Major changes to Australian security of payment laws recommended

John Murray's thoroughly-researched national review of Australian security of payment laws comprehensively analyses some of the most important pieces of legislation for the infrastructure and construction industry. Overall, his 86 recommendations satisfy calls by the industry for uniform security of payment laws and present a balanced approach to ensuring that those laws protect the rights of contractors to recover payment for work performed while giving paying parties a reasonable opportunity to present their arguments to a qualified and impartial adjudicator.

Security of payment laws are widely used in Australia. About A$1.8 billion (€1.16bn) in claims are submitted under the legislation each year in New South Wales (NSW), Victoria, Queensland and Western Australia alone. Most major construction disputes on infrastructure projects commence with security of payment, and the issue of 'who holds the money' pending final determination is significant for the negotiation and cash flow position of the parties.

However, security of payment is a state and territory matter and there are currently eight different regimes in place, which in some cases are very different. This poses particular difficulties for firms that operate nationally, and creates uncertainty for both employers and their contractors and subcontractors.

What does the report recommend?

John Murray AM is a well-regarded adjudicator and the former head of Master Builders Australia. His report is the most substantial review of security of payment laws in Australia since they were first introduced 19 years ago.

His recommendations assist in promoting cash flow in the construction industry. This is critical to preventing insolvencies, particularly amongst subcontractors; and enhancing Australia's reputation as a market that values the effective flow of money during the building of major infrastructure.

Murray's central recommendation is to make security of payment laws nationally consistent with what is commonly known as the 'East Coast' model, based on the NSW security of payment legislation. This model only allows claims 'up the line'; as opposed to the 'West Coast' model, which allows claims both up and down the contractual chain.

The other main recommendations of the report are:

• abandoning the term 'reference date' and adopting a process of 'monthly payment claims'.

If adopted, this change will alleviate the significant confusion experienced by many project managers and contract administrators when making claims under the security of payment regime. Errors made in relation to claims made before reference dates, or work claimed after reference dates, are common.

• establishment of statutory trusts for construction projects over A$1 million;
• that a contractual term be void if it purports to make a right to claim or receive payment, or a right to claim an extension of time, conditional upon giving notice where compliance with the notice requirements would: a) not be reasonably possible; b) be unreasonably onerous; or c) serve no commercial purpose.

This is a very significant proposed change that could, depending on the scope of its application, range beyond adjudication processes. If adopted in a broad form, it could ultimately be pleaded in most construction-related disputes which involve the application of time bars.

• making it an offence to use coercive and threatening conduct, whether directly or indirectly, in relation to a person's statutory rights to, or claim for, a progress payment under the legislation;
• extending of security of payment laws to residential builders making claims against owner-occupiers;
• the legislation should not apply to companies in liquidation;
• creating maximum payment terms of 25 business days after the payment claim has been made;
• adopting 22 December to 10 January as 'non-business days', to avoid the clock ticking over the end-of-year shutdown period;
• creating new requirements for payment claims.

These include: a) identifying the contract, or arrangement, on which the claim is based; b) identifying that the claim is made under the legislation; c) identifying the period for which a payment schedule is to be provided; d) identifying the consequences of not providing a payment schedule; and e) for claims by a head contractor, including a supporting statement that incorporates a declaration that all subcontractors have been paid.

• rejecting the concept of 'complex' and 'standard' claims first introduced in Queensland, where different timeframes apply depending on the value of the claim;
• allowing a paying party to request and receive from the adjudicator an extension of up to 10 business days for providing the adjudication response;
• the appointment of the adjudicator may be agreed by the parties in some circumstances, but otherwise the adjudicator will be appointed by the regulator. Currently, the adjudicator is often appointed by an authorised nominating authority chosen by the claiming party, which may be a privately-owned business;
• adjudicators would be registered and graded by the regulator;
• the time for the adjudicator to make a decision may be extended by up to 30 business days with the agreement of the parties;
• allowing parties to make an application for review of an adjudicator's decision, by the most senior registered adjudicator available, in certain circumstances.

These are if: a) the adjudicated amount is equal to or greater than A$100,000 of the scheduled amount; b) the adjudicated amount is lower than A$100,000 of the claimed amount; or c) the adjudicator rejected the adjudication application.

• adjudicators' decisions should not be required to be published. Presently, adjudicators' decisions are published in Queensland.

What will happen now?

In his cover letter to small business minister Craig Laundy, Murray said that he "encourage[d] the Australian government to work closely with its state and territory counterparts to deliver what is widely considered within the industry to be a long overdue process of essential national reform of security of payment legislation".

The call for a uniform security of payment system is strong, and the industry has been waiting with anticipation for Murray's report. The next step is for the Federal government to consider the report and decide, following consultation, whether it will legislate for national security of payment laws using the 'corporations power' in the commonwealth constitution, or whether it will go down the long and arduous path of agreeing uniform security of payment laws with the agreements of the various states and territories. Industry expectation is that the former will occur.

Tom Heading is a construction disputes expert at Pinsent Masons, the law firm behind Out-Law.com.