Road testing the latest SOPA changes

Further to our first article about the practical implications of the 2018 Amendments issued in April 2020 (see Practical implications of the changes to the Building and Construction Industry Security of Payment Act 1999 (NSW) – a SOPA update), we now examine the “road testing” of the more fundamental mechanical changes to the Building and Construction Industry Security of Payment Act 1999 (NSW) (Act), including the abolishment of reference dates and claims following termination of the construction contract. There have also been some emerging trends of adjudicators looking closely at the precise terms of the contract or arrangements underpinning the claim, and more recently the application of the Act to residential building work.

By way of review, the amendments introduced in October 2019 brought changes to the process of payment claims and adjudication applications for building and construction contracts entered into after 21 October 2019. The amendments were established to provide greater protection to subcontractors, suppliers and workers in the building and construction industry. They promote cashflow transparency in the contracting chain and are intended to lessen imbalances in bargaining power between contracting parties. A key focus was improving the efficiency and effectiveness of the operation of the Act. For further details on the range of amendments made, our colleagues David Creais and Mark Glynn provided a summary in the following article - Changes to the NSW Security of Payment Regime to Commence on 21 October 2019. Are you ready?

We analyse more specifically the practical impact of key amendments to the Act and the Regulations, given the passage of time has seen them come into practical operation:

Application of Amendments

Amendments to the Act: Building and Construction Industry Security of Payment Amendment Act (2018)

Amendments to the Regulations: Building and Construction Industry Security of Payment Regulation 2020 (NSW)

Amendments to the Act

Reference dates

Section 8 of the Act provides entitlement to a person undertaking construction work under a construction contract or supply of related goods and services to receive a progress payment. Prior to the amendments, a right to payment occurred “on and from” a reference date which was either specified in a contract or, if the contract made no express provision for it, the last day of the month in which the construction work was carried out.

Previously, section 21 of the Act was often relied on by adjudicators for requesting further submissions by the parties in relation to the reference date and extension of time for delivering determinations. The process was not efficient and calculation of reference dates caused confusion, particularly where creative contract drafting could lead to ambiguous interpretations.

Confusion about the reference date gave rise to this topic being one of the most focal aspects of judicial review. This is apparent in not only New South Wales but also in other jurisdictions in Australia which are governed by different state Acts (Ian Street Developer Pty Ltd v Arrow International Pty Ltd (2018) 54 VR 721; Liquid Systems Pty Ltd v Future Capital Group Pty Ltd [2020] VCC 1271). This is still a live issue in states where the relevant legislation refers to reference dates. This was the antithesis of what the authors of the Act set out to achieve, which was to speed up the efficiency of resolving disputes over payment, improve cashflow and reduce judicial intervention.

The term “reference date” was abolished under the amended regime in New South Wales.

Now a payment claim can be issued on and from either:

• the last date of the month in which work was carried out and/or goods supplied; or

• an earlier date for serving of payment claims in a month stated in a contract.

However, in either case the Act does not permit more than one claim in any single claim period. Second and subsequent claims issued during the same claim period are void.

Claims following termination of a contract

As seen in the case of Southern Han Breakfast Point Pty Ltd (in Liquidation) v Lewence [2016] HCA 52 the concept of reference dates and the effect of a contract’s termination caused additional anomalies. In that case, the High Court held that the claimant’s rights to a progress claim were suspended following termination of the contract, unless there was a contract term which specifically enlivened additional reference dates post termination. Absent in such a clause, a right to issue a progress claim did not survive termination of the contract. This permitted potential respondents to terminate their contracts to avoid exposure to the processes of the Act, relegating their dispute over payment to the court system.

Following the amendments to the Act, section 13(1C) of the Act allows, where a construction contract has been terminated, a claimant to make a payment claim on and from the termination date. This provision did not exist prior to the amendments and now provides an avenue to protect a potential claimant whose contract might otherwise be terminated for tactical reasons to avoid the purview of the legislation.

The impact of this is that it is clear to parties to a construction contract that a claimant has a right to payment under the adjudication process even if a contract is terminated, allowing an adjudicator jurisdiction to determine such claims. The intention of the amendment was to prevent the recurrence of outcomes arising from Lewence, necessitating examination of the intention of construction contracts where the wording regarding survival clauses is unclear. It is also important to note that it is a provision for a single further payment claim only, so that the issue of that payment claim exhaust all future reference dates after that time. The only mechanism by which further reference dates would be available, is if the contract provided that multiple reference dates would exist post termination of contract. Naturally, this is antithetical to the notion of terminating contractual relations.

Case study analysis

Noting that the amended Act applies to contracts entered into on or after 21 October 2019, we are entering the timescale for adjudication under the amended Act because contested payment claims are statistically more prevalent toward the final 25% of building project programs.

Recently Bartier Perry acted for a wall framing contractor upon receipt of a payment claim from one of its suppliers. The alleged contract or arrangement was entered into after 21 October 2019 meaning the amended Act applied. The claimant submitted in its adjudication application that it had a right to issue a payment claim under the contract or arrangement in place. The claimant submitted that given the Act allowed for monthly claims the applicant was entitled to issue a payment claim. However, in its payment claim were identified two separate categories (a) day labour work and (b) framing work. The claimant submitted that its claim comprised a combination of two bills of quantities, and while it claimed it had a statutory entitlement to issue a claim, the applicant did not distinguish the precise contract or arrangement the payment claim was being issued under. The adjudicator was interested in determining not only the entitlement to claim, but whether the claim was being issued pursuant to a single construction contract. The adjudicator called for further submissions on this subject.

Both claimant and respondent exchanged submissions regarding the precise identification of the “contract or arrangement" between the parties. The claimant by its somewhat loose description of the arrangement was found to have issued the claim pursuant to two separate contracts as found in Trinco (NSW) Pty Ltd v Alpha A Group Pty Ltd [2018] NSWSC 239 (Trinco). This highlights the need for strict adherence to the requirements of the Act, notwithstanding the requirement to accurately identify a valid reference date has been removed.

A key takeaway is that whilst the amended Act doesn't change the definition of construction contract, it is worth noting that under the amendments the claimant bears a significant onus of establishing its entitlement to issue a payment claim under section 13 and ensuring that the payment claim cannot be invalidated on jurisdictional grounds.

Amendment to Regulations

The changes to the regulations have less of a practical impact on the day to day process of adjudication. There were two tranches of changes to the Regulations:

The 1 September 2020 changes

• Trust accounts– there are now requirements regarding the management of trust accounts for contracts valued at least $20 million. Head contractors need to deposit retention money into an approved retention money trust account within five days of the head contractor receiving the money from a subcontractor. Retention money can be withdrawn from the trust account under specific conditions, and there are reporting obligations on the head contractor. Directors of companies can face personal liability by action initiated by the Department of Fair Trading.

• Supporting statements – head contractors have an obligation to provide a supporting statement along with a payment claim, but only to those subcontractors or suppliers that they have engaged directly. The supporting statement is used to declare that all subcontractors have been paid all amounts that are due and payable to the subcontractors, in relation to construction work they have carried out. The supporting statement no longer requires separate identification of amounts that the head contractor is in dispute over with a subcontractor.

• Adjudicator requirements– there are new eligibility requirements for adjudicators, who now need to be professionally qualified in a building discipline and have at least 10 years relevant experience.

• Adjudicators must also complete the required continuing professional development to remain eligible.

The 1 March 2021 Changes

These changes relate to residential construction projects, and provides that owner occupier contracts will no longer be exempt from the Act. 

An owner occupier contract means a residential building contract under the Home Building Act 1989 (NSW), or in other words, a contract between a builder or tradesperson and a homeowner. Previously, the security of payment legislation had only applied to commercial building projects, or larger scale residential developments (in which the developer did not reside or intend to reside). 

Conclusion

Prior to now, given that many larger scale projects take 18 months or longer to complete, there haven’t been many adjudications which might enable testing of the amended sections of the Act by the Supreme Court of New South Wales. However, so far, we have observed more clarity for the parties involved around reference dates which has streamlined the process for payment claims and added a layer of certainty for an adjudicator’s jurisdiction in determining adjudication applications. The commercial aspect of this for parties to a construction contract is that it will lead to less time and money spent in court challenging the validity of an adjudicator’s determination.

Although it is too early to say by reliance on statistical information if the amendments will reduce judicial review in relation to jurisdictional challenges, our view is that that there may be some modest reduction in judicial reviews (particularly in relation to when a payment claim is made and termination of contracts). This being said, there are likely to be unforeseen issues arising from the amendments. In other words, there is less likelihood of claimants being unsuccessful at the outset, because an adjudicator determines that he or she does not have jurisdiction to value the claim. Rather, as occurred in the case study above, the adjudicator will likely ask for further submissions in relation to the question of the construction contract in order to deal with the issue.

Authors: Robert Kalde & Arvand Ghazizadeh