(above image: AI generated via freepix)

The author of a review into security of payment laws in Australia has slammed a decision by the current government to walk back on its previous commitment to support statutory deemed trusts as a means of protecting subcontractor payments in the construction sector.

Seven years after the final report of a national review of security of payment laws was published in 2018, the current Labor Government has responded to the report.

But the government has refused to support a key recommendation regarding the implementation of deemed statutory trusts.

This is despite Labor having previously promised to support these during the 2022 election campaign.

The refusal has drawn criticism from the report’s author, John Murray AM. Murray is the former chief executive officer of Master Builders Australia is a leading construction industry payment dispute adjudicator.

During an interview with Sourceable last week, Murray expressed disappointment at the Government’s response.

He said the refusal to support deemed statutory trusts is another example of the Federal Government failing to act on the critical issue of contractors failing to pay subcontractors and suppliers by due dates and instead using money owed to subcontractors and suppliers for their own working capital.

“It’s a missed opportunity and it’s another example of the Federal Government – whether it’s a Liberal government or whether it’s a Labor government – failing to confront a fundamental problem which bedevils the industry,” Murray said.

“It’s a fundamental problem that relates to the appalling and immoral payment practices that undermines the integrity of the industry.

“By failing to confront the issue of contractors misusing funds that don’t belong to them – treating funds that rightfully belong to subcontractors as if it were their (the contractor’s) money and treating it as free working capital – it leaves the subcontractors and the tradies high and dry, particularly where the contractor becomes insolvent. It continues to place tradies under unnecessary and undue financial strain.

“All this is against the backdrop of unprecedented insolvencies within the industry.

“It’s so disappointing that tradies continue not to receive the backing of the Commonwealth – particularly the ALP that had raised such high expectations that it would, in its current term, implement statutory trusts and then has shrunk away from carrying out what they had promised to do.”

Ongoing concern about poor payment practices

Murray’s comments come amid ongoing concern about the degree to which construction constructors and subcontractors are failing to pay subcontractors, sub-subcontractors and suppliers what they are owed by the due dates on construction projects.

To assist subcontractors and others to recover payments which are due under their contract, states and territories have introduced security of payment (SOP) legislation.

Over the past couple of decades, however, there has been concern that the level of protection which is being delivered through SOP may not be adequate.

In 2016, Murray was commissioned by the then Coalition Government to conduct a review of security of payment legislation around the country. The aim was to identify legislative best practice, with a view to:

• improving consistency in security of payment legislation across the country; and
• maximising the level of protection which is afforded to construction industry subcontractors to ensure that they are able to obtain payment for work which they have completed or for goods and services which they have supplied.

In his final report published in 2018, Murray made 86 recommendations.

Of these, two concerned the introduction of deemed statutory trusts.

A deemed statutory trust is a legal mechanism through which all payments received by head contractors or subcontractors in respect of either goods supplied by or work carried out by subcontractors, sub-subcontractors or suppliers are automatically treated as trust funds for the benefit of those parties who provided the relevant goods or performed the relevant work.

The aim is to prevent contractors and subcontractors from misusing money owed to subcontractors, suppliers and others for their own working capital.

Such trusts operate throughout Canada and in many US states.

In Australia, the concept of statutory trusts was first raised by then WA Law Reform Commissioner Wayne Martin in 1996.

In addition to the Murray report, the introduction of deemed statutory trusts has been recommended in several other inquiries.

These include:

• the Inquiry into Construction Industry Insolvency in NSW chaired by Bruce Collins, a Queens Counsel, in 2012.
• The 2015 inquiry into insolvency in the Australian construction industry undertaken by the Senate Economics Reference Committee; and
• a review into security of payment law in Western Australia conducted by barrister John Fiocco in 2018.

As part of his report, Murray recommended that:

• A deemed statutory trust model should apply to all parts of the contractual payment chain for construction projects which are valued at more than $1 million; and
• The Australian Government should work with states and territories to establish a nationally consistent statutory trust model.

Murray said that deemed statutory trusts were preferable to project bank accounts on account of the administrative and compliance burden which is associated with the latter.

Since the report’s release, actions have been mixed.

Across individual states and territories, a significant number have implemented reforms which accord with report recommendations.

New South Wales, Victoria and Western Australia, for example, have all amended their legislation to incorporate some of the report recommendations. The ACT is currently considering how they can amend their legislation to incorporate some of the report recommendations.

However, no state as of yet has introduced deemed statutory trusts. Meanwhile, in Queensland, the newly elected Liberal Government has frozen that state’s ongoing implementation of the less preferred project bank accounts pending that government’s review into security of payment laws in that state.

At a Commonwealth level, however, the response has been woeful.

Despite commissioning the report, the former Coalition Government failed to respond to its recommendations before being voted out in 2022.

The latest response by the current Labor Government comes at the end of its three-year term.

The response was released on a Friday afternoon – something which is usually done when governments wish to avoid drawing attention to the matter in question.

In its response, the Government noted that responsibility for state and territory laws rests with individual states and territories.

As such, the Government did not respond to specific recommendations but provided an overview of current and future actions.

It said that actions taken at a federal level to improve subcontractor payment protections include:

• working with the construction industry and unions on a number of matters affecting business and workers in the sector through the National Construction Industry Forum
• implementing prompt payment practices on Commonwealth construction projects
• strengthening prohibitions against unfair construction contract terms
• consulting on options to address unfair trading practices
• supporting the adoption of e-invoicing
• working to combat illegal phoenixing activity
• considering changes to insolvency laws; and
• engaging with states/territories in respect of security of payment laws and processes through means such as the Building Ministers Meeting.

(above image: AI generated via freepix)

Government backflips

However, the Government has refused to support the introduction of deemed statutory trusts in its response.

This is despite Labor’s policy platform in the 2022 election stating that the Murray recommendations ‘including in implementation of statutory trusts, must be implemented immediately’ (see p133 here).

In its response, the government argued that:

• views surrounding deemed statutory trusts are ‘diverse’
• implementation of deemed statutory trusts could involve a significant administrative burden for contractors and suppliers who would be subject to trust requirements; and
• deemed statutory trusts may not be deliver effective protection in cases where trust obligations are not followed or are ignored.

The Government further argued that statutory trusts may limit the ability of contractors and subcontractors to use money which they receive through client/head contractor payments for working capital purposes to fund the ongoing operations of their business.

This, it said, could lead to further business pressures upon those who are subject to trust requirements. In turn, this could impact both the viability of such businesses along with their ability to grow, invest and innovate.

“The Government notes the significant complexity of deemed statutory trusts and the diverse views of stakeholders and jurisdictions,” the Government said in its response.

“Undertaking reforms as significant as statutory cascading trusts at a time of economic change could see an unintended consequence of increasing project funding costs and increasing insolvencies, particularly for small and medium participants in the sector.”

Murray says that this response is disappointing.

He expresses particular disappointment at the aforementioned argument about trusts limiting contractor ability to use money owning to subcontractors for their own working capital purposes.

This, he says, is exactly the point of statutory trusts.

Preventing contractors from diverting money owed to subcontractors toward their own working capital purposes is exactly the reason why trusts are a good idea, he said.

“That’s exactly what the statutory trust is intended to do,” Murray said.

“It’s not the contractor’s money. It’s money that rightfully belongs to the subcontractors.

“When a client pays a head contractor, it pays the head contractor the money in circumstances where the contractor has submitted its payment claim to the client saying that it (the contractor) has carried out the work but where 85 percent or maybe more of that work has been carried out by subcontractors.

“When a client pays the head contractor, 85 percent of it rightfully belongs to the subcontractors. If the subcontractors had not carried out the work, the client would not have paid the head contractor the money.

“So, for the Treasury – if you don’t mind the Treasury – to say that one of the real problems with statutory trusts is that it will prevent a party from continuing to have a free lunch, well hello what’s going on here?”

Plumbers give thumbs up

Despite the backflip on statutory trusts, a leading organisation representing plumbers has given a positive appraisal of the Government’s response.

In a statement, Master Plumbers Australia and New Zealand (MPANZ) welcomed several aspects of the response.

These include an increase in funding for the Australian Securities and Investments Commission to crack down on illegal phoenixing activity, a focus on reducing payment timeframes and stronger protections against unfair contractual terms.

However, MPANZ stressed the need to fully implement the Murray recommendations and for stronger measures to protect subcontractors against non-payment.

“We strongly support the Federal Government’s commitment to protecting small businesses from unfair trading practices,” MPANZ spokesperson Nathaniel Smith said.

“Plumbers and other small contractors often face significant challenges when dealing with larger corporations, and these reforms will help level the playing field.

‘We look forward to working with the Government to ensure these protections deliver real benefits to our industry.”

Enjoying Sourceable articles? Subscribe for Free and receive daily updates of all articles which are published on our site

Want to grow your sales, reach more new clients and expand your client base across Australia’s design and construction sector?

Advertise on Sourceable and have your business seen by the thousands of architects, engineers, builders/construction contractors, subcontractors/trade contractors, property developers and building industry suppliers who read our stories across the civil, commercial and residential construction sector