‘Accrual’ reminder for developers

The recent Supreme Court decision of Broadview Windows Pty Ltd v Architectural Project Specialists Pty Ltd [2015] NSWSC 955 again demonstrates the contrast between the security of payment statutory regime for the accrual of reference dates and the corresponding rights under a typical contract, and the consequences for builders and developers alike.

Broadview Windows concerned whether the claimant had made more than one payment claim in respect of the same reference date, which is prohibited under section 13(5) of the Building and Construction Industry Security of Payment Act 1999 (NSW) (Act).

Reference dates

Section 8 of the Act states that a person who has carried out construction work or supplied related goods and services is entitled to a progress payment “on and from each reference date”.

A reference date is to be determined in accordance with the contract as the date on which a progress claim can be made for work carried out or undertaken to be carried out. If the contract does not “make express provision” for a reference date, section 8 of the Act provides that the reference date is the last day of the named month in which construction work was first carried out and the last day of each subsequent month.

Typical contractual regime v statutory regime

In Broadview Windows, the contract was formed by an acceptance of a quote and, unsurprisingly, the contract did not make express provision for a reference date. The reference date was therefore, in accordance with the Act, the last day of each month.

The work under the contract was completed by the end of August 2014. The claimant made two subsequent payment claims on 24 November 2014 and 23 February 2015 and proceeded to adjudication on the second payment claim. The respondent applied to the Court for an order quashing the adjudication determination because it claimed that the second payment claim was in respect of the same reference date (as the first payment claim).

The Court dismissed the respondent’s claim and affirmed the position that, under the statutory regime, reference dates continue to accrue on a monthly basis until 12 months after the construction work to which the claim relates was last carried out (as per section 13(4) of the Act).

Unintended benefits for builders

As we have noted in recent updates, the absence of express reference dates in a construction contract can (and often unintentionally does) have benefits for builders.

  1. If a contract is terminated, reference dates continue to accrue under the statutory regime, thereby entitling a builder to make a payment claim after termination and enabling a builder to apply for adjudication if unsatisfied by the principal’s payment schedule. In contrast, contracts rarely expressly state that the accrual of reference dates survives termination and therefore the builder’s right to make further payment claims in accordance with the Act is terminated with the contract.
  2. As can be seen in Broadview Windows, the statutory regime entitles the making of a payment claim each month, even where no work has been carried out. The only limitation on this period is the 12 month period after completion of the construction work. Accordingly, a builder can continue to make payment claims (including for the same work) each month, up to a year after work has been completed. Conversely, typically a contract will limit an entitlement to make a payment claim to the months in which work under the contract is being undertaken and a final payment claim (usually at the expiration of any defects liability period).

The recent decisions of the Supreme Court exemplify the need for principals and head contractors to make express provision for reference dates in contracts. Although this usually occurs, Broadview Windows, where the contract was formed by the acceptance of a quote, demonstrates the potential adverse consequences for a principal or head contractor of lax contract documentation.

The importance of unequivocal termination of construction contracts in the eyes of Security of Payment legislation

A series of recent NSW Supreme Court decisions have highlighted just how important timing can be when it comes to constructions contracts and their termination.  The court has confirmed that where the relevant construction contract includes a reference date (as contemplated by section 8(2) of the Building and Construction Industry Security of Payment Act 1999 (NSW) (Act), reference dates do not continue to accrue under the Act after termination.

The recent Supreme Court decision in Illawarra Retirement Trust v Denham Constructions Pty Ltd [2015] NSWSC 823 is a stark reminder of the importance of unequivocally communicating the time for termination of construction contracts and the adverse consequences of failing to do so.

In Illawarra Retirement Trust, the principal sought to terminate the contract at its convenience by the issue of a notice of termination, in accordance with the contract.  There was no dispute that the principal was entitled to terminate for its convenience, however the principal’s notice of termination did not specify a time for termination, only that the notice was “with effect from Friday, 29 May 2015”.

A dispute arose as to the date that the contract was, in fact, terminated.  The date that the contract was terminated was important because the contractor had made a payment claim on 29 May 2015.  The principal asserted that the contract had been terminated on 28 May 2015 and so there was no reference date to make the payment claim on 29 May 2015.  Conversely, the contractor asserted that the contract had been terminated on 29 May 2015 and so there was a reference date to make the payment claim.

His Honour Justice Darke determined that the date of termination, objectively understood by the notice of termination, was at the conclusion of 28 May 2015.  However, his Honour also reviewed correspondence between the principal and the contractor after the issue of the notice of termination.  That correspondence concerned, amongst other things, the last of the contractor’s contract works, the contractor’s insurances and obligations as principal contractor for the site, all of which were stated to be concluded on 29 May 2015.  By this correspondence, his Honour found that there had been a subsequent agreement that the termination would occur at the conclusion of 29 May 2015.

As a result, there was a reference date to enable the contractor to make a payment claim on 29 May 2015.  The principal’s application for an injunction preventing the contractor from proceeding to adjudication on the payment claims was dismissed.

Ensuring a clear termination date

Principals can ensure that they clearly and unequivocally terminate their construction contract by:

  1. strictly following the procedure set out in the contract, including compliance with the regime for the form and service of required notices;
  2. in notices, stating a time and date that termination of the contract will take effect; and
  3. so as to avoid any inference to the contrary, adhering to the date of termination in any subsequent correspondence and requiring the contractor to act in accordance with the date of termination.

No reference dates after termination

As discussed in our previous article entitled “Contractors beware: risk of no reference dates after termination”, the Supreme Court has confirmed that, where a contract provides for reference dates, unless the clause providing for reference dates is expressed to survive termination of the contract, no reference dates will arise after termination of the contract.

This position has been reinforced in the subsequent Supreme Court decisions of Southern Han Breakfast Point Pty Limited v Lewence Constructions Pty Limited [2015] NSWSC 502 and Veer Build Pty Limited v TCA Electrical and Communication Pty Ltd [2015] NSWSC 864.  Further, in Illawarra, his Honour said: “The defendant advanced an alternative argument that, even if the contract had terminated immediately prior to 29 May 2015, s 8(2)(b) of the Act would operate to provide a further reference date on the last day of May. I think that argument faces considerable difficulties, but in view of my conclusion about the time of termination, it is not necessary to deal with it.

Accordingly, it is important for contractors, particularly in contracts with termination for convenience clauses, to include either a clause providing for reference dates to survive termination of the contract or a clause requiring the principal to give notice of its intention to terminate the contract for its convenience.

A failure to include either of these clauses may result in a contractor losing its entitlement to make a further payment claim under the Act.

The end of the road for retention moneys on large projects?

Head contractors who enter into construction contracts with subcontractors after 1 May 2015 on projects with a value of more than $20 million must hold retention money retained as security in a retention money trust account.

The introduction of retention money trust accounts arises out of the Building and Construction Industry Security of Payment Amendment (Retention Money Trust Account) Regulation 2015 (“Amending Regulation”) published in March 2015.

The Amending Regulation imposes burdensome and costly administrative obligations and reporting requirements on head contractors, which will almost certainly result in the increased use of insurance bonds and bank guarantees as security under construction contracts. Typically, insurance bonds and bank guarantees are the favoured form of security for head contractors, however the introduction of the Amending Regulation is likely to signal the death knell for retention money being used as security under contracts between head contractors and subcontractors.

Scope of the Amending Regulation

The Amending Regulation applies to retention moneys held by a head contractor under its contracts with subcontractors where the value of the contract between the principal and the head contractor exceeds $20 million, ie the “project value”.

If the project value exceeds $20 million during the course of the project, most likely pursuant to variations of the head contract, the Amending Regulation applies to contracts entered into by the head contractor after the date that the project value exceeded $20 million.

Interestingly, notwithstanding the definition of ‘head contractor’ under the Security of Payment Act, the Amending Regulation appears to contemplate that there will only be one head contractor on a construction project.

Retention Money Trust Accounts

The Amending Regulation provides that retention money must be held by the head contractor in a trust account established with an approved deposit-taking institution.

A head contractor is only entitled to withdraw from a trust account if:

  1. it is to pay money in accordance with the terms of the construction contract under which the money was retained by the head contractor;
  2. as agreed in writing by the head contractor and the subcontractor concerned; or
  3. in accordance with an order of a court or tribunal.

Importantly, from the subcontractor’s point of view, the money held in the retention trust account cannot be used to pay any debts of the head contractor and is not liable to be taken as satisfying a judgment debt owed by a head contractor, eg a garnishee order against the trust account.

Administration

The Amending Regulation requires compliance with a number of administrative obligations, by head contractors in particular, including:

  1. notifying the Chief Executive of the Office of Finance and Services (“Chief Executive”) when a trust account is opened, becomes overdrawn or is closed;
  2. retaining records in relation to a trust money account for three years after the closure of the trust money account;
  3. preparing annual account review reports and retention account statements in respect of the trust account; and
  4. paying an annual fee of $1,500 to the Chief Executive to review the account review reports and retention account statements.

A failure to comply with the administrative obligations in respect of a retention money trust account, typically, results in a maximum penalty of $22,000.

Implications and Public Policy

The introduction of the Amending Regulation is a response to the inquiry conducted by Bruce Collins QC into contractor insolvencies, which was commissioned by the NSW Government. One of the findings of the Collins Report was that some head contractors were misappropriating retention money and using the retention money, supposedly provided as security by subcontractors, to boost their cash flow.

Inevitably, this had adverse consequences for subcontractors whenever a head contractor encountered financial difficulties and subcontractors were often out of pocket in head contractor insolvencies.

Undoubtedly, with respect to larger projects, the Amending Regulation should achieve the public policy aim of preventing head contractors from misappropriating retention moneys, primarily because very few head contractors will elect to use retention moneys. The Amending Regulation will drive most head contractors to require their subcontractors to use insurance bonds or bank guarantees, thus avoiding the scope of the Amending Regulation.

To the extent that head contractors intend to use retention moneys as security, they should consider whether the Amending Regulation may apply and, if so, they should remain mindful of their obligations to avoid incurring penalties.

Contractors beware: Risk of no reference dates after termination

A payment claim may not be valid (for the purposes of the Security of Payment Act (“SOP Act”) in NSW) if it is issued after termination of a construction contract.  Whether or not a payment claim is valid will depend on whether the contract provides for a ‘reference date’ to make payment claims and, if so, whether those provisions of the contract survive termination.

In the Supreme Court decision in Patrick Stevedores Operations No. 2 Pty Ltd v McConnell Dowell Constructors (Aust) Pty Ltd, his Honour Justice Ball considered the effect of termination of a contract on a contractor’s entitlement to make a payment claim.

Here, the contract expressly provided for a ‘reference date’ under the SOP Act, meaning the default reference date under the SOP Act (which applies if a reference date is not nominated in the contract) was excluded.  His Honour said whether or not reference dates arise after termination of the contract is a matter for interpretation of the contract – in this case, one subclause in the payment clause (which granted a right of setoff to the principal) expressly survived termination.  Conversely, the contract was silent as to whether any other payment subclauses, including the subclause establishing ‘reference dates’ for payment claims, survived termination.  Accordingly, his Honour determined that these subclauses did not survive termination.

Therefore, there was no reference date after the termination of the contract and the payment claim, which was made after the contract had been terminated and not in respect of a reference date under the contract, was not a valid payment claim in accordance with the SOP Act.

Contractors should be conscious of this decision when entering into contracts, particularly contracts that allow the principal to terminate for convenience.  By ensuring that all payment terms expressly survive the termination of the contract, a contractor can preserve their entitlements under the SOP Act if the contract is terminated.

Supporting statement essential for valid service of payment claim

The Supreme Court has determined that a payment claim is not validly served in accordance with the Building and Construction Industry Security of Payment Act 1999 (NSW) (“Act”) if it is not accompanied by a supporting statement from a head contractor. The decision in Kitchen Xchange v Formacon Building Services clarifies the effect of non-compliance with one of the amendments to the Act that became operative on 21 April 2014.

A ‘supporting statement’ is essentially a declaration by a head contractor that all subcontractors have been paid all amounts that are due and payable in relation to the construction work the subject of the payment claim.

Section 13(7) of the Act says that a head contractor must not serve a payment claim on the principal unless the payment claim is accompanied by a supporting statement that indicates that it relates to the payment claim.

The Court has determined that, if a supporting statement does not accompany the payment claim, the payment claim may be valid, but, importantly, the payment claim is not validly served in accordance with the Act.

Valid service of a payment claim is an essential requirement for invoking the jurisdiction of the Act and therefore empowering an adjudicator to make a determination on an adjudication application. If a payment claim is not validly served, the adjudicator has no power to make an adjudication determination based on the payment claim and any determination by an adjudicator would be susceptible to being quashed by the Courts.

Contractors should bear this in mind before electing to expend significant time and expense in proceeding down the path of adjudication, only for a Court to render a favourable determination invalid and unenforceable.

Builders are reminded that the amendments to the Act made in April 2014, including the requirement for payment claims to be accompanied by a supporting statement, do not affect construction contracts entered into prior to 21 April 2014.

Amendments to Queensland legislation

Amendments to the Building and Construction Industry Payments Act 2004 (Qld) (BCIPA) came into force on 26 September 2014 and will have a significant impact on how payment claims are made, managed and adjudicated in Queensland.

Some of the key amendments to be aware of:

Appointment of adjudicators

One of the more interesting amendments relates to the appointment of adjudicators.  The Queensland Building and Construction Commission (QBCC) (formerly the QBSA) will now be the sole adjudication registry responsible for appointing adjudicators based on their skills, experience, areas of expertise and availability.  The establishment of a single adjudication registry is aimed at removing the common industry perception that certain nominating authorities are “claimant friendly” and to eliminate a claimant’s ability to ‘adjudicator-shop”.

Time for making claims

The time for when payment claims can be made is reduced from 12 months to six months after the construction work was last carried out or the related goods and services supplied (unless the contract provides a longer period).

Classification of claims

BCIPA now distinguishes claims as either ‘standard’ or ‘complex’.  A ‘complex payment claim’ is a claim for over $750,000 excluding GST (or a greater amount prescribed by regulation).

Respondents now have a longer time frame to serve a payment schedule in response to a ‘complex payment claim’.  The time for a respondent to provide a payment schedule is extended to 15 business days (from 10 business days). Timeframes are extended to 30 business days if the payment claim for a progress payment is served more than 90 days after the date in the contract on which a claim for progress payment may be made. Statistics suggest that only 10% of claims adjudicated under BCIPA will fall into this category.

In relation to standard claims (which are simply claims that are not complex claims), the former process for issuing payment schedules will continue, although respondents now have a longer period for adjudication responses.  The time for a respondent to provide an adjudication response is increased from five business days to 10 business days.  For ‘complex payment claims’ the adjudicator can extend the time for an adjudication response by up to an additional 15 business days.

A respondent to an adjudication application for a ‘complex payment claim’ can now include reasons in its response that were not included in the respondent’s payment schedule.  In such circumstances, the claimant may be given a right of reply to the new reasons of up to 15 business days and the claimant can apply to the adjudicator for an extension of time of up to 15 additional business days because of the complexity or volume of the new reasons.

Definition of ‘business day’

Also of relevance is the amended definition of ‘business day’, which now excludes the period between 22 December and 10 January during the industry Christmas shut down period.

Transitioning into the amended BCIPA

For construction contracts entered into before 26 September 2014, the former recovery of progress payment provisions under BCIPA (which are defined as being the sections in the unamended BCIPA dealing with the process for payment claims, payment schedules and adjudications of disputes) will continue to apply for the recovery of progress payments as if the provisions had not been amended.  However, the changes relating to the appointment of adjudicators being transferred to the registrar will apply to all construction contracts.

The amendments result in significant changes to the industry and its participants, who should familiarise themselves with the new procedures and consider what the changes mean for them in the context of their existing and future projects.  The new laws will also impact on the drafting of future contracts, which will need to reflect these changes.