Ben Corcoran

The idea in brief:

• In November last year the Treasury Laws Amendments (More Competition, Better Prices) Act 2022 changed the application of the laws regarding unfair contract terms in standard form contracts when contracting with small businesses (the new UCT regime).
• The new regime was recently tested in, DCZ Early Learning Pty Ltd v Semper Mortgage Management Pty Ltd [2024] which assessed the dealings between the parties to an indicative letter of offer preceding a loan agreement to determine whether:
  • the contract was in a ‘standard form’; and
  • the clauses in the contract were unfair.
• The Supreme Court of Queensland found that while the lender had, on multiple occasions, used this contract (with substantially similar terms) previously, it was not a ‘standard form’ contract as defined under the ASIC Act because:
  • the lender did not have all or most of the bargaining power;
  • the first version of contract sent to the borrower included transaction specific details that were obtained after discussions between the parties; and
  • the borrower was not placed into a position in which it had to “take it or leave it [the terms under the contract]” with the borrower being given the opportunity to negotiate the terms of the contract.
• This is helpful guidance for industry as this decision (and the reasons provided) demonstrates what businesses should do to prevent its contracts being classified as standard form and subject to the new UCT regime.
• Notwithstanding the contract was deemed not to be a standard form contract and therefore the UCT regime did not apply, the judge also concluded that the terms of the contract were not unfair, which provides further useful insight into how the courts interpret the fairness of terms being used in real world transactions.

We have considered the application of the new UCT regime to the recent case, DCZ Early Learning Pty Ltd v Semper Mortgage Management Pty Ltd [2024], in which the applicant DCZ Early Learning sought a declaration that its contract with Semper Mortgage was in a standard form and that two clauses of the contract were unfair.

Case study: DCZ Early Learning Pty Ltd v Semper Mortgage Management Pty Ltd [2024]

• The applicant, DCZ Early Learning Pty Ltd and other individuals (collectively, the Borrower), were eagerly seeking a loan after entering into an agreement to purchase part of a childcare business on 28 November 2023. The Borrower engaged a finance broker, Australian Commercial Finance (the Broker), to procure finance for the purchase and to act on behalf of the Borrower during negotiations with private lender, Semper Mortgage Management (the Lender).
• Within a week of engaging the Broker, an ‘Indicative Letter of Offer’ (ILOO) had been secured along with a commitment from the Lender for $3.425m to be loaned to the Borrower. Acting for the Borrower, the Broker negotiated and exchanged five versions of the ILOO with the Lender and on 8 December 2023 the Borrower signed the fifth version of the ILOO and paid a commitment fee of $5,500.
• The ILOO included two clauses which the applicant contended were unfair. These clauses were clause 8 with the fundamental obligation on the applicant to “immediately upon acceptance of this offer… pay the Lender, all fees, costs and disbursements outlined in this document”, and clause 9 which entitled the Lender to lodge a caveat or register a security interest on the PPSR as “security for the payment of fees, costs and disbursements”.
• On 18 December 2023, the Lender instructed its lawyers to lodge caveats and PPSR registrations for its fees ($150,260.00) as the Lender had formed the view that the Borrower may have been getting cold feet as all communications had ceased. The following day the Borrower emailed the Broker and the Lender to notify each that the deal was not proceeding, refuted that the ILOO was a legally binding loan agreement (a point which was later conceded), and demanded a refund of $8,800 for the search and valuation fees.
• The Lender responded by issuing a demand for $366,260 for the various fees (establishment, admin, legal fees, etc.) payable under the ILOO with the Borrower later initiating proceedings in relation to the Lender’s terms entitling them to such fees as being ‘unfair’.
• The question before the court was whether clauses 8 (amounts payable by the obligors) and 9 (security) of the ILOO were unfair terms within the meaning of s 12BF of the ASIC Act and are therefore void and of no effect.

Determining if the contract was in a ‘standard form’

In determining whether a contract is a ‘standard form’ contract, courts are entitled to take into account any matter deemed relevant to the matter before it. However, as a minimum, courts are obliged to consider the factors provided under s 12BK of the ASIC Act, which include the following:

• whether one of the parties has all or most of the bargaining power relating to the transaction.
• whether one of the parties has made another contract, in the same or substantially similar terms, prepared by that party, and, if so, how many such contracts that party has made.
• whether the contract was prepared by one party before any discussion relating to the transaction occurred between the parties.
• whether another party was, in effect, required either to accept or reject the terms of the contract.
• whether another party was given an effective opportunity to negotiate the terms of the contract.
• whether the terms of the contract take into account the specific characteristics of another party or the particular transaction.

The court in this case considered each of the above factors in turn.

Has the Lender previously used a contract with the same, or substantially similar terms?

This was not a contentious factor as it was agreed that the Lender, in the business of private lending, had on a reasonable number of occasions made other contracts which had the same or similar terms. The court found the Lender had previously used a contract with the same or substantially similar terms as the ILOO. Therefore, this factor in determining whether the contract was in a standard form was satisfied.

Did the contract consider the specific characteristics of the Borrower or the transaction?

Notwithstanding the contract had been used previously with similar terms, the court needed to consider whether the terms of the ILOO had considered the specific characteristics of the Borrower, or the specifics of the transaction.

The court found that the ILOO’s format was a combination of terms that were both standardised and colourful. This amalgam was the result of the inclusion of both boilerplate conditions (which would likely apply to every loan transaction that the Lender entered into) and tailored conditions, some of which were the result of the negotiations.

Therefore, the ILOO was found to have indeed taken into account the specific characteristics of the transaction which included the Borrower’s negotiated terms of the bargain.

Did the Lender have all or most of the bargaining power?

The court looked to the facts surrounding the negotiations between the Lender and the Broker (acting on behalf of the Borrower) in which the Borrower instructed its broker to negotiate terms of the ILOO. This resulted in five versions of the ILOO being drafted with each containing amendments that were not minor in nature and were the result of “back and forth” rounds of negotiations. The court found this demonstrated a willingness by both parties to negotiate the terms of their bargain with neither party holding “the whip hand in the negotiations”.

The court made the distinction between the question of whether the bargaining power of the Lender was ‘unequal’ to that of the Borrower and the ASIC Act requirement that the Lender had ‘all or most’ of the bargaining power in reaching the agreement. The significance of this distinction is that the test under the ASIC Act requires a higher threshold to be met to satisfy this element in determining whether a contract is in a standard form.

The court found that the Lender did not possess all or most of the bargaining power and that the Borrower’s actions had not illustrated that it had a lack of bargaining power.

Was the contract prepared by the Lender prior to having any discussions with the Borrower?

The court found that the first of the five versions of the ILOO had been prepared after the Lender held a discussion concerning the transaction with the Broker. The court noted that the fact that the ‘essential terms’ were included in the first version was proof that the ILOO was prepared after the Lender had discussions with the Broker.

It is worth mentioning here that the ‘essential terms’ referenced dealt with the loan amount, the proposed security, the term, and the interest rates. However, the first version did not include any negotiated terms of the bargain which were only included in subsequent versions. The implication with this sequence of events is that an alternative interpretation may have been made if (pre-negotiation) standardised terms had been provided to the Borrower for its review and consideration without any of the transaction specific details (such as the loan amount) being included in that first version.

Was the Borrower effectively required to either accept or reject the terms of the contract?

The court found there to be no evidence that the Lender presented the Borrower with terms that were on a “take it or leave it” basis. Rather, the Lender was found to have been open to negotiations with the Borrower as it had allowed for the ‘main terms’ of the bargain to be negotiated during the rounds of back and forth discussions between the parties.

The court observed that this conduct would suggest the Lender may have adjusted the terms under clauses 8 and 9 of the ILOO if the Borrower had requested these be changed – in the same way it requested the terms of the bargain to be changed.

Was the Borrower given an effective opportunity to negotiate the terms with the Lender?

Earlier in the decision, under the heading ‘Bargaining Power’, the court found that no evidence had been submitted to explain why the Borrower had not sought to alter clauses 8 and 9 with the Lender and suggested that if the Borrower had wanted to negotiate these terms it could have done so and could have also raised it with its Broker.

The court found that the Borrower was given an effective opportunity to negotiate the terms of the agreement and was perfectly comfortable in raising significant changes to the terms under the ILOO and, through its Broker, sought and obtained adjustments to the bargain. The court also found that the Borrower not only had an opportunity to negotiate but, in effect, the Borrower “took advantage of that opportunity”. Therefore, the Borrower was not placed into a position in which it had to choose between rejection or acceptance of the terms provided by the Lender.

As a result, the court found the contract not to be standard form and that the applicant’s case must fail. Nonetheless, the court proceeded to assess whether the terms were unfair in the meaning of the ASIC Act.

Were the terms of the contract ‘unfair’?

In determining whether a contract contains terms which are ‘unfair’, the court referred to the factors listed under s 12BG of the ASIC Act. Under s 12BG(1), a term will be unfair if, inter alia:

• it would cause a significant imbalance in the parties’ rights and obligations arising under the contract; and
• it is not reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the term; and
• it would cause detriment (whether financial or otherwise) to a party if it were to be applied or relied on.

Therefore, the court was required to determine if all three of the above elements were satisfied within the context of viewing the contact ‘as a whole’ and ensuring the term was ‘transparent’.

Did clauses 8 and 9 of the ILOO cause a ‘significant imbalance’ in the parties’ right and obligations?

A lack of individual negotiation was stated to have much less relevance when considering if there has been a significant imbalance. Rather, determining whether there has been a significant imbalance required an examination of whether the term had been significantly weighted in favour of one party over another. In determining whether clauses 8 and 9 created an imbalance that was sufficiently large enough to be important when compared against the parties’ other rights and obligations, the court examined the three complaints brought by the Borrower against three relevant factors:

1. whether the customer could not “opt out” of unfair terms;
2. whether the contract gave one party a right without imposing on that party a corresponding duty or without giving any substantial corresponding right to the counterparty; and
3. whether the party advantaged by the term was better placed to manage or mitigate the risk imposed by the term than the customer.

Complaint 1: Immediate liability for entirety of the Lender’s fees

The court agreed that making the fees payable immediately is a legitimate criticism given the transaction could be cancelled the following day, but the Lender would still be entitled to the fees. However, the court also observed the opposite being true. The transaction could be cancelled at the eleventh hour after the Lender had incurred fees and expenses after having obtained the necessary funds for the loan but then would not enjoy the benefits and profits.

The court noted three issues with this complaint.

First, it assumes that the fees are high and unreasonable. However, the level of fees are not dealt with under clauses 8 and 9 at all as they are specified under a specific ‘Proposed Funding Table’ which set out the various fees payable under the agreement. The court found the effect of clauses 8 and 9 did not really create a significant imbalance and that without these clauses the timing for payment of some of the fees listed under the table would be difficult to determine.

Second, a lack of evidence had been provided to disprove that charging the fees was inconsistent with standard industry practice. Without sufficient evidence to demonstrate that no reasonable lender would charge fees at that level, make the fees be payable immediately, or that security is required for their fees, the court found the Lender may be “perfectly consistent with industry practice”.

Third, there was an assumption that without clauses 8 and 9 the Lender would have had to prove and justify the high fees it charged. The court found this was not correct for all the fees charged by the Lender as the fees listed in the Proposed Funding Table were flat fees (except for legal fees) payable by the Borrower. The court noted that it was clear that legal fees were reimbursable based on the legal fees actually expended. Further, the court noted it would be likely for the Establishment Fee (one of the fees listed) to be immediately payable as the price of the Lender entering into the transaction.

Complaint 2: Obligation to pay Lender fees regardless of which party may fail to perform its obligations under the contract

The court agreed that an imbalance in the parties’ rights could be created if the Lender failed to lend the funds to the Borrower but still imposed its fees. The court also noted that, hypothetically, the Lender could make it a regular practice to enter into these types of transactions and withdraw from the agreement and still seek to collect its fees. However, the court compared these fees against the overall benefit that would be received by the Lender if it carried the loan to the end of the term to consider whether the imbalance was ‘significant’.

Ultimately, the court found there to be a lack of evidence to prove whether the fee was significant, and therefore whether a significant imbalance had been created.

Complaint 3: Unbalanced right of charging real and personal property

The Lender argues that given it is the party providing the money, it should be afforded the right to charge real and personal property as security. The court found difficulty in understanding why the Borrower ought to be given a corresponding right as it was the Lender that was assuming the risk in the transaction. The court was unable to justify the Borrower’s purported need to include a provision giving it the right to secure the Lender’s property.

Were clauses 8 and 9 reasonably necessary to protect the Lender’s legitimate interests?

Counsel for the Lender referred to Australian Competition and Consumer Commission v Ashley & Martin Pty Ltd and quoted Justice Banks-Smith who stated that:

“The question of what is ‘reasonably necessary’ will also involve consideration of the particular circumstances of the business.[1]

…whether the relevant system [in this case, clauses 8 and 9] was reasonably necessary to protect the respondent’s legitimate interests that ‘there were alternatives’…[2]

What is ‘reasonably necessary’ might also involve an analysis of the proportionality of the term against the potential loss sufferable.[3]”

The court acknowledged that the Lender had carried out preparation work in relation to the proposed loan for which it had expended time, effort, and expense. The court found that the Lender did have a legitimate interest in ensuring that it would not be out-of-pocket for the activities it had carried out. It was also concluded that the costs of the effort, time and expenses did not need to correlate with an hourly rate to justify the amount charged as was the case here in which the payment charged by the Lender would be calculated as a percentage of the loan value.

The court identified that in the case before it, clauses 8 and 9 did not deal with the quantum of the fee payable to the Lender, rather their purpose is to make the fees immediately payable – even if a deal does not proceed.

When considering whether clauses 8 and 9 of the ILOO were ‘reasonably necessary’ to protect the Lender’s interests the court found this element may cover a range of responses to the legitimate interest. On this basis, the court determined that clauses 8 and 9 did not fall outside the range of what is reasonably necessary and therefore were reasonably necessary to protect the Lender’s legitimate interests under this deal.

Would clauses 8 and 9 cause detriment to the Borrower if either were to be applied or relied on by the Lender?

The court disagreed with the argument made by Counsel for the Lender; that the detriment caused was that the Lender would be vulnerable to out-of-pocket expenses without the existence of clauses 8 and 9. Counsel referred to the below passage from the judgement in Director General of Fair Trading v First National Bank plc[4]:

“…The essential bargain is that the bank will make funds available to the borrower which the borrower will repay, over a period, with interest. Neither party could suppose that the bank would willingly forgo any part of its principal or interest. If the bank thought that outcome at all likely, it would not lend. If there were any room for doubt about the borrower’s obligation to repay the principal in full with interest, that obligation is very clearly and unambiguously expressed in the conditions of contract. There is nothing unbalanced or detrimental to the consumer in that obligation; the absence of such a term would unbalance the contract to the detriment of the lender. [Counsel’s emphasis]”

The court identified four reasons why it disagreed with the Lender’s position regarding the detriment caused by applying or relying on the relevant terms:

1. The passage from Director General of Fair Trading v First National Bank did not specifically address the element of detriment, rather this judgement was a consideration of Lord Bingham’s assessment of fairness;
2. The current case concerned fees being claimed by a private lender, whereas Director General of Fair Trading v First National Bank concerned repayments of principal and interest. Therefore, an easy parallel could not be observed;
3. The fees claimed by the Lender were likely characterised as a combination of reimbursements and fees that were not ‘out of pocket’ expenses. The Lender had not shown the fees claimed could be characterised as out of pockets; and
4. The issue being considered here was not in regard to the Lender’s right to claim its fee, rather whether the right to claim the fees immediately and secure those fees against the Borrower’s property, irrespective of the outcome of the loan constituted a detriment to the Borrower.

The court found that clauses 8 and 9 did cause a detriment and this detriment was caused to the Borrower as they enabled the Lender to take steps to enforce the fees it had set out under the ILOO. These fees would, in effect, be characterised as a detriment due to the ability of the Lender to lodge a caveat or other charge on the Borrower’s property and the immediate liability of the Borrower to pay these fees to the Lender – irrespective of the fate of the loan.

In determining whether clause 8 and 9 are ‘unfair’, the court found this element of s 12BG(1) had been satisfied.

Contract ‘as a whole’ and Transparency

The payment of the fees to the Lender were found to be only one element in a larger transaction with other commercial considerations including the loan amount, the term, security, and interest provisions. With this in mind, and notwithstanding the fact that the Lender’s terms concerning its fees were found to cause a detriment to the Borrower, the court found clauses 8 and 9 (viewing the contract as a whole) were not unfair terms. The court also noted that it was important to consider the context of the transaction in which rapid finance was being provided by a private lender in circumstances where two banks were unable to assist the Borrower proceed with its business transaction.

The court also determined that not only were clauses 8 and 9 (and the value of the fees) completely transparent under the ILOO, but an increase regarding the commitment fee (which was an issue raised by the Borrower) was easily explainable.

Conclusion

On 7 June 2024, the court dismissed the Borrower (the applicant’s) application and, on 28 June 2024, ordered the Borrower to pay the Lender the full claim amount, interest and legal costs on a standard basis for the first proceedings (declaration of unfair contract terms) and on an indemnity basis for the second proceedings (application by the Lender to enforce the caveats which were only brought about by the conduct of the Borrower).

It is evident from DCZ v Semper that the courts are inclined to consider the larger framework of a matter when determining whether terms under a contract are ‘unfair’ in the context of the definitions under the ASIC Act.

This case has provided the industry with a useful interpretation of what contracts will be considered standard form as well as analysing and identifying when contract terms will be unfair. This update is particularly critical for entities using standard form contracts as they must be cognisant of the terms being used in their contract suites as they may be deemed to be unfair. And as the new UCT regime covers a greater number of ‘small businesses’ than ever before, more business need to be conscious of who they are contracting with to avoid disputes and potential (increased) financial penalties.

If you require legal advice for your next contract, please contact Adam Merlehan [email protected] (+61 401 219 769) for assistance.

 

[1] Australian Competition and Consumer Commission v Ashley & Martin Pty Ltd [2019] FCA 1436; [51].

[2] Ibid [54].

[3] Ibid [55].

[4] Director General of Fair Trading v First National Bank plc [2002] 1 AC 481 at [20].

Previously we published a National Construction Industry Security of Payment Legislation comparison table that has proven useful for clients and industry as a ready reckoner of the various construction industry security of payment legislation in Australia.

With the Western Australian Building and Construction Industry (Security of Payment) Act now in force and other jurisdictions having made amendments to their respective Acts, we have recently updated this table to provide a summary and comparison of the most significant aspects of the security of payment schemes across all jurisdictions in Australia.

Please find our updated National Construction Industry Security of Payment Legislation comparison table for free download here. We trust you may find the tool useful.

Note: while the table is a useful ready reckoner, it is not a substitute for legal advice or the detailed review of the relevant legislation for an individual case.

Should you need assistance with the various construction industry security of payment legislation in any state or territory in Australia, email or contact Adam Merlehan [email protected] (+61 401 219 769) for more information.

The idea in short

• Security of Payment legislation has had a presence in Australia for over 20 years, however despite consistent consideration, no uniform legislation has been enacted.
• The fragmented system currently involves inconsistent obligations on parties – with the significant burden of compliance falling on the construction industry.
• As of March 2023, the federal government and all but one state in Australia is governed by the same political party – meaning now may be an ideal time to create national consensus and relieve some of the pressure on the construction industry.
• This opportunity should be taken to improve the functionality of the legislative schemes and help protect the structure of the construction industry into the future.

Introduction

Security of Payment (SOP) legislation has, in various guises, had a constant presence throughout each state and territory over the past 20 years. However, the effect of different requirements and processes across each state and territory has resulted in a fragmented approach across jurisdictions, placing the significant burden of compliance squarely on the shoulders of the construction industry.

As the primary purposes of each SOP legislation align, with only relatively minor differences, it is possible to ameliorate these differences to harmonise individual SOP legislation to, in essence, create a ‘national’ model. Currently, all mainland states and territories (as well as the federal government) are being controlled by the same political party. Leveraging this unique political climate could be an opportune way for harmonisation of the state and territory SOP Acts by creating a uniform SOP scheme across Australia, with such a scheme able to build off the substantial building blocks placed by John Murray in 2017.

The current state of play in Australia

Since 1999, each state and territory of Australia has introduced and progressively updated their own SOP frameworks on a jurisdiction-by-jurisdiction basis, which have historically been divided into two separate models – commonly as the ‘East Coast’ and ‘West Coast’ SOP models. In August 2022, WA significantly altered its SOP framework to adopt changes and a model that more readily resembled the ‘East Coast’ system model – meaning that each state and territory in Australia (save the Northern Territory) now adopts an ‘East Coast’ model.

Despite the significant uptake of the ‘East Coast’ model, all SOP frameworks (including the Northern Territory) share the same fundamental purpose of enabling and facilitating rapid payment under construction contracts with the aim of providing financial stability to industry participants. However, there are a number of differences in the application of each scheme – the nuances of which can be critical to a contractor’s entitlement to recovery under the scheme.

Notwithstanding that the disjointed approach observed under the current SOP models, the security provided to the construction industry has been a welcomed tool for subcontractors as it has enabled access to adjudication processes for participants in the commercial construction industry. However, a national uniform SOP legislation would undoubtedly provide improvements to all stakeholders – improvements we discuss below.

In 2015, the Senate Economics References Committee set out in the ‘Insolvency in the Australian construction industry’ report the issues it observed within the eight state and territory SOP Acts and set out recommendations to resolve these issues which included the Commonwealth enacting a uniform security of payment legislation.

Following the Committee’s recommendations, in 2016 Mr Paul Murray AM was appointed to conduct a review of the eight SOP legislations. The following year the Murray Review was published – making 86 recommendations covering the changes to legislation needed to affect a national scheme, while balancing the interests of varying industry processes and stakeholders. The most significant takeaway from the Murray Review was the recommendation that the East Coast model (specifically the NSW SOP Act) ought to be used as the basis for a national scheme.

More recently, there have been renewed calls for a national SOP model to be enacted – including from ACT Senator David Pocock – which brings the proposed national SOP model squarely into the spotlight (see article).

Also of particular interest is the core 2022 election commitment of the now governing federal Labor government which was that:

“The recommendations in Review of Security of Payment Laws: Building Trust and Harmony, prepared by John Murray in 2017, including in relation to the implementation of statutory trusts, must be implemented immediately.”

Now, a year on from the 2022 federal election, and with the recent outcome of the NSW state election, all mainland Australian states and territories are now governed by same political party. Optimistically, aligning the politics of Australia’s legislators may reduce frictions previously preventing federal and state powers from working pragmatically to develop a ‘national’ SOP model with uniform rules.

Further, with the Australian construction industry facing the most significant economic and market headwinds in some time, now (more than ever) provides an opportunity for our national policy makers to fashion a national SOP scheme.

Industry fatigue caused by a fragmented system

The fundamental function of SOP schemes is to act as a regulatory tool to address the disparity between parties contracting for construction works by providing greater protection for ‘weaker’ parties to secure their payments from ‘stronger’ parties.

Despite this purpose being shared across the individual state and territory SOP models, there are numerous differences between each, including inconsistent rights and obligations, timeframes, specifical language in drafting, mechanisms, and exclusions clauses to limit an Act’s coverage.

This is demonstrated in our Australia-wide comparison table of every piece security of payment legislation in place.

With varying, and at times contrary rules and entitlements, a state by state, territory by territory SOP system playing field does not serve the interest of the whole Australian construction industry – nor does it achieve the intended objectives or purpose of the respective laws and regulations. Industry participants are subject to the whims of location-specific rules and interpretations such as:

Rights and remedies – contractor entitlements to payment

A key distinction between the East and West models is the ‘purpose’ of the relevant legislation. Where the West Coast model relies only on contractual rights in respect to recovering payments, the East Coast model works to also provide a separate statutory right to payment.

A further significant distinction is how the definition of “construction work” differs under each SOP Act. This limits some fields within the construction industry being able to rely on SOP legislation if the state they operate in does not include that field under its definition of “construction work”. Current definitions of “construction work” include complex ‘exclusion’ clauses – in an attempt to detail what is “construction work” for the relevant state or territory SOP Act.

The application of exclusions to “construction work” results in inconsistent and insufficient protection for some areas of the construction industry. For example, the WA Act excludes “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”. The effect of this exclusion may see a contractor being excluded from being entitled to rely on the relevant SOP Act for the same technical work which, if carried out outside of the ‘mining’ sector, would be covered.

However, both models do offer welcomed entitlements to the industry by providing access to rapid adjudication for aggrieved parties to have their payment disputes settled by an experienced and independent adjudicator, and both models legislate suspension rights if payment is not made.

Application of SOP legislation to construction related activities

A core distinction between the different models is the inclusion of domestic construction contracts under SOP Act. Only two jurisdictions (being Tasmania and Northern Territory)) include domestic construction contracts in their SOP legislation, whereas all other states and territories do not provide any provisions for participants of domestic construction contracts to be afforded the same access to payment security entitlements.

Whether SOP models should incorporate domestic building and construction work into their legislation is not the focus of this article. However, it illustrates the stark differences between the individually enacted SOP Acts and the shortcomings of an inconsistent system on a national scale.

Tasmania is the only ‘East Coast’ state to deviate from its peers by including domestic construction work in its SOP legislation. However, Tasmania may be ahead of the times as many stakeholders have expressed their support for domestic construction works to be included under the existing SOP Acts – subject to modification and education of the rights and obligations for domestic clients/homeowners.

Variable timeframes for payment and enforcement – when can payment be achieved?

The timeframes and procedural obligations for payment claims, payment schedules, adjudication responses, and adjudication decisions for each different SOP Act do not align consistently and this leads to confusion and frustration.

An example of such inconsistency is the timing obligations for adjudication responses. NSW, VIC, and SA all require between two and five business days, while QLD has the longest time periods of any jurisdiction – up to 30 business days.

QLD also separates itself from other states by also being the only state that splits its claims into ‘standard’ claims (under $750k) and ‘complex’ claims (over $750k) to determine the time period allowed for an adjudication response. While this results in increases to the time in which an adjudication decision is eventually provided to an applicant, the QLD model does offer more complex matters to be assigned an adequate level of resources and afforded more time to appropriately adjudicate the dispute in a timely way.

Complexity and admin burden

A business operating and working in only one state or territory will have less concern with the content and application of external models when compared against a business which operates across multiple jurisdictions. However, as noted in the Murray Review, the very nature of the construction industry means the contractors, subcontractors, suppliers, consultants, service providers, and material manufacturers will often work under complex and diverse commercial arrangements and likely across multiple states and/or territories.

On this basis, it is not controversial that most stakeholders would consider a uniform national SOP system to be preferential to the current system. Following the initial transition, moving from eight different SOP models to (essentially) one uniform model would naturally reduce the  burden for properly administrating compliance with SOP legislation by streamlining the rules and obligations being imposed.

Those operating on an interstate or national level would benefit from one SOP model as this would reduce unnecessary confusion caused by the complex set of rules that stem from having eight different models in the same domestic market.

Given the apparent flaws across the various domestic SOP systems and the unique political climate, now is an opportune time for stakeholders and policy makers to work collaboratively to effect meaningful change. Revision is required to address and resolve the issues discussed above (among others) to avoid further detriment to an already fragile construction sector.

What would a wish list for a uniform framework look like?

Constructing a national SOP model which contains uniform provisions needs to consider the unique needs of individual jurisdictions in order for it to be effectively adopted and enforced. Further, such a model needs to encompass not only a consolidation of current provisions but also needs to look beyond current drafting to consider the future needs of the industry to introduce provisions not currently provided in some or any jurisdictions.

We have developed a short ‘shopping list’ of the changes that should be prioritised which we consider are not only achievable but necessary. Beyond the below items, the federal government should continue to consult with stakeholders at all levels of government and the construction industry in the development of a national SOP model.

The scheme should have broad application to construction related activities

A persistent complexity to each respective SOP model has been defining what activities comprise ‘construction work’ and therefore which work and businesses are subject to the relevant SOP legislation.

There should be a consistent definition of ‘construction work’ and broader inclusion of construction related activities.

Uniform definitions

The definition for “construction work” is a cornerstone term that is likely to cause heated debate between the states and territories as it determines how wide the net is cast across the construction industry.

Therefore, our first recommendation would be to prioritise the drafting of “construction work” to produce one consistent list of the specific activities this would include. Implementing this recommendation would remove the complexity and inconsistencies currently observed in the different SOP legislations – especially in respect of terms which dictate the application of entitlements and obligations for participants

Broader application

In developing the definition for “construction work” it would be prudent to draft a term which includes additional construction related activities.

Including some of the currently excluded areas in the definition for “construction work” would be beneficial to the broader construction industry. In particular, we consider there is limited justification for excluding construction work in the mining sector from the SOP Act.

Effectively, this would allow contractors, subcontractors, suppliers, and service providers operating in these (currently) excluded fields to access the regulatory tools available under the SOP legislation – regardless of the industry in which they perform ‘construction work’.

We also consider the inclusion of domestic building works to be worthy of consideration.

However, given the nature of domestic building work, unsophisticated or ‘lay’ clients may not be conscious to the intricate workings of the SOP Acts. Therefore, including domestic building works into SOP legislation would require consideration of the needs of these participants; such as educational campaigns and information packs as part of all domestic building contracts and very clear and simple processes for adjudication of such disputes.

The above suggestions would make a real effort at fixing the currently insufficient protection for participants lower in the chain – especially those working in areas currently subject of the ‘mining exclusion’.

Mandated payment timing and accelerated adjudication processes – make maintenance of cash flow a priority

An ambition of any reform should be that all stakeholders in the industry gain clarity through:

• Uniform timing for submissions, responses, decisions, and other significant processes which currently have varying allowances to create one set of time allocations and limitations;
• Uniform language to ensure each jurisdiction uses the same drafting to facilitate ease of use of the legislation, increase understanding of rights and obligations of stakeholders, and utilise opportunity to remove inauspicious terms such as ‘reference date’;
• Uniform rights and obligations for all stakeholders regardless of their geographic location to reduce any bias or prejudice, especially when working on cross-jurisdiction projects; and
• Uniform project mechanisms such as the operation of project trust accounts.

The harmonisation of individual SOP legislations to create one model which would apply to participants working on projects nationwide would reduce the overcomplication of rules and rights currently experienced by industry participants. For example, a large head contractor carrying out works across multiple states would no longer be subject to the administrative burdens associated with executing and managing construction contracts across various legislations with overly complicated and inconsistent rules.

The streamlining of rules, rights, and obligations would make the processes concerning payment claims and schedules less confusing and payment dispute processes more accessible for all parties to a construction contract. This will undoubtedly result in adjudication applications and decisions becoming more efficient which will reduce wait times for payments being passed downstream.

Development of a national registry

A final recommendation is for the creation of a national registry to oversee the education, implementation, and enforcement of the uniform SOP system.

The registry would be responsible for:

Developing and maintaining a national adjudications catalogue/register:

• developing a national register of all adjudication decisions (as currently published in QLD) that is accessible to everyone and simple for all participants to understand; and
• developing working relationships with adjudicators to encourage decisions to be recorded as efficiently as possible to allow adjudication decisions to be transparent and available in real time.

Educating participants of the key provisions under the national SOP model:

• increasing awareness of the uniform model and build on the required knowledge of participant rights and obligations; and
• conducting education campaigns to ensure the market understands the key differences under the new national model and how the individual jurisdiction model no longer applies.

The current government bodies responsible are not all specifically building and construction departments – for example, the Office of Fair Trading is responsible in New South Wales and the Office of the Small Business Commissioner is responsible in South Australia. There should be alignment between government departments responsible for overseeing and enforcing the national and state specific SOP legislation to further increase consistency and reliability.

Conclusion

There may never be a more promising time for the harmonisation of state and territory legislation to develop a national SOP model. Regardless of the mechanism, to successfully introduce a uniform SOP model that achieves the consistency and clarity sought, involvement by the Commonwealth government in brokering consensus will be required.