Major projects & construction 5 Minute Fix 56

Significant proposed reform to security of payment legislation in WA and NSW

WA: Overhaul of WA security of payment legislation has potential for significant alteration of contractual risk allocations

As we reported in our earlier note, the Consultation Draft Building and Construction Industry (Security of Payment) Bill 2020 (WA) (Proposed WA SOP Act) that was released for industry consultation is intended to effect closer alignment between security of payment processes in WA with the "East Coast" model in force is most other Australian jurisdictions.

Our earlier note discussed the reduced time limits, obligations and importance of issuing payment claims and comprehensive payment schedules on time under the Proposed WA SOP Act and by way of comparison with the current Construction Contracts Act 2004 (WA). In addition, the Proposed WA SOP Act contains numerous other elements that will, if enacted, alter risk profiles under construction contracts in WA, generally in favour of parties down the contracting chain (ie. subcontractors as against head contractors). These include:

• notice requirements the subject of time bars regulating payment and extension of time claims may be declared unfair and unenforceable;
• a party seeking recourse to performance security (retentions or performance bonds, eg. unconditional undertakings) must provide five business days' notice to the party which provided the security; and
• retention money must be placed into a trust account with limited access rights.

Also, to ensure that these rights are not diluted or removed by bespoke contracting, the Proposed WA SOP Act contains a broader prohibition on contracting out.

NSW: New Regulation regarding trust accounts and adjudicator qualifications and eligibility

The NSW Government has released a consultation draft of the Building and Construction Industry Security of Payment Regulation 2020 , with comments open until 24 July 2020. The new Regulation is proposed to take effect from 1 September 2020, replacing the 2008 Regulation.

The main provisions of the proposed Regulation deal with:

• the retention money trust account requirements under the Building and Construction Industry Security of Payment Act 1999 (NSW) (NSW SOP Act):
  • reducing the threshold project value for the scheme to apply from $20 million to $10 million (but, the relevant provisions of the 2008 Regulation will continue to apply to contracts with a value over $20 million entered into between 1 May 2015 and 1 September 2020); and
  • removing the annual reporting requirements for trust accounts;
• a new requirement for head contractors to provide trust account records to subcontractors where their money is held on trust: these ledgers must be provided to subcontractors every three months (or, if otherwise agreed in the contract, at least every twelve months); and
• introduction of qualifications and eligibility requirements for adjudicators, including at least 10 years' industry experience and compliance with continuing professional development requirements.

Security of payment cases wrap

NSW: contingent right to contractual payment claims and the prohibition on contracting out

In East End Projects Pty Ltd v GJ Building and Contracting Pty Ltd [2020] NSWSC 819, the NSW Supreme Court held that a contractual obligation to provide a draft payment claim as a precondition to making a payment claim was void for unduly restricting the operation of the NSW SOP Act.

The claimant failed to submit a draft, and instead served a payment claim under the NSW SOP Act. The claimant argued that the contractual precondition was rendered void by section 34 of the NSW SOP Act, which prohibits a contract from "excluding, modifying or restricting the operation of the Act". The Court agreed, ruling that the contractual precondition would have the effect of removing the claimant's entitlement to serve a payment claim if it failed to submit a draft claim by the relevant date.

The Court clarified that a requirement to submit an early draft claim may, in some circumstances, facilitate prompt payment of progress claims, and that it is generally "not the purpose of the [NSW SOP] Act to prevent the parties from introducing other mechanisms in their contract to ensure that they are not caught by surprise".

Victoria: "reference dates", nature of adjudications and grounds for review

In Citi-Con (Vic) Pty Ltd v Punton’s Shoes Pty Ltd [2020] VCC 804, t he claimant purported to withdraw an earlier payment claim and serve a replacement payment claim on the defendant. Both payment claims related to the same reference date. The defendant did not agree to the plaintiff's withdrawal of its earlier payment claim. Justice Marks held that, under section 14(8) of the Building and Construction Industry Security of Payment Act 2002 (Vic) (Vic SOP Act), the claimant was not entitled to unilaterally withdraw its earlier payment claim and serve another payment claim in respect of the same "reference date". Therefore, the second payment claim was invalid, as a claimant may submit only one payment claim for each "reference date".

In Daniel Radman v Open Plan Pty Ltd [2020] VSC 318, it was held that an adjudicator under the Vic SOP Act is in the nature of a "tribunal" or "other body" and was therefore a "court" for the purposes of section 4(1) of the Appeal Costs Act 1998 (Vic). This meant that an indemnity certificate could be granted. Justice Digby also provided some general observations on the grounds for review of an adjudicator's determination under the Vic SOP Act, including noting that a determination can be challenged for jurisdictional error and want of procedural fairness, and for material error of law on the face of the record. The latter goes further than the High Court in Probuild Constructions (Aust) Pty Ltd v Shade Systems Pty Ltd [2018] HCA 4, which considered the NSW SOP Act .

Queensland Court of Appeal affirms that expert determination is challengeable

The Queensland Court of Appeal has affirmed the limited basis on which an expert determination may be challenged.

In Middlemount South Pty Ltd v Anglo American Metallurgical Coal Assets Pty Ltd [2020] QCA 132, a share purchase agreement (SPA) between the appellant (Middlemount) and the first respondent (Anglo American) contained a process for the calculation of the purchase price, including by reference to accounts prepared according to a prescribed hierarchy of approaches. The SPA also provided for any disputes relating to the preparation of accounts to be resolved by an “Independent Accountant” engaged to make an expert determination in respect of those disputes.

Disputes arose and an Independent Accountant was duly engaged. Middlemount challenged aspects of the Independent Accountant's expert determination in the Queensland Supreme Court but the determination was declared to be final and binding. Middlemount appealed.

Middlemount argued that the expert determination was invalid because the Independent Accountant "had not performed the task set for it". According to Middlemount, the primary judge erred in construing the clause prescribing the hierarchy by which Middlemount was to prepare accounts relevant to the calculation of the purchase price.

This case turned on its own facts, however the Court of Appeal provided guidance on the extent to which a determination of an independent expert, appointed by the parties, can be challenged. It was noted that where parties agree:

"that an expert determination shall be final and binding, mistake or error on the part of the expert will not invalidate the decision unless it is of a kind which shows that the expert determination has not been made in accordance with the contract."

In this instance, a majority found that the Independent Accountant "failed to perform its contractual task" resulting in "part of its determination being invalid".

The case is a reminder that, while the courts are generally supportive of the concept of expert determination (as discussed in our recent report on The Illawarra Community Housing Trust Limited v MP Park Lane Pty Ltd [2020] NSWSC 751), determinations can nevertheless be the subject of successful challenge.

Past consideration and quantum meruit post-Mann v Paterson

In Wilson Pastoral International Pty Ltd v George Street Steel Pty Ltd [2020] SASCFC 54, the Full Court of the South Australian Supreme Court determined numerous issues relating to payment for the commissioning of a boiler and assembling of a pellet plant. Of particular interest is the discussion regarding the effectiveness of past consideration and the availability of quantum meruit claims.

The Court held that a promise to perform an existing obligation can be valid consideration where it forms part of a bona fide compromise of a dispute. The proposition that mere temporary forbearance where there is no liability does not constitute valid consideration was also qualified, and it was held that a promise to defer bringing a claim which is honestly made on reasonable grounds, can constitute good consideration.

The trial judge's refusal to award damages assessed on a quantum meruit basis was upheld. This was because the circumstances of the case involved payment agreements which were enforceable during the relevant period, and the Court held that quantum meruit was only available after the payment agreements no longer applied, following Mann v Paterson Construction Pty Ltd [2019] HCA 32.

New NSW procurement guidelines now in effect for skills and diversity on major construction projects

New NSW Government procurement guidelines for skills, training and diversity in construction (published as PBD 2020-03) approved in May this year, have come into effect. The guidelines apply to all new construction project procurements by a NSW Government agency commencing after 1 July 2020. Agencies should ensure that they implement these requirements in their tender documentation, while businesses should review the new guidelines now and ensure any bids submitted after 1 July 2020 reflect the changes so as to increase their chances of a successful bid.

The new skills, training and diversity guidelines require all agencies to demonstrate a commitment to meeting skill and diversity targets to engage apprentices, learning workers, people under 25 years, indigenous people, and women on major construction projects. These targets are consistent with those outlined in the Infrastructure Skills Legacy Program (ISLP). The new guidelines apply to individual contracts rather than overall programs. Agencies are encouraged to comply with the guidelines of contracts are valued between $10-100 million.

The details are discussed in more detail in an article by Lina Fischer and Jessica Lighton here.

Essay Prize success for Sean Kelly

Sean Kelly, a Senior Associate in our Major Projects and Construction team based in Melbourne, has been awarded a Commendation by the Society of Construction Law Australia for a paper he wrote with barrister Christopher Hibbard for the 2020 Brooking Prize. The paper is entitled “Providing a safe harbour for insolvent contractors – a proposal for Commonwealth reform to divergent security of payment legislation“.