Contract foundations set for shake

WESTERN Australia’s construction industry could be in for a shake-up due to legislation currently being debated in State Parliament.

The Construction Contracts Bill aims to provide security of payment to subcontractors and applies to all participants in the construction process from the client down to the smallest subcontractor’s suppliers. New South Wales and Victoria already have similar legislation.

Industry is widely supportive of the legislation, especially because nobody in the construction chain is excluded.

In fact, industry has been waiting several years for such legislation. The Court Government first proposed it in 1996 and the Gallop Government made an election promise to introduce such legislation.

The Opposition is supporting the bill, although it plans to introduce an amendment regarding home building.

The bill excludes contracts worth less than $200,000 that are covered by the Home Building Contracts Act.

One of the bill’s key provisions is the removal of the pay-when-paid or the pay-if-paid terms from contracts. Such terms have posed a major problem for subcontractors and are said to be relatively common within the industry.

It also prohibits any clause allowing for payment after 50 days.

An attempt has also been made to allow subcontractors to recover their goods from building sites where the principal contractor has gone broke.

There are also terms that will be implied into contracts to cover a raft of issues such as interest on overdue payments and ownership of goods.

A low-cost rapid adjudication process that can produce a court-enforceable decision has also been included.

Some legal experts are predicting a bonanza for lawyers as building companies strive to come to terms with the new legislation and conduct contract audits.

However, Phillips Fox partner Robert Shaw said most standard form contracts used by the industry included many of the implied terms.

The rapid adjudication process could also spawn a new industry – adjudicators.

There were more than 400 adjudications in the first 14 months of the NSW ‘security of payment legislation’.

The Institute of Arbitrators and Mediators is seen as the body most likely to lead the adjudicator push.

Institute member Graham Anstee-Brook said the institute would ensure that it was the first cab off the rank.

“If the NSW experience is anything to go by it could be quite a business,” he said.

Mr Anstee-Brook is the convenor of the institute’s training program for adjudicators.

“It’s not a matter of how many adjudicators we can find. It’s a matter of how many we can logistically train,” he said. 

One area the bill does not cover is boat building – something that was included in an earlier draft of the legislation. It also quarantines some of the major Burrup Peninsula and other downstream processing projects.

The legislation specifically excludes “constructing any plant for the purposes of extracting or processing oil, natural gas or any derivative of natural gas, or any mineral bearing or other substance”.

Housing and Works Minister Nick Griffiths said mineral processing and natural gas extraction processes had been excluded for now because that was what industry wanted.

“During the public comment period representations were made by the mineral processing industry for the bill not to apply to the construction of mineral processing plants,” he said.

“Because the bill has been based on mainstream building and construction industry contracts, and the effect of the bill on specialist mineral processing contracts was uncertain, the Department of Housing and Works recommended that these contracts be excluded from the bill at this stage.”

There have also been suggestions that the bill was fast-tracked into parliament due to the collapse of Consolidated Constructions.

The Government denied this was the case, pointing out that the legislation went to parliament on March 2, the day Consolidated announced it was in financial difficulties.

Master Builders Association executive director Michael McLean voiced a concern that the bill could pave the way for unfair contracts legislation, which has been causing problems for the construction industry in Victoria.

The Government has denied that it has any plans for such legislation.

Minter Ellison partner Greg Steinepreis said there was a concern that head contractors could circumvent the pay-when-paid prohibition.

“In NSW there were cases where builders were using contracts saying subcontractors would be paid when they [the head contractor] received a certificate from the client rather than payment,” he said.

“I don’t see anything in this bill that prevents that.”

Freehills senior associate Toby Browne-Cooper said that problem had prompted an overhaul of the NSW legislation.

“The WA provisions do not appear to be as broad as the NSW equivalent in this regard so it will be interesting to see how they are addressed in practice,” he said.

Mr Griffiths said construction contracts had a number of mechanisms that determined when a payment was due to be made.

“The bill does not restrict the parties to a contract agreeing on when a payment is made. The bill does limit the time in which the payment must be made after the payment comes due to a maximum of 50 days,” he said.