The much anticipated national review of security of payment laws by John Murray AM was released by the federal Government on 21 May 2018.
Mr Murray’s report comprises almost 350 pages, and makes 86 separate recommendations based on extensive feedback from a variety of industry stakeholders. Some of the most noteworthy recommendations are summarised below.
1. Security of payment laws should be nationally consistent.
The review recommends that security of payment should be dealt with at a national level, with the same laws in place across the country.
At the moment, there are effectively two different models of security of payment legislation, being the ‘West Coast model’ (operating in Western Australia and the Northern Territory) and the ‘East Coast model’ (operating everywhere else).
The East Coast model and the West Coast model are quite different.
In addition, there are differences between the legislation in those States where the East Coast model applies. Some of these differences are obvious, such as the unique adjudication review process in Victoria. Other differences are more subtle, such as small differences in wording.
Some of these differences have resulted in similar legislation being interpreted and applied in different ways by the courts.
Few would argue against the idea that security of payment laws should be the same across Australia.
2. The East Coast model should be adopted.
Of the two different models, the review suggests that the East Coast model should be preferred.
One of the key features of the East Coast model is that if you do not respond to a payment claim within the required timeframe, you will become liable to pay the entire amount of the claim.
The review found that the general approach of the East Coast model is more likely to achieve the statutory intention of promoting cashflow down the contracting chain.
3. The legislation should be extended to residential building work.
At present, the legislation in most States does not apply to contracts between builders and residential owners. (Tasmania is an exception.)
The review found that because ‘residential builders face similar cash flow issues to subcontractors when they do not receive prompt payment’, the legislation should be extended to all domestic building contracts.
As part of this recommendation, the review suggested that a payment claim served on an owner-occupier should include certain prescribed information, to make the owner-occupier aware of the legislation (and specifically the consequences of not responding to a payment claim within the required timeframe).
4. For larger claims, the parties should be able to choose their own adjudicator.
To date, adjudicators under the security of payment legislation have been appointed by independent nominating authorities. The review recommends that, at least for payment claims involving more than $250,000, the parties should be able to appoint their own adjudicator by agreement.
Importantly, this provision would only apply where the parties agreed on the adjudicator at the time when the dispute arises.
5. Unreasonably onerous notice provisions should be rendered void.
The review suggested that the legislation should void contractual terms that purport to make a right to claim or receive payments, or a right to claim an extension of time, conditional upon giving notice where compliance with the notice requirements would:
- not be reasonably possible, or
- be unreasonably onerous, or
- serve no commercial purpose.
This recommendation is focused on unreasonably onerous notice and time bar provisions, which effectively serve no commercial purpose other than to make it difficult (if not impossible) for a contractor to pursue an otherwise valid entitlement.
6. Adjudication reviews should be available for larger disputes.
Once an adjudication determination has been issued, the scope for appeal or review in most jurisdictions is very narrow (as we explain here).
Mr Murray recommended that a review mechanism be incorporated into the legislation. However, he also recommended that the mechanism only be available where the adjudicated amount is at least $100,000 more than the schedule amount, or at least $100,000 less than the claimed amount, or where the adjudicator has rejected the application.
Review applications would be made to the regulator, who would then appoint the reviewer – being the most senior adjudicator then available.
A review would not be available if the parties chose the original adjudicator by agreement.
7. The registration and oversight of adjudicators should be more actively regulated.
The variability in the quality of adjudication determinations is a common complaint, a concern recognised by Mr Murray in his report.
The review recommended that, among other things:
- the registration of adjudicators be controlled by the regulator, who should also be responsible for their general oversight;
- the process for registration as an adjudicator be more prescriptive;
- adjudicators for individual disputes should be appointed by the regulator (although a nominating authority would still have the ability to put forward nominations);
- adjudicators be graded by the regulator, according to their seniority and skill sets;
- if an adjudicator is found by a court to have made a technical error in performing an adjudication, the adjudicator should not be appointed to determine any other applications until the cause of the error has been resolved.
8. Adjudication fees should be regulated
For adjudications up to $25,000, the review recommended that an adjudicator’s fees should be fixed at a rate prescribed by the regulator.
For adjudications involving more than $25,000, the review recommended that there be a cap on the rates an adjudicator could charge.
Read statistics about what adjudicators are currently charging here.
9. A deemed statutory trust scheme should be established.
The review noted that while the security of payment laws to date have focused on enshrining a right to progress payments and providing a mechanism for the rapid resolution of payment disputes, little has been done to ensure that payments made to a party higher up the contracting chain for work carried out by subcontractors are protected from insolvency and misuse.
The review recommended that a deemed statutory trust scheme be implemented and applied to all parts of the contracting chain. It should apply on all projects over $1 million.
In broad terms, the concept is that whenever a payment is made to a party that includes an amount for work carried out or materials supplied to it by someone else, the person receiving the payment will be taken to hold that money as trust monies on behalf of the third party contractor or supplier. The intention of this arrangement is to limit the impact of any insolvency on those further down the contracting chain.
Although this is one of the biggest changes recommended by Mr Murray, it is also one of the most complicated. In addition, it is not the first time this recommendation has been made.
Observations and next steps
Given the complexity of the issues, it will no doubt take some time for Government and industry participants to evaluate Mr Murray’s recommendations.
Although the report may provide an insight as to the future of security of payment laws in Australia, the extent to which Mr Murray's recommendations will ultimately be adopted remains to be seen.
The federal Government has indicated that it is working with the states and territories through the Building Ministers' Forum to consider and respond to the findings and recommendations of the review.
You can find a copy of the full report here.