payment
BIHlDll\IG & CGNSTRIJCTHIN
Security of payment reforms miss the mark on multi-tiered projects By JESSICA RIPPON and ANTOINE SMILEY
New security of payment reforms mean practitioners will need to understand how each participant in the project will be characterised under the Act.
T he construction industry in NSW is bracing itself for a number of reforms to
the Building and Construction Industry Security of Payment Act 2010 (the Act) expected to commence this month.
A primary purpose of the refonus is protection of sub~ contractor interests against insolvency and questionable payment practices of head con- tractors. A central feature being greater control over head contractors and serious consequences (including criminal sanctions) if those controls are not adhered to.
When the reforms com~ menee, an important con- sideration for contractors will be to identify the 'head contractor', as defined in the Act. Practitioners may be surprised to discover that the contracting parly Iypically recognised in the industry as the head contractor may not in fact be considered the same under the Act.
Intent of reform When the Collins Inquiry
was announced in 2012, sev- eral high-profile construction companies were in the midst of corporate collapse: Kell & Rigby followed by St Hillier's, Hastie Group and Reed Con-
26 LAW SoCIETY JOURNAL
structions, to name a few. Further collapses occurred after the inquiry commenced, such as Southern Cross Con- structions, Walton Construc- tion and Steve Nolan Construc- tions.
Although head contractors are Iypically engaged with single point responsibilily to deliver a projec~ the inquiry found that 80 to 90 per cent of construction work is performed
"Given the complexity
prospect of head contractor insolvency, while simultane- ously protecting them against (what was alleged to be) the widespread practice of payment avoidance tactics utilised by head contractors.
Targeting head contractors The refonns that specifically
target the head contractors are: o No endorsement on pay- ment claims: Except for pay-
of these projects, some confusion and disagreement may arise about which party is which under the
ment claims made under certain exempt residential building contracts, payment claims will no longer need to state that they are made under the Act in order to attract its operation. This reform stems from the Collins Inquiry finding that subcon- tractors were reluc- tant to use the Act for fear that head con-
Act ... "
by specialist subcontractors.l Subcontractors are therefore the most vulnerable when the head contractor either refuses to payor becomes insolvent. In the case of insolvency, subcon- tractors are often left with a few cents in the dollar, if anything.' This is Oile of the reasons the Collins Inquiry focused on safeguarding interests of small subcontractors against the
tractors would not award them future work. o Supporting statements: Head contractors will be required to provide a statement with each of their payment claims, confirming that all subcontrac- tors have been paid. Failure to provide the statement or knowingly providing a false or misleading statement will be considered an offence. This
jessica Rippon and Antoine Smiley are senior associates at Corrs Chambers Westgarth.
refonn was introduced to stop the practice of head contractors allegedly providing untruthful statements that subcontractors and suppliers had, in fact, been paid. o Retention monies trust: Head contractors will be required to deposit subcontractor reten- tion monies into a separate trust account. 3 TIlls reform responds to the finding of the inquiry that head contractors were routinely refusing or fail- ing to return retention money to subcontractors. Where bonding is provided instead of retention, no trust account will be set up. This may result in increased reliance on bond· ing in preference to retention. Such a measure would likely increase the cost of the project and separately undermine the purpose of the reforms. It is also proposed that the regula- tions will provide for retention money to only be released from the trust account on consent of both parties or by order of an adjudicator or a court. 4 For head contractors, this is likely to erode the benefit of reten- tion money as performance securily, particularly where such securily is intended to be available to the head contractor pending final determination of a dispute regarding incomplete, defective works or other such
April 2014
failures to perform. o Maximum payment tenus: Head contractors (as well as subcontractors) will be required to adhere to payment terms of no more than 30 busi- ness days. Head contractors will, bowever, benefit from a new requirement that princi- pals pay head contractors on terms of no more than 15 busi- ness days. Any contract provi- sion with longer payment terms will be void and unenforceable. This reform seeks to eliminate onerous payment terms, which have become prevalent in the industry.' It will be interesting to see how this can be achieved as between subcontractors where there are often multiple layers of contracting.
Identifying the head contractor
Given the significant con- sequences of non-compliance with the reforms, it is impera- tive that, in each case, practi- tioners and their clients cor- rectly identify which party is the principal and which is the head contractor.
Previously, the position of parties in the contracting chain did not matter. However, the focus of the reforms has resulted in delineation between 'principals's, 'head contractors'7 and'subcontractors'.8
At first glance, the defined terms seem consistent with industry usage and in a simple three-tiered contracting sce- nario, they should operate as intended. However, a sig- nificant number of major con- struction projects have addi- tional layers of contractual relationships. In these more complex project structures, the Act's defined terms raise questions about their applica' tion. This issue is best demon- strated by considering three examples of common project delivery models that account for a considerable value of pro- jects undertaken.
Public private partnerships In a public private partner·
ship (PPP) , design and can· struction obligations will typi· cally be passed down from the state government to a special purpose vehicle (SPV) made up of a consortium, includ- ing financiers and the design and construct (D&C) contrac· tor. The SPV will then engage
April 2014
Defined Tenn PPP Project
Principal
Developer Project Owner-builder / Managing Cont.ractor Project
15 business days ' "·····"t,,,······,··,····,,·····, •.. "., .. "~."'., ... , .. ".,.
Head contractor
Sub-sub sontractor
the D&C contractor to deliver the project, who, in turn will engage a number of specialist subcontractors through back· to-back pass through contracts (see figure 1).
It is the clear intent of the reforms to protect specialist subcontractors by imposing the reform burdens on the D&C contractor.
However, when the Act's definitions are applied to this project structure, it becomes apparent that: o the state could be regarded as the principal under the pro- ject agreement, because it is "the person for whom work is being carried out" and "is not themselves engaged under a construction contract to carry out construction work"; o the SPY will then become the head contractor because it is "the person who is to carry out construction work ... for the principal" and "for whom construction work is to be car- ried out"; and o the D&C contractor will instead become the subcon- tractor because it is "a person who is to carry out construc- tion work" under a construc- tion contract "otherwise than as a head contrador".
It then follows that the true subcontractors, those at the fourth tier of the contracting chain, will not be considered to be contracting with the head
contractor and consequently, will not receive the full benefit of the reforms.
It is unlikely that the reforms intended to impose the obliga· tions of a head contractor on an SPY, and protect the large construction organisations that typically form the D&C contractor on such projects.
In addition, SPVs may now be required to provide a sup- porting statement, confirm- ing that the D&C contractor has been paid, with failure to do so constituting an offence. Even stranger is the fact that the Spy will be under an obli· gation to deposit retention money of a D&C contractor in a trust account. This win seldom occur in any event, given that bonding is preferred over retention money in the larger D&C contracts.
Property development projects This same issue will likely
arise on property development projects where a landowner engages a property developer to build and develop its land and the developer will engage a D&C contractor (not uncom· manly a company related to the developer). As shown in figure 1, with the addition of a developer in the contract~ ing chain, the D&C contractor now becomes a subcontrac~ tor. The reform burdens again appear to miss their mark, fall·
ing on the developer instead of the D&C contractor.
Consequently, in this style of project contracting, the subcontractors, suppliers and designers engaged by the D&C contractor are left unpro- tected in so far as the D&C contractor is not required to provide a supporting state- ment or deposit subcontrac- tors' retention money into a trust account.
Managing contractor and owner·builder contracts A further issue may arise
where a principal engages sub- contractors directly or through a managing contractor (who might engage subcontractors as agent for the principal).
The legislation anticipates this scenario in the "notes" under the definitions of "prin· cipal" and i'subcontractor".9 However, given that "notes" do not form part of the Act, the question is whether a sub- contractor might unintention~ ally become a head contrac· tor under the Act if or when it engages sub-subcontractors.
The intent of the Act is that there is only one princi- pal, one head contractor and potentially multiple subcon· tractors. In our view, the intent of the Act is sufficiently (but certainly not clearly) appar· ent in the definitions by the
... continued on p.28
LlWr SOCIETY JOURNAL 27
... continued from p.27
contrasting use of the definite and indefinite articles, where a principal is 'the' person that contracts with a head contrac¥ tor who is 'the' person who contracts a subcontractor who is 'a' person that carries out construction work otherwise than as head contractor. How- ever, in a claimant-friendly forum, the contrary argument may succeed, at least until a court determines otherwise.
Given the complexity of these projects, some confu- sion and disagreement may arise about which party is which under the Act, particu- larly if scopes of work are split across more than one D&C contractor or a managing con- tractor transforms into a D&C contractor during later phases of the project.
Conclusion With the looming com-
mencement of the new reforms, it is important that contractors and principals understand how each par- ticipant in the project will be characterised under the Act. In doing so, one must not
think in terms such as head contractor according to their common industry meaning.
In NSW, significant con" struction work is undertaken under complex project struc" tures and sophisticated supply chains, including those men- tioned above. Looking ahead, the Sydney International Con- vention, Exhibition and Enter- tainment Centre Precinct PPp, North West Rail Link PPP and Northern Beaches
Hospital PPP are a few examples of large scale multi" tiered projects that have, or will commence shortly. Any contract for construction work entered into after com" mencement of the reforms may be the first to encounter the issues we have canvassed.
the definitions in the Act are now fixed.
In 2015, the government has promised to undertake a full and comprehensive review of the Act and its oper- ation. This may be the first opportunity for these defini- tions to be revisited to accom¥ modate complex project structures and improve the effectiveness of the reforms across the NSW construction industry. 0
ENDNOTES 1. Collins Inquiry Report, p.12, citing Australian Procurement and Construction Council Inc. (APCC), "National Action on Security of Payment in the Construction Industry in Australia - Adelaide 1996", APCC Canberra ("1996APCC National Action Report"), p.2. 2. See, for example, Administrators' Reports by PPB Advisory on its website www.ppbadvisory. com for: (a) Kell & Rigby, 22 March 2013. p.15 (b) Hastie Group, January 2013, p.28; and (c) Reed Constructions, 1 March 2013, p.1. Note also the Inquiry's finding that more than 92 per cent of unsecured creditors in the
It is unclear to what extent these issues can be mitigated through the regulations, how- ever, there does not appear to be much scope to do so given
NSW construction industry were left with a zero dividend from collapses in 2011/2012. 3. See Discussion Paper released by the Department of Finance and Services in November 2013, "A statutory retention trust fund for the building and construction industry", which outlines a proposed retention trust model to be set up under the Regulations. 4. See for example, the Collins Inquiry Report findings at p.72. 5. Jbid. 6. Principal is defined as ''the person for whom construction work is to be carried out or related goods and
services supplied under a construction contract (the main contract) and who is not themselves engaged under a construction contract to carry out construction work or supply related goods and services as part of or incidental to the work or goods and services carried out or supplied under the main contract". 7. Head contractor is defined as "the person who is to carry out construction work or supply related goods and services for the principal under a construction contract (the main contract) and for whom construction work is to be carried out or related goods and
services supplied under a construction contract as part of or incidental to the work or goods and services carried out or supplied under the main contract". 8. Subcontractor is defined as "a person who is to carry out construction work or supply related goods and services under a construction contract otherwise than as a head contractor". 9. Principal: 'There is no head contractor when the principal contracts directly with subcontractors." Subcontractor: "A subcontractor's contract can be with the head contractor or (when there is no head contractor) with the principal directly." D
PIHiHSSWI\I/H I'HlT!CES
""'''''ll''' appointed: Allied Lawyers & Immigration Services, Donald S. Harley, ST Krishnar Solicitors & Barristers, Martin & Associates Lawyers Pty Ltd, Ronald Clifton Vercoe
On 14 February 2014, by resolution of the Council of the Law Society of NSW (Coun- cil) under s.616 of the Legal Profession Act 2004, Richard Stephen Savage, solicitor, was appointed as manager of the law practice known as Allied Lawyers & Immigration Ser- vices, formerly conducted by Casimir Awulonu Ugo- chukwu. No conduct issues.
On 20 February 2014, by resolution of the Council under s.616 of the Legal Pro- fession Act 2004, Richard Ste- phen Savage, solicitor, was
28 LAW SoCIETY JOURNAL
appointed as manager of the law practice known as Donald S. Harley, formerly conducted by Donald Stallard Harley. No conduct issues.
On 20 February 2014, by resolution of the Council under s.616 of the Legal Pro- fession Act 2004, Richard Ste- phen Savage, solicitor, was appointed as manager of the law practice known as ST Krishnar Solicitors & Barris- ters, formerly conducted by Sivananthan T Krishnar. No conduct issues.
On 20 February 2014, by resolution of the Council under s.616 of the Legal Pro- fession Act 2004, Margaret Conn, solicitor, was appointed as manager of the law practice known as Martin & Associates Lawyers PlY Ltd, formerly conducted by Kevin John Martin. No conduct issues.
On 26 February 2014, by resolution of the Council
under 8.616 of the Legal Pro- fession Act 2004, Richard Ste- phen Savage, solicitor, was appointed as manager of the law practice known as Ronald Clifton Vercoe, formerly con- ducted by Ronald Clifton Vercoe. No conduct issues.
Kevin Lo & Company
On 20 February 2014, the Council resolved to terminate the following manager appoint" ments: Margaret Ruth Conn as manager of the law practice known as Kevin Lo & Com- pany.
Peaceful Lawyers, Chris Lee Lawyer
On 6 March 2014, by resolu- tion of the Council under s.616 of the Legal Profession Act 2004, Anthony Neary Walker,
solicitor, was appointed as manager of the law practice known as Peaceful Lawyers formerly conducted by Thai Le Huu Nguyen.
On 6 March 2014, by resolu- tion of the council under s.616 of the Legal Profession Act 2004, Richard Gerard Flynn, solicitor, was appointed as manager of the law practice known as Chris Lee Lawyer formerly conducted by Chris- topher Milton Lee. No conduct issues.
Suspension of practil;ing
Thai Le Huu Nguyen The Council of the Law
Society of New South Wales, at a meeting on 6 March 2014, resolved to immediately sus- pend the practising certificate of Thai Le Huu Nguyen under s.548 of the Legal Profession Act 2004.0
April 2014