A sunshine state for subcontractors: Queensland security of payment reforms

The security of payment landscape has changed dramatically in Queensland in recent years. A number of measures are in now in effect which tilt the balance slightly towards claimants, and require respondents to be very vigilant so that their interests can be protected. Two other initiatives, the subcontractors’ charge regime and the project bank account regime, have also been modified.

These changes were all brought by the Building Industry Fairness (Security of Payment) Act 2017 (Qld) (BIF Act), which received royal assent on 10 November 2017. Its provisions have recently come into effect.

The BIF Act repeals the previous regime, which is the Building and Construction Industry Payments Act 2004 (Qld) (repealed Act).

Security of Payment Changes

Even though the passing of the BIF Act is old news, the security of payment provisions only came into operation very recently, on 17 December 2018. They have retrospective effect, meaning the changes affect contracts even where they were entered into before this commencement date. The exception to this is where a payment claim was issued before this date and the matter remains “unfinished”. This will be for example where an adjudication is yet to be completed.

In general, the latest security of payment regime in Queensland is more claimant friendly. This is because the BIF Act allows claimants more time to make claims, and it requires faster and more comprehensive responses to claims by respondents.

This is consistent with the stated goals of the BIF Act. The Explanatory Memorandum stated that the goals of the changes were to improve the security of payment regime for subcontractors, to improve the accessibility of the security of payment legislation, and to increase the oversight of the Queensland Building and Construction Commission over the building industry.

Changes to “payment claim”

Under the BIF Act, payment claims no longer need to be “endorsed”, meaning they do not need to state that they are made under the Building Industry Fairness (Security of Payment) Act 2017.

An invoice can be a payment claim so long as it is a written document, it identifies construction work or related goods and services the subject of payment, it states the amount payable, and it requests payment (here, simply using the word “invoice” counts as a request).

Developers and contractors need to be very careful. An apparently unremarkable “invoice” might be a payment claim, which will trigger the security of payment regime. Further, there are serious consequences for respondents should they fail to respond to one of these (see below).

Many of the older rules about payment claims were copied over to the BIF Act now in force. Payment claims may still include amounts that were included in a previous payment claim. They must be given within a period of six months after the construction work was completed, unless the construction contract provides for a longer period of time (in which case, this longer period applies).

Reference dates after termination

The old reference date system is still in operation. Claims for progress payments may be made on a date or on dates provided for by the contract. If the contract does not state any date for claiming progress payment, such claims may be made on the last day of each month of work. Only one payment claim can be made on each reference date.

However, the BIF Act now addresses the murky situation of termination. This situation is not altogether clear in some states, but at least in Queensland we have clarity.

Now, where a construction contract is terminated, and the construction contract prevents reference dates from surviving past termination or is silent on the issue, the BIF Act states that a reference date will arise on the date that the contract is terminated.

It is assumed it does not matter which party terminates the contract, though the BIF Act does not say either way.

Payment schedule

The requirements for a valid payment schedule remain broadly unchanged. However, the time limits for a respondent to issue a payment schedule have been changed.

Under the repealed Act, different times for responding to payment claims were imposed depending on whether the claim was “standard” (equal or below $750,000 excl. GST) or “complex” (above $750,000 excl. GST).

Now, no matter if a claim is for $1,500 or $1.5 million, a respondent has 15 business days to respond to a payment claim. Where the contract stipulates less than 15 days to provide a payment schedule, this reduced time limit will apply.

This is more time to respond to standard payment claims, but for some complex payment claims it is less time to respond.

Consequences of no payment schedule

Failure for a respondent to provide a payment schedule prevents the respondent from giving an adjudication response. This is old news.

However, now in Queensland if the respondent does provide a payment schedule and the matter proceeds to adjudication, the adjudication response by the respondent cannot contain reasons that were not already included in the respondent’s payment schedule.

Previously the repealed Act allowed for the introduction of new reasons for withholding payment where the claim for payment was complex (over $750,000). The change to prevent the use of reasons not previously stated brings the Queensland regime in line with other East Coast regimes like NSW and Victoria.

However, unusually in Australian jurisdictions, failure by a respondent to provide a payment schedule is now also:

• an offence, with a maximum penalty of $13,055 for individuals or up to $65,275 for corporations

and

• a ground for disciplinary action under the Queensland Building and Construction Commission Act 1991 (Qld).

The only time a respondent does not need to issue a payment schedule is if the respondent pays the payment claim in full on or before the due date for the progress payment.

If the respondent disputes the claim or intends on paying it but after the due date, it is essential that it issues a payment schedule.

No second chance for payment schedule

The BIF Act has abolished the so-called “second chance” that a claimant was required to give to a respondent prior to commencing adjudication or court proceedings.

Previously, under the repealed Act, where a respondent failed to provide a payment schedule by the deadline in response to a payment claim, the claimant was required to notify the respondent that it may serve a payment schedule. The respondent then had five business days to take advantage of this second chance and produce the payment schedule. Only when it failed the second time was the claimant permitted to adjudicate or litigate the claim.

This is no longer the law.

Now, where no payment schedule is received by the claimant on time, the claimant can proceed immediately to adjudication.

If the claimant wishes to instead use court proceedings to recover the unpaid portion, it must give a warning notice of at least five business days to the respondent that the claimant intends to litigate. However, this is not a second chance – it does not allow the respondent to provide a payment schedule.

Extended time to make adjudication applications

The deadlines for claimants to make an adjudication application were extended by the BIF Act as follows:

• Where the respondent fails to issue a payment schedule and fails to pay the full amount stated in the payment claim – 30 business days after the due date for payment, or 30 business days after the last day that a payment schedule could have been given by the respondent, whichever is later (previously: 10 business days);
• Where the respondent states an amount owing in the payment schedule that is less than the amount stated in the payment claim – 30 business days after receipt of the payment schedule (previously: 10 business days);

In one situation, the deadline remains unchanged from before. This is where the respondent issues a payment schedule but fails to pay the whole or any part of an amount stated therein. This deadline for making an adjudication application remains 20 business days after the due date for payment. Some sources, including the explanatory memorandum of the BIF Act, state incorrectly that this deadline is 40 business days.

The upshot is that for respondents, the period of time after a payment claim is received during which the prospect of an adjudication looms, has been increased.

In addition to these time requirements, the adjudication application made by the claimant must:

• be in approved form,
• be made to the registrar,
• identify the payment claim and payment schedule to which it relates,
• include the prescribed fee, and
• be served on the respondent.

One example of form is that for claims under $25,000 the submissions cannot exceed 10 pages in total.

Adjudicator

Adjudicators must now accept a referral to decide an adjudication application unless they have a reasonable excuse. They must do this within 4 business days of the referral being made.

Adjudicators now have the power to consider the conduct of both the claimant and respondent and allocate costs for the adjudication based on this. The adjudicator can consider a number of factors, including whether the adjudication was commenced or defended without reasonable prospects of success, and any reasons given by the respondent for not making the progress payment.

Parties must be careful about adjudicating claims without merit or unnecessarily delaying these processes, or they risk paying the other party’s costs.

Changes beyond Security of Payment

Apart from the amendment and consolidation of security of payment provisions, the BIF Act also introduced or amended a number of other regimes. Two are discussed below.

Project bank accounts for large contracts

The BIF Act introduces the Project Bank Accounts (PBAs) regime, for government building and construction projects valued between $1 million and $10 million (but not engineering infrastructure projects).

The regime will also expand and become mandatory for non-government projects valued at over $1 million, where over half of the contract price is for building work. The government has said this expansion will occur sometime in 2019 but more details are not yet available.

What are PBAs? They are bank accounts where progress payments and retention monies are held in trust; they cannot be touched by principals and head contractors in the way that regular moneys can. This is to protect subcontractors from head contractors, who traditionally receive the totality of the funds and sometimes fail to pass this down to subcontractors.

Penalties apply for head contractors undermining these reforms, such as where they fail to set up a PBA when required, or they end a PBA without authorisation. The maximum penalty in either case is 500 penalty units, which can amount to $326,375 for a corporation.

Subcontractors’ charges

The BIF Act also repealed the Subcontractors’ Charges Act 1974 (Qld), and took for itself many of the provisions of this Act. Most of the old subcontractors’ charge regime lives on, with a few small changes.

Ordinarily, a developer or principal owes money to builders (“contractors” in the BIF Act), who themselves owe money to subcontractors. Payment for work flows from the top through this hierarchy.

The subcontractors’ charge regime allows certain subcontractors to lodge charges over moneys that are otherwise owed by a principal to a contractor higher up in the hierarchy. The charge can be lodged by providing a notice to the contractor and the developer. The contractor then either accepts the liability, in which case the developer pays the subcontractor directly, or otherwise the contractor disputes the claim, and the amount is secured while court proceedings decide the matter.

Subcontractors should note that deadlines apply for issuing the notice, and once the money has passed from the developer to a contractor, it cannot be the subject of a charge.

This subcontractors’ charge regime remains broadly unchanged under the BIF Act. However, there are new provisions introducing certain offences:

• It is an offence for a contractor to fail, within 10 business days of being requested, to provide certain information about the party who engaged the contractor and certain information about securities in existence for the contract.
• Similarly, it is now an offence for a contractor to fail to give within 10 business days a written response to a notice by a subcontractor.

Both offences attract a maximum penalty of $2,611 for an individual and $13,055 for a corporation.

Conclusion

Overall, principals and contractors must be on their toes when receiving documents from other contracting parties.

The Queensland government has made significant changes to the security of payment procedure.

The BIF Act has combined three of the largest pieces of building regulation into one piece of legislation, putting the security of payment regime, the subcontractors’ charge regime, and the project bank account regime under one roof.

It has also introduced offences that penalise contractors and principals for their failure to comply with these regimes.

These changes affect every building contract in some way and are progressively coming into effect. It is essential that builders and developers are across them, as ignorance of these changes will not exempt them from some hefty financial penalties.

If you or someone you know wants more information or needs help or advice, please contact us on +612 9248 3450 or email [email protected].