The Fantastic Fourth: another NSW Security of Payment amendment

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On 21 November 2018, the NSW Houses of Parliament passed the Building and Construction Industry Security of Payment Amendment Act 2018 (Amendment Act). This will amend some provisions of the Building and Construction Industry Security of Payment Act 1999 (Security of Payment Act).

Some of these changes are reversions to old systems, while others introduce completely new regimes. Readers will be forgiven for being irritated at yet another shock to the system, but it is vital to become familiar with all of these so that when they come into effect, businesses are ready for them. Directors and managers should take particular note as they will soon be open to criminal proceedings.

We wrote a pocket summary of these changes in December (see here).

Here we expand on the details, and we can now give some indication of when these changes will be activated.

Before going into the detail, readers should take note that as of 5 March 2019, none of these changes have come into effect.

When the changes will come in

This is the most important detail and so far, we don’t know. We will only know for sure after the fact, when the government makes the official announcement in the NSW Government Gazette.

However, a paper released by Fair Trading NSW in December 2018 has given some hints about when to expect these changes. It looks like there will be three main phases of changes throughout 2019 for principals and contractors to weather:

  • Phase 1 changes were proposed to come in during February 2019. This has not yet happened, so we can expect that any day now the changes will come;
  • Phase 2 changes were proposed for June 2019;
  • Phase 3 changes were schedule for December 2019.

When they do come into effect, they will not affect contracts already entered into. The old Security of Payment Act will still apply to these contracts.

Phase 1: February 2019

Investigation and enforcement powers for the Department

The most wide-reaching changes concern new powers of officers of the Department of Finance, Services and Innovation that can be used for the purposes of investigating, monitoring and enforcing compliance with the Security of Payment Act.

Authorised officers may now:

  • Require a person to provide them with information or records that they can obtain;
  • Require a person to answer questions on topics about which they are suspected of having knowledge, or to attend at a specified time and place to answer such questions;
  • Enter premises (including commercial premises without a search warrant);
  • When entering premises, make examinations, direct persons to produce records for examination, copy records, and seize anything suspected on reasonable grounds of being connected with an offence under the Security of Payment Act.

The Amendment Act also introduces offences for failing to comply with the above without reasonable excuse, or obstructing or delaying an authorised officer. The maximum penalty is $4,400 for a corporation and $2,200 for an individual.

There are even greater maximum penalties for providing information, answers or records that are false or misleading: $55,000 for a corporation and $11,000 for an individual.

Authorised officers will also be able to issue quick penalty notices for more minor infringements to the Security of Payment Act.

Liability of directors and managers

The Security of Payment Act already provides for offences of a corporation. See the next section for examples.

The Amendment Act now extends this liability to its directors, or for those involved in the management of the corporation (managers).

Where

  1. A corporation commits an offence against the Security of Payment Act, and
  2. A director or manager aids, abets, induces, conspires, is knowingly concerned in, or is a party to this offence,

then the director or manager will have committed an offence, which is subject to the same maximum penalty as applies to the corporation.

The Security of Payment Act also creates an “executive liability offence”. This is an offence involving specifically the supporting statement to a payment claim. These statements are required to be put forward by head contractors to certify that subcontractors have been paid.

Where:

  1. A corporation fails to attach a supporting statement to a payment claim, or the statement provided is false or misleading, and
  2. The director or manager knows this or is recklessly indifferent about it, and
  3. The director or manager has failed to take reasonable steps to prevent the offence.

the director or manager will have committed an executive liability offence. The maximum penalty is $22,000.

One example of failing to take reasonable steps under (3) is failing to ensure that a corporation’s employees, agents and contractors have supervision, and information and training about complying with the Security of Payment Act.

Higher penalties

Head contractors should take note that failure to include a supporting statement not only risks the payment claim to a principal being rendered invalid (which is the current law). Failure to include this is also now subject to tougher maximum penalties: $110,000 for corporations and $22,000 for individuals.

The same maximum penalties now apply where the supporting statement is provided by someone who knows that it contains false or misleading information. As mentioned, directors and managers may also be liable.

There are also offences relating to payment withholding requests. Currently a claimant in an adjudication application can issue a payment withholding request to the principal contractor, requiring them to hold back any money due to the respondent to cover a successful adjudication application. If a person receives this payment withholding request but is not, or is no longer, the principal contract, they must notify the claimant of this fact within 10 business days. The Amendment Act makes the penalties harsher: the maximum penalty for failing to do this is $5,500 for a corporation, and $1,100 for an individual.

There are similar increases in penalties where a claimant withdraws an adjudication application but fails to tell a principal who has received a payment withholding request, and where a respondent fails to comply with the direction by an adjudicator to give the identity and contact details of a principal contractor.

Adjudications reviewable for error

The Amendment Act now puts into writing what the courts have already decided. This is that an adjudicator’s determination, or any part of it, that is affected by jurisdictional error may be set aside by the Supreme Court. A jurisdictional error is where an adjudicator wrongfully decides a case that it has no authority to decide under the Security of Payment Act, such as where a payment claim is not properly served on the respondent or it is served without a supporting statement.

However, non-jurisdictional error, such as where an adjudicator makes a mistake about what the law is, is not reviewable.

No ball for companies in liquidation

A new change is that if a corporation claiming progress payments enters liquidation at any stage up until the final determination by an adjudicator, it will be prevented from claiming.

The NSW government is now denying the right of a corporation which is in liquidation to serve a payment claim, and is not allowing them to enforce a payment claim such as through applying for adjudication under the Security of Payment Act. This overrides some of a recent NSW Court of Appeal judgement.

A corporation that goes into liquidation while a determination is being considered is taken to have withdrawn the application.

There are uncertainties that NSW courts may need to resolve. Firstly, it appears that notwithstanding these changes, claimants in liquidation may still use the alternative to adjudication, which is enforcing a statutory debt that arises from unpaid payment schedules. Secondly, the Amendment Act does not appear to affect companies in voluntary administration. However, we may know for sure when the courts address these questions.

Phase 2: June 2019

Reference dates are no more

The Amendment Act removes the reference date system that has been the bane of many a claim.

It appears that the entitlement to a progress claim is no longer triggered by a reference date, but is merely triggered by that party undertaking to carry out construction work.

Under the new changes, contractors may serve a payment claim “on and from the last day” of the month in which work was carried out. If the contract provides for an earlier date of any month, the contractor may serve the payment claim from that date.

Only one payment claim per month

Unless the contract says otherwise, a claimant can only serve one payment claim in any particular month for work carried out in that month (previously one claim per reference date).

Parties can still include in a payment claim amounts that were the subject of previous payment claims, or include claims for work completed in previous months.

Payment claims after termination

Where a contract has been terminated, a contractor may serve a payment claim on or after the date of termination. This is a change from the existing law.

Endorsement of payment claims

In a return to the previous law, payment claims to be valid must state that they are “made under the Building and Construction Industry Security of Payment Act 1999”.

Shorter deadline for subcontractor payments

Where a party receives a payment claim from a subcontractor, the payment is due 20 business days after the payment claim is made (previously: 30 business days). If the contract provides for a shorter deadline, this shorter deadline will apply.

Withdrawal of an adjudication application

A claimant may now withdraw its adjudication application at any time before the application is determined. It can do this by serving written notice on both the respondent and the adjudicating body (and on the adjudicator, if one has been appointed).

Extended time for adjudicator’s decision

Under the original Security of Payment Act, the adjudicator must decide the application within 10 business days after notifying both parties that it has accepted the application.

The Amendment Act changes this where the respondent is entitled to lodge a response (e.g. where it had issued a payment schedule). The deadline for deciding the application is 10 business days after the respondent has lodged the response. If no response is lodged, the 10 business days start ticking at the end of the period that the respondent could have issued a response.

The adjudicator must now serve the determination on the claimant and the respondent.

Phase 3: December 2019

Owner-occupier exceptions removed

The Amendment Act makes changes so that the Security of Payment Act will apply to residential construction contracts between a builder and an owner-occupier of the building (that is, someone who resides or proposes to reside in the building).  Currently the Security of Payment Act does not apply to these contracts.

Codes of practice

The Minister for Innovation and Better Regulation may now prescribe a code of practice for adjudication bodies to follow. They will publish this on the NSW legislation website.

Bonus phase: May 2019

Lastly, Fair Trading NSW is also proposing changes to the Building and Construction Industry Security of Payment Regulation 2008 (Regulations).

These changes are scheduled to be drafted by May 2019, at which point stakeholders will be able to submit comments on these proposed changes.

  • Retention moneys for projects valued at over $20 million must currently be held in a trust account. It is proposed to reduce this threshold to $10 million, and to reduce annual reporting obligations on this trust account.
  • Fair Trading NSW proposes to amend the Regulations to require the keeping of trust account records by a head contractor, and to allow subcontractors to inspect these records if they have their retention held.
  • Liability of directors and managers of companies is proposed, for offences under the Regulations. These mainly relate to head contractors and trust accounts.

Conclusion

Fair Trading NSW has recommended that these changes be staggered over the course of a year to allow people in the industry to prepare for them. It is vital that everyone involved in construction and building business familiarise themselves with them. Even tiny non-compliances may have big consequences for adjudications. They can also give rise to criminal liability and severe penalties.

Businesses also need to be aware that authorised government officers will soon be perfectly within their rights to demand access to their documents and premises, and to demand answers to questions in relation to Security of Payment Act issues.

If you or someone you know wants more information or needs help or advice, please contact us on +61 (0)2 9248 3450 or email info@bradburylegal.com.au.

What are defects and how does a defects liability period work?

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Every builder dreams of the perfect build without so much as a single fault being found with their work. However, the reality of most construction projects is that at some stage issue will be taken with some or all of the work, and a complaint of a defect will arise.

It is therefore important to understand exactly what is meant by the term ‘defect’, how a contractual ‘defects liability period’ works in practical terms, and whether there is any right to claim damages for covering the costs of rectifying a defect.

What exactly is a ‘defect’?

Ordinarily where the term ‘defect’ is used in a construction contract, it refers to work that has not been performed in accordance with the standards and requirements of the particular contract.

Matters to take into consideration in determining if there is a defect may include:

  • the quality of any work and the standard of workmanship;
  • whether design directives have been followed and correct materials have been used; and
  • whether the works have been performed in accordance with contractual specifications and drawings.

The ‘defects liability period’ and how it works

Most experienced builders and contractors would be familiar with the term ‘defects liability period’, as the term commonly appears in construction contracts including contracts based on pro forma Australian Standards building and construction contracts.

A defects liability period is the time period specified in the contract during which a contractor is legally required to return to a construction site to repair any defects which have appeared in that contractor’s work since the date of construction. Usually a defects liability period will start either at practical completion or upon reaching standard completion.

Even if you are familiar with the term it is important to check each new contract carefully to ensure you understand how long the defects liability period is and what is expected of you during that period.

A contract will specify the length of any defects liability period. Anywhere from 12 to 24 months is a fairly common period, although longer or shorter periods are also possible.

The length of any defects liability period will depend on the nature of the build, the type of work a particular contractor carries out and whether it is likely that any inherent defects may take time to be detected. For example, it is not uncommon for contracts involving complex builds and large government contracts to specify longer defects liability periods than a simple domestic building contract.

Why specify a defects liability period in a contract?

A defects liability period gives both a principal and contractor a degree of certainty as to the process that will be followed for making good any defects which may not be apparent at the date of practical completion.

In addition, a defects liability period can also be useful in providing a means of making good any defects that are apparent at the time of practical completion but which either do not need to be rectified prior to practical completion or perhaps cannot be easily rectified due to the presence of other contractors and trades still working on the build.

Wherever possible, it also makes practical sense to have a contractor who carried out the original work return to fix any defect as this contractor will be familiar with the site and the work in question. This should mean that rectification by this contractor is likely to be the most cost-effective approach to any rectification work. Also, a contractor may prefer to be the sole party authorised to carry out rectification work within a given period as the quality of the work and any subsequent repairs will potentially affect their reputation.

Once a defect is fixed does a new defects liability period commence?

Whether a new defects liability period applies to rectified work will depend on what the parties agreed, as reflected in the terms of each particular construction contract. It is important that both the principal and contractor are clear on this point prior to entering into a contract.

What right to damages exists for covering the costs of rectifying a defect?

Ordinarily any defect would be a breach of contract.

There have been several cases where the courts have considered whether the existence of a defects liability period in a contract alters or removes the need for a common law right to damages, with individual cases appearing to turn on their particular facts and the behaviour of the parties to the contract.

Generally, damages for any defects will cover the amount needed to ensure that the work is brought up to the standard that a contractor was initially required to provide under the contract.

Depending on the particular circumstances of a build, damages could include:

  • Recovery by the principal of any reasonable costs of demolition and rebuilding work; and
  • Any secondary or incidental costs, for example loss of income if the property is unable to be rented out due to the rectification works, or ancillary costs such as relocation expenses (such as where tenants are involved) or additional consultant’s fees directly related to the rectification works.

If circumstances dictate that carrying out rectification work in respect of the defects is not reasonable, for example if a building is so damaged or defective as to make the work needed impossible or impractical to carry out, a principal may be able to recover damages for any loss in the value of the building. In very limited circumstances, they may also claim for loss of enjoyment or inconvenience suffered, if there is no actual loss in value of the subject property but the principal, for whatever reason, is unable to use and enjoy the building as previously planned.

Help is available

It is always prudent to seek advice prior to entering into any contract to ensure that you fully understand your rights and responsibilities.

If you have already entered into a contract or carried out work and a complaint has now been made that your work is defective, you may be concerned about both your professional reputation and any potential financial implications for your business.

If you find yourself in a situation where this could be an issue, we recommend you seek legal advice as soon as possible.

If you or someone you know wants more information or needs help or advice, please contact us on +61 (0)2 9248 3450 or email info@bradburylegal.com.au.

The devil with no detail: rectification of mistakes in contracts

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In contract law, words used in a written instrument are powerful, but they are not invincible. One of the first major judgements of 2019 in New South Wales has reminded us all of one way to defeat even very clear wording of a contract.

This is the process called rectification, and it came up as part of a number of issues that the highest court in NSW had to consider. The case was Seymour Whyte Pty Ltd v Ostwald Bros Pty Ltd.

It has been said that rectification arguments are on the rise, as commercial contracts become more complex, records of contractual negotiation and correspondence are now electronic-based, and Ctrl+C and Ctrl+V have become prolific contract drafters.

Whether this is true or not, the case Seymour Whyte v Ostwald Bros and its lessons of rectification serve as a code red for everyone doing business with written contracts.

The case

The NSW Roads and Maritime Services was the head contractor for a roads project. The parties to this dispute were a contractor Seymour Whyte Constructions Pty Ltd (Seymour Whyte) and its subcontractor Ostwald Bros Pty Ltd (Ostwald Bros).

The parties had either through neglect or confusion inserted in their written contract two deadlines for Seymour Whyte to issue a payment schedule:

  • The box for Item 21 was ticked, which required payment within 30 days of a payment claim (which was to be made at the end of the month);

and

  • Special Condition 9.1 was inserted, requiring the payment to be made within 15 business days of receiving a payment claim.

On 28 July 2017, Ostwald Bros issued a payment claim for over $6.35 million.

Seymour Whyte replied with a payment schedule on 11 August 2017, in which it admitted it owed $2.50 million.

In a move that it will be regretting, Ostwald Bros delayed serving the Adjudication Application until 27 September 2017. Depending on which of the (1) or (2) due dates above applied, it was potentially going to be made out of time. The NSW Security of Payment Act s 17(3)(d) requires adjudication applications to be served within 20 days of a due date for payment, or they are invalid.

The arguments of the parties

Seymour Whyte argued that the Special Condition should apply (option (1) above). This deadline would have made the adjudication application invalid for being out of time. Option (1) would mean 18 August 2017 was the due date for payment, and therefore the adjudication application deadline was 15 September 2017.

Unsurprisingly, Ostwald Bros argued that option (2) above should apply, which would make the due date for payment 30 August 2017, and so the adjudication application was due on 27 September 2017. Its adjudication application would be valid.

This was a tricky argument to make by Ostwald Bros, as Special Conditions to a contract will usually take priority over General Conditions. Ostwald Bros argued that the courts should “rectify” the contract by deleting Special Condition 9.1. If there was no Special Condition, then the General Condition would apply.

The primary judge agreed with Ostwald Bros, and ordered rectification. Seymour Whyte appealed to the NSW Court of Appeal.

Common law rectification

Common law rectification was discussed but not argued in this case. However, it is useful to know that if an error in a written instrument is clear, and it is clear what a reasonable person would have understood the parties to have meant, then a court will correct the error. An example is where “lessor” is used in the contract, but it is clear that the parties meant “lessee”.

The law sometimes gets a bad reputation for rigidly following the literal meaning of words. However, courts will not do this if this literal meaning is absurd, and the intention of the parties is self-evident.

As Leeming JA pointed out in the case, “even in a formal legal document, the parties will make mistakes which are nonetheless readily identified and corrected.”

Equitable rectification

Courts in some cases recognise the separate process of equitable rectification. Equitable rectification is a process whereby a court will make a written instrument “conform to the true agreement of the parties where the writing by common mistake fails to express that agreement accurately”.

When argued successfully, it results in the actual intention of the parties overriding the “objective” intention of the parties (what is written in the instrument), a rare thing in contract law.

The Court of Appeal in Seymour Whyte v Ostwald Bros neatly spelled out what a court will (and will not) do when a party argues something went wrong in the contract negotiation and drafting.

A party arguing for rectification must prove three things:

  1. That at the time of executing the written instrument, the parties to the instrument had an “agreement” in the sense of a common intention; and
  2. That the parties intended that the written instrument was to conform to this common intention; and
  3. That the written instrument does not in fact reflect this common intention because of a common mistake.

The parties need not have actually communicated to each other this common intention; courts will look to words or actions.

As will become clear, equitable rectification is a very difficult argument to make. Courts have said that they are wary of rectifying an agreement, based on the logic that if the parties make the effort to write up their agreement, this should end the debate. Courts are also wary about aggrieved parties later claiming that an agreement it signed is inaccurate, to serve its purpose.

To be clear, this is not an argument of miscommunication. To convince a court to rectify a mistake, a party must successfully argue that a common intention was held by all the parties up until execution of the instrument. This common intention must be precise and not general.

Rectification in the case

The director of Ostwald Bros was an important source of evidence of Ostwald Bros’ subjective intention, as he had signed the instrument with the company secretary. However, he was not available to give evidence in court. This may have been fatal to the argument.

The Court considered the negotiating process of the parties. As usually happens in contract negotiation, both parties in their Departures Tables had argued back-and-forth about what the due date for payment should be. Ostwald Bros had initially pressed for “within 10 business days of the end of the month”. Seymour had rejected this, and it pushed for “within 30 business days” as being “Non-negotiable”.

Ironically, in the court proceedings the parties completely reversed their previous positions.

It was almost Seymour Whyte’s undoing that it had written “Non-negotiable” in pushing for 30 days. However, the NSW Court of Appeal was persuaded that in other provisions being negotiated, Seymour Whyte had also written this, and had later agreed to compromise on them. Nevertheless, it was a warning about what parties write during negotiations and how this can come back to haunt them.

Even though Seymour Whyte had sometimes paid Ostwald Bros 30 days from the end of the month, there was no evidence of this being an “invariable practice” or a misapprehension about the terms of the instrument.

Finally, the Court considered that as Items at the end had been ticked in a way that was internally inconsistent, it appeared that the Item 21 deadline of 30 days had been ticked in error.

The Court concluded that there was no case for rectification. Special Condition 9.1 remained in the subcontract, it prevailed over Item 21 and so the adjudication application was made out of time.

Takeaways

Extraordinarily, throughout the three hearings of Seymour Whyte v Ostwald Bros, no party could show the court direct evidence about how the Special Condition 9.1 came to sneak into the contract in the first place. The likeliest explanation was that a Commercial Manager of Seymour Group had instructed the lawyers to prepare a pro forma subcontract, compliant with a NSW government head contract in force at the time of negotiations.

Regardless of what happened, this is the first lesson: stray contractual provisions and special conditions slip through the cracks all the time, especially in the age of “copy and paste”. Lawyers and businesspeople need to be on high alert for this, it can save a lot of anxiety and legal fees.

Clearly the important takeaway is that parties cannot rely on courts fixing what may seem like obvious errors in drafting. Although it can happen, it is difficult and not to mention costly to persuade a court to do this. If there is an error, no matter how small it may seem, it is essential to negotiate a solution with the other party before a dispute arises. Once this happens, parties typically grab at every advantage they can and dig their heels in.

Parties must also be careful about how they talk about the written instruments that they sign. Courts will scrutinise all kinds of behaviour, including negotiating documents and correspondence between the parties, for evidence of intention or for evidence that a mistake has been made in drafting. Parties should negotiate believing that anything they say might later be important in a dispute.

Seymour Whyte may have won, but it was not at all a comfortable victory and slight differences in the negotiations may have changed the outcome of the case.

If you or someone you know wants more information or needs help or advice, please contact us on +612 9248 3450 or email info@bradburylegal.com.au.