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.
