Will the failing security of payment scheme ever get “Fixed”?

The Federal Government has announced plans for a review of the security of payment laws in the building and construction industry.

The review stems from a concern on the government’s behalf over the significant differences in security of payment frameworks across Australia, and the impacts of these differences on the level of protection afforded to subcontractors. The review will consult with business, governments, unions and other interested parties in the industry.

Could we see a national security of payment framework?

It’s possible. The review will try to find areas of ‘best practice’ in the industry, following a review of the laws in each state and territory. The review will re-examine a number of previous enquiries into security of payment, including the December 2015 report by the Senate Economic References Committee on insolvency in the Australian construction industry, and the 2003 Cole Royal Commission into the Building and Construction Industry draft legislation.

The December 2015 Senate report made a total of 44 recommendations directed at overcoming the challenges that the construction industry faces in dealing with its high rate of insolvency. One of those recommendations was that the Commonwealth enact uniform security of payment legislation. Another recommendation was that the Commonwealth commence a two year trial of ‘Project Bank Accounts’ on construction projects where the Commonwealth’s funding contribution exceeds ten million dollars, following which it was recommended that the Commonwealth legislate to extend the use of this form of ‘trust account’ to private sector construction. The report also examined ways to address phoenix activity as a significant issue in the construction industry (that is, the transfer of assets from an indebted company to a new company to avoid paying creditors etc).

The 2015 report also recommended that each state and territory construction licensing regime require:

  • that licence holders demonstrate they hold adequate financial backing for the scale of their intended project;
  • that on registration, licence holders provide evidence they have completed an agreed level of financial and business training programs, including principles of commercial contract law; and
  • that each licence holder demonstrates it is a fit and proper person to hold a licence.

The 2003 Cole Royal Commission made 211 reform recommendations, and unsurprisingly concluded that the Commonwealth should enact uniform legislation (with the peculiar exception for the national regime not to apply to construction contracts governed by the terms of a state or territory ‘in which adequate alternative legislation is in force’ – adequate as declared by the Governor-General).

Is reform actually likely?

We have seen a number of reviews and enquiries over the years, all of which conclude a national regime is preferable. The difficulty with enacting national security of payment legislation lies in the Commonwealth’s limited powers to legislate in these areas. Security of payment is typically something that lies in the hands of the states and territories to enact, unless (a) the relevant state or territory refers its power to the Commonwealth or (b) the Commonwealth uses one of its specific constitutional powers to enact such legislation (which in itself is a long process). The bottom line is, it’s going to be a long process.

However, whilst changes may not happen next week, it is a hot topic in the industry and the government is presumably feeling the pressure.

What next?

Importantly for head contractors and subcontractors, the review will examine the various types of contractual clauses restricting contractors in the industry from obtaining payment for completed work. It will also consider entirely different security of payment models, drawing on advice from various working groups established over the years. Thus, it is vitally important that members of the industry have their say in how any new regime will operate going forward.

We will be monitoring the review, including making submissions through working groups we are participating in with numerous industry associations.

A progress report will be given to the Minister by 30 September 2017, and a final report will be given to the Minister by 31 December 2017 with recommendations. Watch this space.

For more information contact the Building and Construction Dispute Resolution Team:

Alisa Taylor | Partner
(02) 6279 4444