Security of Payment, Statutory Trusts and Unfair Contract Terms: The Murray Review – Building Trust and Harmony

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By Scott Higgins, Partner, Carlo Garofali, Consultant and Natasha Joukhdar, Lawyer

The Murray Review

The Murray Review (Review) was released by the Commonwealth Government on 21 May 2018, which was commissioned to identify legislative best practice, and to improve consistency in Security of Payment (SOP) legislation across Australia.  The title of the Review by Mr John Murray AM: “Building Trust and Harmony”, is apposite.  Murray hopes that when adopted, his 86 Recommendations will imbue:

  1. trust in the SOP system;
  2. trust in the construction industry across all stakeholders; and result in the
  3. harmonisation of the disparate permutations of SOP regimes which exist currently.

The Review acknowledges that current SOP regimes can be characterised into two categories:

  1. The West Coast Model (existing in WA and NT).
  2. The East Coast Model (loosely based on NSW legislation which is adopted by the remaining states).

Although not expressly in response to it, the newly proposed NSW reforms make considerable reference to the Review.

Problems afflicting the Industry despite SOP

Participants in the Review reported persisting problems afflicting the Building and Construction Industry, notwithstanding current SOP regimes.  These include:

  1. Except in QLD, no jurisdictions provide effective ‘security’ of prompt payment where a party higher up the contractual chain becomes insolvent.
  2. Complex legislative regimes, which discourage participation and cause confusion.
  3. Dissatisfaction with the process of appointing adjudicators; the adequacy of their qualifications, training and grading of adjudicators; and the variable quality of adjudication decisions.
  4. The imbalance of bargaining power within the contractual chain, coupled with the accepted practice of passing on contractual risks, giving rise to inclusion of unfair contract terms which purportedly prevent payment for construction work performed.
  5. Alleged intimidation and retributive conduct by head contractors which discourage subcontractors from pursuing their entitlements.
  6. Late payment continues to be a persistent, major issue for the construction industry.

The Review addresses three Policy Considerations:

  1. Preserving cash flow by enshrining the right to receive prompt payment of progress claims (by largely aligning with the East Coast Model).
  2. Providing a quick and efficient adjudication process under the auspices of a new Regulator (resulting in superior decision making by adjudicators, thereby enhancing overall industry confidence in the process).
  3. Protecting, and not merely enshrining, the entitlement to prompt payments via a cascading statutory trusts model (shunning the Project Bank Account (PBA) system existing in QLD as being too administratively onerous).

A list of each of the 86 Recommendations can be found here.  This article will now go on to discuss some of the more significant recommendations.

Alignment of processes

Many of the Recommendations strive to achieve alignment of the processes and administration of SOP.  Others deal with redressing unsatisfactory determinations, and the poor performance of adjudicators who deliver them.  The appointment of a Regulator to oversee adjudicator accreditation, as well as administering a review mechanism of determinations, is an overdue initiative to rejuvenate the waning confidence in the SOP system.  (Note that the NSW reforms are silent on this aspect other than the planned imposition of a Code of Practice.)

Another Recommendation will also permit participants to agree on an accredited adjudicator in certain circumstances.  However, parties who appoint their own adjudicator will be precluded from seeking a review of a determination of that adjudicator.

Cascading Statutory Trusts

Possibly the most contentious is the recommendation calling for a cascading statutory trust model.  Murray here has resurrected the clarion call by Collins QC in his Inquiry Report from six years ago (2012).  This initiative would apply to all parts of, or cascading down, the contractual payment chain for projects over $1 million.  Most stakeholders cited in the Review are supportive of the statutory trust model, in lieu of the PBA system used in QLD.

Murray says that it is time for governments to stop “kicking the can down the road”, to take advantage of the “momentum” for change, and to therefore take uniform action to establish a statutory trust regime.  This is no doubt the rationale for the Consultation Paper recently released by the NSW Government on the issue (see here for more details).

The same level of enthusiasm is lacking from some sections of the industry (particularly head contractors) that are likely to bear the brunt of any such reforms.

Murray reported that many subcontractors were actually opposed to a cascading statutory trust environment for fear of undue administrative burden.  Whilst they may support an arrangement that obliges entities higher than themselves to hold their monies in trust, they were perhaps less enthusiastic to embrace a system that imposed similar constraints upon themselves.

Just as a cascading statutory trust regime would protect the cash flow of stakeholders down the payment food chain, the Recommendation will have profound ramifications upon the cash flows of those at the top of the chain.  Head Contractors will be forced to park substantial amounts of cash which they would ordinarily receive, without being able to utilise it freely during the ordinary course of their businesses, potentially adding significant financing costs to their projects.

Of course this restriction on the ability of a contractor to use progress payment moneys as working capital is precisely the point.  The current practice of many head contractors “robbing Peter to pay Paul” to supplant moneys to support other projects, is one which Murray declares should be condemned, not condoned.

The reality is that small margins characterise the industry.  Head contractors take on inordinate risks for a small percentage of compensation which may or may not eventuate.  Implementation of cascading trusts will require participants to be better capitalised.

This is a noble goal to strive for in the name of sustainable construction industry, but it is inevitable that the process of getting to that point will prove challenging and is unlikely to be without a significant cost impost to projects given the fundamental changes to current industry practices that are involved.  The elevation of subcontractors to secured creditors in the event of an insolvency would be a substantial improvement for small business, but at what cost?

For further discussion see our article on NSW reforms.

Perhaps what is truly required is a robust debate about the shortcomings of entrenched industry practices giving rise to the high incidence of insolvency in the first place.  Such a debate would necessarily include the following topic.

Unfair Contract Terms

This Recommendation may surprise many stakeholders, both by its ramifications as well as its existence in the first place.  Rather than relating to the administration or mechanism of SOP, it instead seeks to bolster the contractual right to prompt progress payment under SOP, for work done under a construction contract. In other words, it constrains the freedom of contracting parties to agree upon their own terms.

Murray highlighted the prevalence of imbalanced or one-sided and aggressive time bar clauses, which often characterise the scenario where one party offers a contract document on a take-it-or-leave-it basis.  This Recommendation states:

The legislation should void a contractual term that purports to make a right to claim or receive payment, or a right to claim an extension of time, conditional upon giving notice where compliance with the notice requirements would:

  1. not be reasonably possible; or
  2. be unreasonably onerous; or
  3. serve no commercial purpose.

It is clear that Murray seeks to redress an imbalance of bargaining positions of many parties to construction contracts prevalent in the industry.  However, to do so via a SOP reform route has perhaps taken many by surprise.

Supporters would advocate that if a party has performed work legitimately under a construction contract, then that party is entitled to a progress payment for that work, and should not be prevented from receiving that payment because of onerous or unfair notice provisions and time bars which serve little practical utility. Detractors would counter that respondents to claims should have the benefit of timely submission of claims at the time of the relevant causative event and that legislators should be reluctant to interfere with the contractual rights of commercial parties.

Domestic Housing

Another contentious recommendation is that seeking to extend SOP legislation to enable residential contractors or builders to make a progress claim against an owner-occupier.  This initiative would redress the current incongruence of a builder being subjected to SOP claims by its subcontractors, yet itself being prevented from seeking reciprocal relief against its clients.

The reality is that many governments have been reluctant to attract political controversy by enacting such an initiative. There is compelling argument that “mum-and-dad” owner occupiers, who typically are ignorant about the industry, could inadvertently suffer through their innocent contraventions of SOP they would be bound to participate in.  They are likely to be ignorant about standards of workmanship and defects, for instance.  Moreover, their cash-flows are typically linked to home loan draw-downs, rendering owner-occupiers at the mercy of valuers, who are actually in control of those funds that might be the subject of a SOP claim.

If the scheme is to be extended, perhaps a threshold of contract value should be established (say $1 million).  This would ensure that only those owner-occupiers with sufficient sophistication and resources to properly administer a construction contract would be obliged, and therefore better suited, to comply with the rigours of SOP.

Harmonisation hurdles

Murray reported that there is much momentum behind the desire to attain legislative best practice, to align the disparate legislation regimes around the country.  Whilst this may be true, the ability of State and Territory stakeholders to put aside their vested interests in the interests of achieving any form of harmonisation is perhaps the immediate hurdle to surmount, let alone settling upon the extent of what that harmonisation might entail.

Next Steps

According to a Communique issued by the Australian Building Minister’s Forum (BMF) after the most recent meeting on 10 August 2018, Ministers committed to working collaboratively to improve consistency in security of payment regimes across jurisdictions.

However, the prime focus of the BMF will actually be developing an implementation plan for reforms aimed at ensuring the safety of the building and construction sector, in response to the Building Confidence Report, commissioned by the BMF in 2017.

It appears then NSW is leading the way for ratification of many Murray Review’s Recommendations, which are contained in the Building and Construction Industry Security of Payment Amendment Bill released by the NSW Government for public comment on 21 August 2018.  Harmonisation across the Commonwealth, however, is unlikely to occur any time soon.

For further information, please do not hesitate to contact us.

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