Ashleigh Taplin

Idea in brief

• In July 2021 we published an article on the planned removal of the Head Contractor Licence Exemption in Queensland.
• Following additional stakeholder consultation, the Building and Other Legislation Amendment Bill 2022 (Qld) (the Bill) was introduced in March of this year to revoke this plan to remove the Head Contractor Licence Exemption and effectively reinstate the exemption before its removal commences.
• This Bill was passed in Queensland on 25 May 2022 and will result in the Head Contractor Licence Exemption remaining available to head contractors who subcontract building work to licensed subcontractors, exempting those head contractors from the requirement of holding a building licence themselves.
• The decision to retain the Head Contractor Licence Exemption was influenced by stakeholder feedback that the removal of the exemption would result in increased costs and administrative burden for head contractors. It was argued that some head contractors who never intended to conduct any of the building work personally, have structured their business models around the exemption by subcontracting out all licenced building work to licenced subcontractors.
• As noted in our previous article, this issue is a vexed one for industry with those opposing the Head Contractor Licence Exemption noting it is contrary to the role of the legislation and licensing regime in Queensland to permit a party to contract to perform building work with customers if they are unlicensed to do that work, even if they in turn then subcontract that work to licenced subcontractors.
• Perhaps in an attempt to appease both sides of the argument, the Bill as passed allows the Queensland Government to make regulations in the future that exclude certain contracts from the Head Contractor Licence Exemption.
• There is no express qualification in the legislation to limit the types or categories of contract that this regulation power could be used to exclude from the exemption in the future. However, it was noted when passing the Bill that this regulation power was included to address concerns held about unlicensed parties contracting to carry out complex or high-risk work that impacts life or safety, such as mechanical services or fire protection, who then subcontract that work out but do not have adequate skills, experience or expertise to properly administer or manage that subcontract. Only time will tell whether and, if so, what regulations are made in the future excluding contracts from the head contractor building licence exemption. For now, the status quo remains.

The idea in detail

Under the Queensland Building and Construction Commission Act 1991, contractors undertaking to perform building work are required to hold a licence of the appropriate class.  Since 2013, head contractors in Queensland have been exempt from this requirement, provided they subcontract that building work to a properly licensed subcontractor (the ‘Head Contractor Licence Exemption’).

The Head Contractor Licence Exemption was due to be removed by the Building Industry Fairness and Other Legislation Act 2020 (Qld) (‘BIFOLA’) by 24 July 2022 in response to feedback received by the Transport and Public Works Parliamentary Committee regarding alleged misuse of the Head Contractor Licencing Exemption. However, further stakeholder consultation led to postponement of the commencement of the BIFOLA provision which would remove the exemption, to enable further consultation.

The Building and Other Legislation Amendment Bill 2022 (Qld) was introduced in March with an explanatory note citing reliance on the Head Contractor Licence Exemption in several areas of commercial contracting, with concerns that the repeal of the exemption would cause increased administrative and cost burdens for these businesses.

The Bill was passed by the Queensland Parliament on 25 May 2022 and will revoke the yet to commence provision of the BIFOLA which sought to remove the Head Contractor Licence Exemption.

It is expected that the Bill will revoke the removal of the exemption prior to the removal of that exemption taking effect.

As noted in our article of July 2021, this exemption has been contentious in the industry for a number of years and has resulted in conflicting legislative amendments – as can be seen by the recent BIFOLA and the Building and Other Legislation Amendment Bill 2022 (Qld) taking opposing approaches to the exemption (one removing it, one reinstating it with a regulatory power to modify its scope in the future).

It has long been argued that the Head Contractor Licence Exemption is contradictory to the purpose of the building licencing regime, which is to ensure that all persons who contract to carry out building work are appropriately licensed to do so. It also allows unlicensed head contractors to avoid requirements of the licencing system by relying on this exemption, such as the minimum financial requirements to hold a licence and permits persons without adequate experience or expertise to contract to perform building work. Opponents to the exemption argue this is contrary to the consumer protection and quality assurance drivers of regulating the industry.

Proponents of the exemption argue industry has structured itself around the existence of the exemption and changing this would result in material compliance burden for nil benefit to consumers because the work that is required to be done by a licensed contractor is done by a licensed subcontractor in any case, where head contractors relying on the exemption subcontract that work to licensed subcontractors.

To attempt to meet both sides of this argument, the Bill introduces the ability for a regulation to be passed by Government under the Queensland Building and Construction Commission Act 1991 (Qld) to exclude certain head contracts from the Head Contractor Licence Exemption. Although the explanatory notes noted this was intended to be used for instances of complex or high-risk work that may impact life or safety, such as mechanical services or fire protection, no definition or examples were provided in the Bill itself and no limits are prescribed in the legislation on the scope of the regulation making power.

Stakeholders consulted prior to the passing of this Bill observed that this created significant uncertainty for head contractors. This is because there is no criteria to guide what categories of contracts the regulations may exclude in the future from the Head Contractor Licence Exemption, so head contractors may be required to rapidly obtain a licence in order to continue lawfully having a subcontractor conduct building work, and the regulations may be made without the same standard of parliamentary scrutiny or stakeholder consultation as an amending act would.

It is critical that contractors are appropriately licenced, because a failure to do so can result in civil offences and disentitle the contractor to payment under its contract or access to the Security of Payment legislation. For this reason, industry is rightly concerned to seek clarity and certainty about the law that applies to it and seek clarity and forewarning of any regulations in the future that might exclude from the head contractor licence exemption certain categories of head contracts.

Although the decision to retain the Head Contractor Licence Exemption does mean head contractors can for now continue to benefit from the exemption from being required to hold a licence for building work they are not personally performing but subcontracting to a licenced subcontractor, it is possible regulation could be passed modifying the scope of the Exemption in the future. For this reason, industry should continue to monitor the licencing requirements and be ready to respond to any changes passed by regulation in the future.

The Idea in Brief

• Many jurisdictions in Australia have statutory limitation periods of six years in which parties must bring actions for breach of contract claims, failing which the claim may be successfully defended on the basis that it is statute barred.
• The limitation period can cause problems for large scale or complex construction and infrastructure projects, particularly where a breach of contract claim may be related to alleged breach of a fitness for purpose warranty that operates as at the date of handover of the project or practical completion.
• In some instances, six years may not be long enough to identify the problem, establish liability, gather sufficient evidence and start court proceedings. Recognising this, some jurisdictions have enacted 10 year long stop periods for building defect claims.
• The High Court recently unanimously confirmed in Price v Spoor that parties can contractually waive the benefit of a limitation of actions period under the limitations of actions legislation in Queensland, even before a cause of action arises, by drafting specific clauses into their contracts to this effect.
• The High Court concluded such contractual provisions were consistent with public policy and not prohibited by the limitation of actions legislation in Queensland.
• This decision is consistent with the finding in Commonwealth v Verwayen that a limitation period is a conferral of a right, which a defendant can waive.
• Practical implications for industry:
  
  • Project owners are now likely to consider the benefit of including a clause that contracts out of the application of limitation of actions legislation to specific types of claims, so as to not undermine their ability to pursue contractors for major defects despite the passage of time since practical completion of the project.
  • Whether this will be effective in jurisdictions that have specific longstop liability periods set by building legislation that apply to certain types of building claims is yet to be tested, but questionable.
  • Contractors and major insurers in the market are likely to be focused on minimising the degree to which clauses are agreed to that seek to contract out of limitation of actions periods, citing the risk of long-tail risk on major construction and infrastructure projects and whether that risk will be insurable at commercially viable pricing.
• If a clause seeking to contract out of or waive the application of limitation of actions legislation is to be included, it must be carefully drafted as the legal reasoning of the High Court turned specifically on the nature of the language used to avoid the operation of the limitation of actions legislation and turned on the particular statute in question. Legal advice should be obtained.
• If you wish to obtain advice or support for your major construction or infrastructure project contracting, or further information on this particular development, reach out to Merlehan Group to engage our leading major projects legal support.

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The Idea in Detail

In June 2021, the High Court in Price v Spoor [2021] HCA 20 unanimously dismissed an appeal of Spoor & Ors v Price & Ors [2019] QCA 297 and confirmed that parties have the ability to contract out of the limitation periods of the Limitation of Actions Act 1974 (Qld). This could be particularly beneficial for large or long-term construction projects where defects or a failure to meet fitness for purpose warranties may not be discoverable until after the expiry of a contractual limitation of actions period, particularly in jurisdictions that do not already legislate a longer “long stop” liability period for certain building actions.

It can take time to identify liability for defects issues, and a conventional statutory limitation period of six years for breach of contract may not be sufficient to ensure parties have enough time to identify issues, engage upon them and take the appropriate action.

Provided the clauses are carefully drafted, the High Court has determined that parties can (in the context of the Queensland limitation of actions legislation) remove the otherwise available defence of an expired limitation period for potential litigation, even before the cause of action arises.

A separate question yet to be tested is whether this same reasoning will apply to building legislation in some jurisdictions in Australia that separately sets long stop dates (often 10 years) for liability for building defect claims.

Contracting out after a cause of action arises

It has long been established that the statutory limitation periods under the Limitation of Actions Act are a benefit conferred on defendants that can be raised as a defence to potential litigation after a cause of action has arisen.

This is typically done by pleading a defence to an action that the claim has been brought outside of the applicable statutory limitation period.

In the High Court decision of Commonwealth v Verwayen (1990) 170 CLR 394 it was held that a letter provided by the Commonwealth 10 years after the cause of action arose in which the Commonwealth Government admitted fault and stated that it would not raise the claim being out of time as a defence, operated as a waiver of this benefit and therefore the expiry of the limitation period could not relied on to defeat the claim at trial.

Enter Spoor & Ors v Price & Ors [2019] QCA 297

Now the decision of Spoor & Ors v Price & Ors has found that the parties are capable of pre-emptively waiving this right in contract.

This is an important development for the construction and infrastructure development industry and commerce generally in Australia.

In Spoor v Price the main point of contention was the ability of the parties to contract out of the application of Limitation of Actions Act 1974 (Qld). The original mortgage in issue in that case included ‘Clause 24’ which read:

“The Mortgagor covenants with the Mortgage[e] that the provisions of all statutes now or hereafter in force whereby or in consequence whereof any o[r] all of the powers rights and remedies of the Mortgagee and the obligations of the Mortgagor hereunder may be curtailed, suspended, postponed, defeated or extinguished shall not apply hereto and are expressly excluded insofar as this can lawfully be done.”

The mortgagors argued that the cause of action arose on 30 April 2001 and therefore actions could not be brought against them for recovery of the money or land after 30 April 2013, relying upon sections 10, 13, and 26 of the Limitation of Actions Act 1974 (Qld).

In response, the mortgagee argued that Clause 24 constituted a covenant on behalf of the mortgagor that they would not raise the Limitation of Actions Act 1974 (Qld) as a defence to their claim.

At first instance, judgement was given that Clause 24 did not apply to the Limitation of Actions Act 1974 (Qld). Although the court at first instance accepted that the statute conferred a right which could be waived (in accordance with Verwayen), it was held that the specific clause in question did not apply because the words used in the clause (curtailed, suspended, postponed, defeated or extinguished) did not specifically apply to the Limitation of Actions Act 1974 (Qld) because the relevant sections of that Act did not ‘suspend, postpone or extinguish’ rights, rather they only defeated or curtailed the rights if it was pleaded as a defence.

It was held that the wording of the clause was too ambiguous and should be interpreted in favour of the party who did not draft the clause – in this case, the mortgagor. This meant the mortgagee was not able to recover the monies owed to them.

This judgement was reversed by the Court of Appeal in December 2019 and then upheld by the High Court in June 2021 where (for the reasons below) it was found that Clause 24 was able to be applied to the Limitation of Actions Act in respect of recovering money owed to them. As a result, clauses properly drafted that contracted out of the limitation periods prescribed by the Limitation of Actions Act 1974 (Qld) are now valid and enforceable.

Public Policy Implications

On appeal, the mortgagor submitted that the initial decision was correct, and that the primary court should also have found that Clause 24 of the mortgage should have been void and unenforceable because it violated public policy to contract out of statutorily imposed limitation periods.

The judgement in the first instance was based on the principle in Verwayen that the Act provides a benefit/right that can be waived. In the appeal, it was submitted that a clause pre-emptively contracting out of legislation prior to the accrual of such cause of action should be void and unenforceable on the grounds that it is contrary to public policy.

The public policy this argument was concerned with was the importance of finality in civil litigation. The American cases raised by the mortgagor on this point stated that the use of these types of clauses would allow for the same abuse of process the statute was intended to prevent, by allowing claims to be litigated in court well beyond when the cause of action first arose and evidence and witnesses would be available. However, this argument was rejected by the Court, as it was held that the Parliament had implemented the policy of finality in civil litigation not by imposing a restriction on commencing actions, but by conferring a right to plead the expiration of the limitation period as a defence. As such, Clause 24 was held to be consistent with public policy because it was the party who stood to benefit from the defence that was voluntarily waiving it pre-emptively in contract. Similarly, it was noted that the Limitation of Actions Act 1974 (Qld) itself does not either explicitly or implicitly prevent contracting out of it.

The importance of accurate language

For clauses to effectively contract out of the Limitation of Actions Act 1974 (Qld) it is critical to ensure clear and accurate drafting to this effect. Spoor v Price extensively considered the definitions of the words chosen and narrowly interpreted their application.

In first instance, the primary judge held that the clause in question was too ambiguously worded, and the words used did not accurately describe the effect of the Limitation of Actions Act 1974 (Qld) that was sought to be contracted out of. The clause was consequently interpreted by the court in favour of the party that did not draft it – in this case, the mortgagor. This serves as an important reminder of the principles of effective drafting of clauses, by establishing clearly and objectively their desired effect.

It is also important to consider the exact words used in such clauses. For example, on appeal in Spoor it was noted that the use of the word ‘curtailed’ would not have been sufficient for the clause to operate to waive the right under the Limitation of Actions Act 1974 (Qld) had only that term been used. Whilst it was argued by the mortgagee that such a term means to ‘cut off’, the mortgagor argued the full dictionary meaning is ‘to cut off part of’. At first instance it was held by the primary judge that even though it completely removed the mortgagee’s right, the provisions of the Limitation of Actions Act 1974 did not ‘cut off part of’ their right, and therefore the drafting term ‘curtail’ would not, alone, apply to waive the limitation period under the legislation.

This depth of reasoning serves to illustrate that it is important to consider the precise language used when drafting clauses that seek to contract out of the limitation periods under the Limitation of Actions Act 1974 (Qld).

It is also important to appreciate that some attempts to contract out of limitations of actions legislation could separately be deemed unfair and unenforceable under unfair terms legislation in Australia, especially standard form attempts to do so where a significant imbalance of market power is evident.

Implications for industry

We expect Spoor & Ors v Price & Ors will see more project owners attempt to contract out of limitation of actions legislation on more major infrastructure and construction projects, citing the need, in cases where fitness for purpose is warranted by contractors, to have a longer tail of liability within which the project owner can properly test whether the asset delivered really was fit for purpose and compliant with the long design life many major infrastructure projects are expected to be designed to meet.

On the other hand, we expect contractors (and insurers) are likely to be focused on avoiding these types of clauses becoming common practice in the industry. The reason for this is the industry operates on modest profit margins, yet involves the management of large amounts of risk. Contracting out of limitation of actions legislation and prolonging the long tail of post completion risk for major contractors may increase commercial risk beyond what is economically feasible to be managed by contractors and their insurers. Insurers are likely to carefully view this development and propensity of such clauses in the industry against the extent of cover offered to contractors.

Conclusion

Although it presents a significant opportunity for parties to more carefully allocate contractual risk, and the time period it is held for, Spoor v Price does present a challenge for the construction and infrastructure industry and the insurance industry to engage with, particularly in those jurisdictions that do not already legislate a long stop date on certain types of building claims. Equally, the development is important for commercial contracts generally in Australia.

It is necessary to find the balance between risk identification, management and transfer and that of sustainable business and market practice to operate a sustainable market.

Separately, the decision highlights the importance for adopting a meticulous approach to drafting key contractual provisions that seek to contract out of the operation of limitation periods and serves as a timely reminder to the proper approach to contractual drafting.

If you wish to obtain advice or support for your major construction or infrastructure project contracting or would benefit from further information about this particular development, contact Merlehan Group to engage our leading major projects legal expertise.

The idea in brief:

• On 25 June 2021, the Western Australian Building and Construction Industry (Security of Payment) Act 2021 received royal assent.
• This Act was introduced to amend the State’s existing model under the Construction Contracts Act 2004 (WA) to align the model with the ‘East Coast’ Security of Payment model that has been implemented by every state and territory in Australia (except the Northern Territory).
• This has been instigated, amongst other things, by the consequences of the recent industry downturn in Western Australia (mainly as a result of reduced mining-related construction) which, as submitted by numerous industry participants, has led to increased competition and businesses working under lower profit margins. This in turn can lead to cash flow shortages which predominately impact the parties sitting lowest in the contractual ‘chain’.
• The changes will include:
  • Introducing time limits for making payment claims.
  • Requiring payment of payment claims to be made:
    • For home building work, within 10 business days of receiving the payment claim; and
    • For all other work, within 20 business days of receiving the payment claim for payments to a head contractor and 25 business days of receiving the payment claim for payments to a subcontractor.
  • Introducing payment schedules, which must be provided within 15 business days of receiving the payment claim.
  • Removing the requirement of a notice of dispute, which was previously required to be made within 14 days of receiving the payment claim if the claim was disputed.
  • Allowing adjudicators, arbitrators and courts to declare ‘unfair’ notice-based time-bar clauses void.
  • Introducing an offence for intimidating claimants, with fines up to $250,000.
  • Requiring retention money to be paid into a Retention Money Trust Account.
• The changes under the Act are expected to commence on a date to be proclaimed.

The idea in detail:

In June 2021, the Western Australian Government passed the Building and Construction Industry (Security of Payment) Act 2021 (the Act).

The Act was introduced to amend the State’s existing model under the Construction Contracts Act 2004 (WA) to be more in line with the ‘East Coast’ Security of Payment model that has been implemented by every state and territory in Australia, with the exception of the Northern Territory.

The current security of payment system operational in Western Australia and the Northern Territory is procedurally different to the security of payment frameworks broadly adopted in all other states and territories of Australia – the so-called ‘West Coast’ model and the ‘East Coast’ model, respectively.  While the ‘West Coast’ model provided an adjudication process that allows either party to a construction contract to adjudicate a contractual claim dispute, the ‘East Coast’ model provides avenues for recovery of payment arising from specific payment claims made for construction works under a construction contract (up the chain from contractor to principal only).

The Act was drafted following a review of the security of payment framework in the construction industry. This review titled Security of Payment Reform in WA Building and Construction Industry Final Report (the ‘Fiocco Report’) was commissioned in 2018 following a national review issued by John Murray AM (the ‘Murray Report’). The Murray Report largely preferred the ‘East Coast’-type models adopted in Queensland and New South Wales in coming to its recommendations for security of payment legislation frameworks Australia-wide.

The Fiocco Report identified a number of ongoing issues with the current regime which particularly affected small to medium sized businesses, but were persistent across Australia in the construction industry. In particular, the Fiocco Report identified the increased risk of payment delay or default as a result of the hierarchical contracting and the associated power imbalance between head contractors and subcontractors when negotiating contractual terms and risk allocations – with the end result being an imbalance of bargaining power that often results in deferrals of payment and other risks being principally borne by subcontractors least equipped commercially to manage them.

Similarly, and particularly relevant to Western Australia, the Fiocco Report explored the consequences of the recent industry downturn in Western Australia (mainly as a result of reduced mining-related construction) which, as submitted by numerous industry participants, has led to increased competition and businesses working under lower profit margins. This in turn can lead to cash flow shortages which predominately impact the parties sitting lowest in the contractual ‘chain’.

The recommendations of the Fiocco Report were largely aligned with the recommendations of the Murray Report – and recommended a substantive overhaul to the security of payment regime in Western Australia.

The McGowan Government originally tabled these changes in a bill in September 2020, however this then subsequently expired when Western Australia went to a state election in March 2021.  The Bill was then reintroduced on 25 May 2021, and received royal assent on 25 June 2021.

What will the security of payment regime now look like in Western Australia? 

The new Security of Payment changes in Western Australia will include:

• Time for payment of payment claims: Reducing the maximum period for payment of payment claims for work from 42 days to:
  • 20 business days for payments to a head contractor and 25 days for payments to a subcontractor (unless the contract provides for an earlier date) for work other than home building work; or
  • 10 business days or by the date provided in the contract for home building work.
• Unfair terms: Allowing adjudicators, arbitrators and courts to declare ‘unfair’ notice-based time-bar clauses void in some circumstances.
• Changes to excluded works: Removing ‘fabricating or assembling items of plant used for extracting or processing oil, natural gas or any derivative of natural gas, or any mineral bearing or other substance’ from work that is not ‘Construction Work’.
• Expiry Date for making payment claims: Introducing an expiry date for making payment claims. For claims other than a final payment claim, this will be the later of either:
  • a date stated under the contract;
  • 6 months from the works subject of the claim being completed; or
  • 6 months from the service subject of the claim last being supplied.
• For a final payment claim, this will be the later of either:
  • a date stated under the contract;
  • 28 days after the end of the last defects liability period;
  • 6 months from the works subject of the claim being completed; or
  • 6 months from the service subject of the claim last being supplied.
• Timing and content requirements for payment schedules: Introducing payment schedules in line with the ‘East Coast’ model.
  • These will need to be issued within 15 business days of receiving the payment claim (or a by an earlier date if agreed under the contract).
  • The payment schedule will need to identify the amount of the payment (if any) the respondent proposes to pay, as well as reasons for their decision. The provision of reasons for the decision will be critical as they will be the only reasons the respondent can rely on if the issue proceeds to adjudication.
  • If the respondent does not provide a payment schedule by the time provided, the respondent becomes liable to pay the full amount claimed by the due date for payment.

If the respondent fails to pay the payment claim amount or the amount stated in the payment schedule in full by the due date for payment, the claimant may either (but cannot do both):

• proceed to adjudication; or
• recover the unpaid amount as a debt in court.

The claimant can also proceed to adjudication is the amount stated in the payment schedule is less than the amount claimed in the payment claim or if no payment is proposed in the payment schedule.

• Adjudication application timing: The claimant may make an application for adjudication within:
  • Where a payment schedule was received, 20 business days of either receiving the payment schedule or the due date for payment. The respondent will have 10 business days to provide a response but will only be able to include reasons that were included in the payment schedule.
  • Where no payment schedule was received and the full amount has not been paid, the claimant must first give notice to the respondent of their intention to apply for adjudication within 20 business days of the due date for payment and the respondent has 5 business days from this notice to provide a payment schedule. The claimant must then make the adjudication application within 20 business days from the end of the 5 business day period above.

The adjudicator must make their decision within 10 business days of the adjudication response or due date for a response, or the adjudication application (where the respondent was not entitled to provide an adjudication response).

The adjudicator will decide the amount due, any applicable interest and the due date for payment.

A review adjudicator will be responsible for reviewing adjudication decisions, which must be applied for within 5 business days of the original decision being made.

Adjudication review applications cannot be made by the respondent unless the respondent has:

• paid any parts of the adjudicated amount that were undisputed;
• paid the part of the adjudicated amount that is in dispute into a trust account; and
• provided written notice to the claimant identifying the trust account the amount was paid into.

• Offence for intimidating claimant:  It will be an offence for a person to threaten or intimidate a claimant in relation to the claimant’s entitlement to or claim for a progress payment or exercising any other right under the new laws to pursue payment, with fines of $50,000 for an individual and $250,000 for a body corporate.
• Retention Money Trust Account:  Retention money held under eligible construction contracts must be held in a Retention Money Trust Account (previously it was only required to be held on trust where the contract did not specify how the money was to be held), with fines of $50,000 for an individual and $250,000 for a body corporate applying for a failure to comply with this requirement.  Eligible construction contracts include constructions contracts to which the Act applies, but does not include:
  • where the party for whom construction work is carried out (or relates goods and services are supplied) is a government party;
  • where the value of the contract at any time does not exceed the prescribed retention money threshold (note:  this amount has not yet been published but was noted in the explanatory memorandum to likely be $20,000 or less), or as otherwise prescribed by regulations;
  • if the contract is for home building work for more than $500,000, unless the principal is a corporation, the work is for multiple dwellings or for the purpose of residential development business, or the contract is between a head contractor and a subcontractor; or
  • if it is otherwise excluded by regulations.

These changes are expected to commence on a date to be proclaimed.

Our Australia-wide comparison table below has been updated to reflect these changes (on the assumption the amendments are eventually proclaimed and commence). You can download the table by clicking on the image below.

If you need assistance with pursuing or defending claims for payment under the various construction industry security of payment legislation in any State or Territory in Australia, email or contact Adam Merlehan [email protected] (+6140219769) for more information.