New security of payment legislation will affect some practices of principals, contractors and subcontractors that have become market norms in the construction sector. Many market participants will need to change their standard contracts and contract administration processes in response to the new law.
The Building and Construction Industry (Security of Payment) Act 2021 (WA) (SOP Act) received Royal Assent on 25 June 2021. The SOP Act replaces the Construction Contracts Act 2004 (WA) (CCA) with respect to construction contracts entered after the SOP Act commences operation.
The operative parts of the SOP Act will come into force on a date to be proclaimed (expected to be imminent). Some of the key changes include:
- a statutory right to progress payments with prescribed maximum payment terms;
- introduction of a payment schedule regime;
- introduction of a minimum rate of interest on late progress payments;
- introduction of trusts for retention money;
- a requirement to issue notice before having recourse to performance security;
- prohibition of ‘pay when paid’ provisions extended;
- invalidity of ‘unfair’ time bars; and
- a narrowing of the mining exemption.
A statutory right to progress payments
The SOP Act creates a statutory entitlement for a party to a construction contract (claimant) to claim progress payments. A claimant is entitled to issue the other party (respondent) a payment claim at the end of every calendar month and such claims must be paid at the earlier of:
- a date that is within 20 business days if the claimant is a contractor and 25 business days if the claimant is a subcontractor; or
- the date provided for in the contract.
As with the CCA, the SOP Act also allows a claimant to apply for adjudication if a payment dispute arises.
Introduction of a payment schedule regime
If a respondent receives a payment claim, it may, within 15 business days (or such earlier time required by the contract), provide the claimant with a payment schedule responding to the payment claim. If the respondent does not intend to pay the full amount of a payment claim, it can use the payment schedule to set out the reasons it is not paying the amount claimed. Failure to issue a payment schedule can have significant consequences for the respondent. If no payment schedule is given within the time allowed:
- the respondent is liable to pay the claimant the full amount of the payment claim submitted;
- if the respondent does not pay the claimed amount, the claimant can either refer the matter to adjudication or recover the amount claimed as a debt in an appropriate court;
- in any such adjudication, the respondent will not be given the opportunity to make its case before an adjudicator and is not entitled to challenge the resulting determination; and
- in any such court proceedings, the respondent is not entitled to bring any cross-claim or raise any defence.
In addition, the content of the payment schedule is very important – in any adjudication regarding the payment claim it relates to, the respondent can only rely on reasons for withholding payment that are contained in the payment schedule.
Introduction of a minimum rate of interest on late progress payments
The claimant is entitled to interest on late payments at the higher of the amount specified in the construction contract or the rate prescribed in the Civil Judgements Enforcement Act 2004 (WA) (currently 6%).
Introduction of trusts for retention money
Non-government entities must hold retention money in trust in a dedicated bank account. Failure to do so attracts significant penalties.
A requirement to issue notice before having recourse to performance security
The SOP Act provides that a principal is not entitled to have recourse to performance security unless it gives the contractor at least 5 business days’ notice of its intention to have recourse to the security. The intention is to enable contractors to remedy the breach giving rise to the right to recourse but contractors may also use the prior warning to seek an injunction restraining the beneficiary of the security from accessing it.
Prohibition of ‘pay when paid’ provisions extended
The prohibition of ‘pay when paid’ provisions (as contemplated in the CCA) prevents a construction contract from making the liability of a first party to pay money to a second party contingent on the first party being paid money by a third party. This concept has been retained and expanded in the SOP Act. For example, the expanded provisions will prevent the common practice of linking release of a subcontractor’s performance security under the subcontract to the release of the head contractor’s performance security under the head contract.
Invalidity of ‘unfair’ time bars
Construction contracts commonly contain provisions that state that if a contractor does not make a claim for costs, compensation or an extension of time within a specified time period, the claim is forever barred and invalidated. The SOP Act provides that a notice-based time bar provision of this kind will have no effect if it is declared to be ‘unfair’. A notice-based time bar provision may be declared ‘unfair’ if compliance with it was ‘not reasonably possible’ or ‘would be unreasonably onerous’.
Time bars will continue to have a legitimate role in enabling parties to keep sight of actual project costs and preventing historic claims on both sides emerging near the end of the project. However, standard time bar clauses may have to be redrafted or restructured to ensure they remain effective.
Narrowing of the mining exemption
Like the CCA, the SOP Act will not apply to certain drilling and extraction activities. However, the CCA regime did not apply to fabricating or assembling plant that was to be used for extracting or processing oil, natural gas or any other mineral bearing substance. This exemption has been removed, meaning that the SOP Act may apply to new developments by mining and energy companies.
Next steps for construction contractors and developers
Market participants (e.g. principals/developers, contractors and subcontractors) should review their template contract documents and update their progress claim and progress claim assessment procedures to ensure compliance with the SOP Act.
If you have any queries about how the SOP Act or payment schedules may affect your project or business, or require any assistance with updating your standard contracts, please do not hesitate to contact us.
Adam Spitz | Special Counsel | +61 8 9404 9131 | [email protected]
Jeremy Thom | Special Counsel | +1 8 9404 9132 | [email protected]