) and the Australian Building and Construction Commissioner.

Non-conforming building products and NCC compliance

One such function of the FSC that is examined in the Review is contained in section 38(ca) of the BCIIP Act, being "auditing compliance with National Construction Code performance requirements in relation to building materials". The Review notes that while this function was included in the context of fire safety concerns relating to aluminium composite cladding, resultant reports and investigations have underscored a more pervasive problem with the use of non-compliant products and non-compliance with the (National Construction Code) (NCC).

The FSC's approach to this auditing power, which is limited to entities accredited to perform Commonwealth-funded building work, is then discussed. The Review notes that steps taken to date have included:

• the introduction of an accreditation condition mandating compliance with NCC performance requirements relating to building materials;
• new model clauses for use in tenders and funding agreements for all Commonwealth-funded building work requiring compliance with NCC performance requirements; and
• the conduct of a pilot audit program targeted at aluminium composite cladding.

The pilot audit program tested whether documented processes were in place in certain projects to ensure the identification, procurement and use of building materials in accordance with NCC performance requirements. According to the Review, the FSC has reported that the pilot audits have "given rise to a substantial number of questions and issues regarding the design and implementation of a full audit program for NCC compliance" and that "considerable further engagement with industry" is intended.

In terms of the ongoing viability of the FSC's auditing function, the Review notes "there are substantial uncertainties as to the broader regulatory environment within which the NCC auditing requirements currently being developed by the FSC will operate", and that government responses to the issues of flammable cladding and NCC compliance are still being developed. Stakeholder submissions canvassed indicate concern for such issues as whether the FSC has the requisite expertise and resourcing to perform this regulatory role and whether the function will divert attention from maintaining standards of occupational health and safety. Responses indicate support, however, for the use of Government purchasing power to drive cultural change within the industry.

In this context, the Review relevantly recommends that:

• Recommendation 5.1: the Australian Government should keep the requirement for the FSC to address NCC issues under review as state and territory government responses to this issue evolve in the short to medium-term; and 
• Recommendation 5.2: there should be a presumption in favour of repealing section 38(ca) of the BCIIP Act, provided that the Australian Government is satisfied with the State and Territory Government reforms in this area.

Security of payment

The Review also discusses the role of the Australian Building and Construction Commissioner and 2016 Code in the enforcement of security of payment laws. Noting that the Government has yet to respond to the Murray Review, the Review proposes that changes to the BCIIP Act and 2016 Code in this regard be deferred pending clarification of the nature and extent of any resultant reforms.

The conversion cost of automated vehicles

Infrastructure Victoria recently released its report to the Victorian Government detailing the investment that will be required to support automated and zero emissions vehicles by the modelled year of 2046, "Advice on Automated and Zero Emissions Vehicles Infrastructure", October 2018.

The Advice makes some 17 recommendations, all of which are stated to have been tested against a number of possible future scenarios and made in the context of Infrastructure Victoria’s 30-year infrastructure strategy. Most identify recommended action within a 5 to10 year timeframe, but many detail investments that the Government could make now to prepare Victoria for these new vehicle technologies.

The identified investments include:

• approximately $250 million for improved line markings on roads (the Advice indicates that clear line markings and road signs are likely to be a key enabler of automated vehicles); 
• up to $1.7 billion to upgrade mobile networks, noting that the provision of cellular data coverage to support automated vehicles on main roads in Victoria will require an additional 134 cell towers, and to cover all sealed roads, some 2,098 cell towers; and 
• at least $2.2 billion for energy network upgrades to cope with the energy demands of batteries. Indeed, the Advice notes "[p]otentially the most significant impact of automated and zero emissions vehicles is the additional electricity generation and distribution capacity required to meet the forecast
• demand of battery electric vehicles. A fully automated, battery electric vehicle fleet is forecast to add over 50% to Victoria’s total annual energy consumption in 2046." 

The Advice further recommends that the regulatory frameworks governing network investment be reviewed to ensure they facilitate investment in the distribution network and to "remove barriers to distributors addressing highly-localised impacts of zero emissions vehicles uptake." (Recommendation 11.b). 

There are plenty of thought provoking forecasts and analyses in the Advice, such as: 

• the emergence of on-demand vehicle services as an alternative to private vehicle ownership could radically reduce the number of vehicles on the road which would in turn have profound impacts on urban design, for example, by enabling spaces currently used for roads and parking to be reclaimed; 
• the significant impact of autonomous and zero emissions vehicles on government revenues (relevantly, at a Commonwealth level, the fuel excise would be impacted, and at a State and local Government level, revenue from parking would all but cease); 
• the resultant demands on public transport; and
• the challenge presented by the creation of significant new waste streams entering the Victorian waste and resource recovery system from lithium-ion battery waste.

Is quantum meruit still a valid remedy for contract repudiation? Watch this space…

In 2019, the High Court will consider the availability of a quantum meruit claim as an alternative to contract damages upon repudiation of a building contract. The High Court granted special leave to appeal the Victorian decision of Mann v Paterson Constructions Pty Ltd [2018] VSCA 231 on 14 December 2018.

A contractor's entitlement to recover on a “quantum meruit” basis (essentially, “amount deserved”) following acceptance of an owner's repudiation of a building contract is an entrenched (albeit controversial) feature of Australian construction law. Contractors tend to view a quantum meruit claim as a kind of holy grail: the builder can claim to be paid "reasonable remuneration" for work carried out for the owner on the basis of the builder's actual costs plus a reasonable margin. Owners tend to view them with dread due to concerns that the contractor may recover an amount exceeding the agreed contract price: a scenario viewed as a windfall gain for the contractor.

The granting of special leave will be welcomed by the construction industry as an opportunity for the High Court to finally address the long-standing judicial and academic criticisms of the common law position: nine years after the High Court's refusal of special leave to appeal against the decision in Sopov v Kane Constructions Pty Ltd (No 2) (2009) 24 VR 510, controversy still reigns. At the nub of the criticisms, is the belief that the terms of the agreed contractual bargain should not be ignored for the adjustment of rights upon termination following acceptance of repudiation.

We will be waiting for the High Court's views on this matter with great interest and will keep you informed of further developments. 

More on cladding – Senate Committee calls for urgent action

In our 5 Minute Fix 25, we noted that the Senate Economics References Committee inquiring into the issue of non-conforming building products had tabled its final report, "Non-conforming building products: the need for a coherent and robust regulatory regime".

Of the 13 recommendations made in the report, five are identified for "urgent" action:

Recommendation 1: the Building Ministers' Forum (BMF) should "develop improved consultative mechanisms with industry stakeholders" and amend the terms of reference for the Senior Officers' Group and the Building Regulators Forum to impose annual reporting requirements on progress;

Recommendation 3: the BMF should "expedite its consideration of a mandatory third-party certification scheme for high-risk building products and a national register for these products";

Recommendation 5: the BMF should examine international approaches to the certification and testing of high-risk products prior to importation;

Recommendation 6: State and Territory Governments should enact legislation similar to Queensland's Building and Construction Legislation (Non-conforming Building Products – Chain of Responsibility and Other Matters) Amendment Act 2017; and

Recommendation 10: in-principle support is given to Recommendation 12 of the report, "Building Confidence – Improving the effectiveness of compliance and enforcement systems for the building and construction industry across Australia" (Professor Peter Shergold and Ms Bronwyn Weir).

You can read a more detailed summation of the Committee's recommendations here.