Changes to SA Security of Payment law – consultation phase

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The South Australian Small Business Commissioner is seeking feedback on possible amendments to the Building and Construction Industry Security of Payment Act 2009.  A number of changes, some significant in scope, are proposed.  These warrant close attention by principal contractors and sub-contractors alike.  Submissions are invited by 19 August.

Consultation Paper – Security of Payment

On 17 June the South Australian Small Business Commissioner released a “consultation paper” (the Paper), seeking feedback on proposed changes to the Building and Construction Industry Security of Payment Act 2009 (BCISOP Act).

The Paper (found here) outlines three possible “stages” of amendment.

Submissions are invited by Friday 19 August 2016.

For some of the proposed changes, the Paper provides only a general outline, without detail at this stage of what the exact statutory drafting would be.

It is clear, however, that the intention is for a significant shift in the regulation of the contractual relationship between principal contractors and subcontractors in the building and construction industry, and in the rights and risks each have in respect of payment for work.

Background –review of the BCISOP Act

The BCISOP Act, passed by Parliament in 2009, came into operation until 10 December 2011.  This Act is modelled on similar “security of payment” legislation in other States, in particular New South Wales (known as the “East Coast” security of payment model).

The BCISOP Act includes a provision which required the Minister to cause a review of the Act to be undertaken within three years of the date of its first operation.

Mr Alan Moss, a retired judge of the District Court, was appointed to conduct this review in December 2014.  Mr Moss delivered his report (the Moss Report, a copy of which is also available here) on 12 March 2015.

The Paper includes changes which are in accordance with the Moss Report recommendations, and others that go beyond the scope of those recommendations.

Why change the BCISOP Act?

The Moss Report recommended some initial changes to the BCISOP Act, and noted that “more hard information” was required before good policy decisions could be made about any further substantial change.  The recommendations included that the Commissioner be made responsible for collecting data on the operation of the BCISOP Act.

The Paper notes that after the delivery of the Moss Report, the Commissioner then sought further feedback and input from industry participants.

The Paper asserts that recent “high profile” collapses of major construction companies have “highlighted the need for reform that goes beyond” the Moss Report, and that there is an “expectation from small business subcontractors that Government will implement recommendations to minimise risks – many of which are outside their control and reflect an imbalance of power between small and big business”.

Many of the changes outlined in the Paper appear intended to strengthen and/or protect the position of sub-contractor claimants, with the likely effect of increasing the payment risk, or at least the regulatory burden, for head contractors (and in some cases, contract principals).

SBC’s Proposed Amendments

The paper outlines proposed changes to the BCISOP Act in three “stages”.

The Commissioner’s website states that:

It is anticipated that the expeditious implementation of stage one will result in a significant improvement in the operation of the Act and principal contractor behaviour. A heavier regulatory approach could be implemented by the Government under stage two, and possibly stage three, if the changes made under stage one fail to improve conduct in the industry and payment to subcontractors.

The “Stage 1” proposals include, amongst others:

the insertion of a penalty provision for “intimidation” (details are not provided, but the stated intention is to address an apparently prevalent “fear of retribution” if sub-contractors were to use the BCISOP Act “progress payment” mechanisms);
amendment to enable the Commissioner to publish adjudication decisions for public viewing;
“implementation of procedures” by Government to ensure subcontractors working on Government projects over $1 million are paid on a regular basis;
the development of a “Building and Construction Industry Code” (administered by the Commissioner) to provide alternative dispute resolution services;
creating a “secretariat” within the Commissioner’s office (at an estimated cost of some $900,000) to take over the role of nominating adjudicators for payment claim disputes under the Act; and
establishing an education program for the industry (recommended funding of $200,000 per annum).

The “Stage 2” proposals include, amongst others:

introducing a distinction between “simple” and “complex” claims, and procedures for each;
extending the BCISOP Act to apply to homeowner builders;
developing a “good behaviour” test policy for principal contractors bidding for government work in excess of $4 million (or $1 million in regional areas);
requiring directors of head contractors to execute statutory declarations confirming that subcontractors have been paid – these declarations to be published on the head contractor’s website and on a noticeboard at the worksite;
requiring a principal to pay money owed to a head contractor against whom a security of payment claim has been made by a subcontractor, into a “trust account administered by the Commissioner” pending resolution of the payment claim dispute; and
establishing trust arrangements for “all retention payments” for projects over $10 million.

The “Stage 3” amendments would involve the establishment of a “Project Bank Account” for State government projects.

Next Steps

The Paper reflects a clear intention on the part of the Commissioner to promote, and on the part of the State Government to then enact, significant changes to the BCISOP Act.

These changes are likely to have a significant impact on the relationships between head contractors and subcontractors, over and above the complex array of statutory and other requirements which already apply.

The “Stage 2” proposals include changes that could have significant impacts on cash flow and project management for head contractors – including, in particular, the proposals regarding retention funds, and to divert payments from principal to the head contractor into a trust account, where a payment claim has been made against the head contractor by a sub-contractor.

The already complex interaction between the BCISOP Act, the separate rights to assert charges and/or liens under the Worker’s Liens Act 1893 (SA), the insolvency laws, and the common provisions regarding progress payments and off-setting claims incorporated in standard building and construction contracts, will become only more complicated.

Those involved in the building and construction industry ought give careful consideration to the matters addressed in the Paper, take the opportunity to provide feedback or submissions as they see fit before the due date of Friday 19 August 2016, and otherwise continue to pay close attention to developments in this field.

Contacts

If you have any queries regarding this alert, please contact:

This Alert is intended as an alert only. It does not purport to be comprehensive advice. Readers should seek professional advice before acting in relation to these matters.