Are Security of Payment Laws Being Weakened? 3

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Thursday, June 30th, 2016
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At first glance, when you look around the political landscape, ideas about security of payment legislation in Australia being weakened or undermined might appear to be rather strange.

Indeed, in many ways, it would seem as though if anything, momentum was going the other way. Virtually all opposition parties have thrown their support behind recommendations from the senate inquiry into construction industry insolvency to move toward a federal system for security of payments legislation.

As part of that process, these parties have also thrown their support behind the idea of trialing the use of special purpose bank accounts known as project bank accounts. These accounts act like trust accounts and ring fence payments made by the principal on particular projects above a certain threshold are to be paid out directly to each individual party according to their share of the relevant work performed to which the payments in question relate.

With limited trials of these accounts already underway in several states, pockets of progress from a subcontractor perspective can be seen in some areas at the state level. Federally, even though the coalition has dithered in responding to the senate inquiry’s recommendations, the idea that they might at least adopt some of those recommendations in its next term if reelected is not out of the question.

Yet in a number of ways, the protection available under security of payment legislation appears to be being eroded.

First, there are moves to abolish the authorised nominating authorities (ANAs) which receive applications for adjudication, nominate adjudicators to hear claims and assist relevant parties regarding the administrative aspects of the adjudication process. ANAs were abolished in Queensland in 2014, and more recently the Liberal Party has moved to do likewise in South Australia. Instead, in Queensland’s case, claims are now handled by the Queensland Building and Construction Commission, which assigns cases to adjudicators from a pre-approved pool. Under the Liberals’ bill in South Australia, meanwhile, adjudication applications would be handled by Business SA.

Such moves are supported by industry lobby groups, who complain that ANAs have a conflict of interest in their dual role as recipients of applications and appointers of adjudicators. In response to the moves in South Australia, for example, Master Builders Association of South Australia chief executive officer Ian Markos said his organisation had heard reports of parties ‘shopping around’ for adjudicators who were likely to view their claim favourably. Again in that state, Liberal MP David Knoll, who introduced the bill, also argues that Business SA has extensive experience in working with small business and thus will be well placed to support claimants and other parties with the application process.

Whilst the removal or otherwise of ANAs does not in itself erode any of the protections available to subcontractors under SOP legislation, both Adjudicate Today managing director Bob Gaussen and Contractors Debt Recovery managing director Anthony Igra say the abolition of ANAs in Queensland has led to a situation whereby claimants are not receiving the support they need from an administrative point of view in terms of managing the process. They add that the number of claims ‘falling over’ has ballooned out as a consequence.

As for arguments about bodies such as Business SA being best placed to provide support, Gaussen says security of payment legislation is detailed and complex and that it is ANAs rather than various fair trading type bodies of state governments which are generally endowed with in-depth experience and dedicated personnel resources in this area.

Gaussen and Igra say claims of conflict of interest do not stand up to scrutiny. No specific case to answer has ever been made against any ANA, Gaussen says. Furthermore, if ANAs did have any commercially vested in interest in favouring any one side, it would actually be head contractors since they themselves are the ones who tend to lodge the larger claims on which ANAs generally make higher levels of profit. Given that head contractors are indeed the respondent rather than the claimant in most adjudication cases, this would actually  mean ANAs had an incentive to be respondent friendly rather then claimant friendly in most cases, should bias exist.

Igra is equally dismissive, pointing out that fees earned by ANAs are not dependent upon the outcome of adjudication decisions and that at any rate, ANAs would have no way of identifying  individual adjudicators who were and were not claimant friendly even if they wanted to do so.

A close look at the facts appears to bear this out. Thus far in the current financial year, 303 adjudication decisions have been reached in Queensland whilst 269 applications have ‘fallen over’ or been withdrawn prior to a decision being reached. Of the applications withdrawn, only 46 were withdrawn for reasons of the matter being settled between the parties whilst a whopping 177 applications have been withdrawn because of ‘validation issues’ (errors in completing the claim).

By contrast, during the 2013/14 financial year prior to the abolition of ANAs, more than 2.5 applications reached decision stage for every application that was withdrawn. Given this, the idea that a lack of support provided to claimants following the abolition of ANAs is causing a blowout in the number of applications which fail to reach decision stage does seem to be well supported in factual truth.

Moreover, these figures appear to be getting worse. Thus far this calendar year, only 86 claims have made it through to decision stage whilst a whopping 108 have fallen over prior to a decision being reached.

Evidence from Queensland also does not support ideas about ANAs choosing claimant friendly adjudicators. Were claims of claimant friendly bias under the former ANA regime in Queensland to be substantiated, then one would have expected fewer decisions to have gone the way of claimants since ANAs were abolished in late 2014. In fact, if anything, more of the decisions which are reached actually appear to have going the way of claimants. Thus far this financial year, for example, the overall value of the adjudicated amount which has been awarded to claimants is just under half of the total value of claims with regard to which a decision has been reached. Compared to most years when ANAs were in operation over recent times, this figure is actually quite high.

Beyond ANAs, time frames for the payment of claims are being extended, whilst those in which the claimant has to make a claim are being reduced. In New South Wales, for example, the default due date for payment which applies where no contractual terms are in place with regard to payment terms has been extended from 10 business days or 14 natural days to 30 business days or 42 natural days. This has effectively meant that that subcontractors under default payment terms now have to wait another month in order to either expect payment or commence adjudication proceedings.

In Queensland, reforms in 2014 saw time frames allowed for respondents to provide a payment schedule in response to payment claims extended from 10 to 15 business days in the case of ‘complex’ claims (a claim of more than $750,000 or a claim relating to either latent conditions or time related costs). Those in which respondents have to provide an adjudication response, meanwhile, have been extended from five business days to 10 in the event of a standard claim or 15 in the event of a complex claim. For complex claims, adjudicators can further extend the time frame to provide an adjudication response by up to an additional 15 business days. Effectively, this means time frames within which claimants will receive payment under the adjudication process have been extended by up to one week in the case of standard claims (non-complex claims) and up to six weeks in the case of complex claims.

Simultaneously, time frames in which claims can be made are shortening. In Victoria, times in which claims under SOP legislation have to be made were shortened from twelve months to three months in 2007. In Queensland, that same reform process which saw timeframes allowed for respondents increase also saw those in which claimants have to make a claim fall from 12 months to six months.

As with the removal of ANAs, this is generally welcomed by industry groups. Responding to questions about the impact of all this upon subcontractors late last year, Master Builders Association of Queensland executive director Grant Galvin, for example, said the extra time frames along with a new right to introduce new material in addition to that included in the payment schedule were necessary as head contractors on major projects were finding themselves inundated with claims and adjudication notices from multiple subcontractors. In that light, he said, the existing time frames had been inadequate and had imposed an unfair burden upon head contractors.

Igra, however, says longer time frames merely add to the time taken for subcontractors to obtain payment.

“They are extending time frames for submissions but at the same time, they are shortening the time in which a claim can be made,” he said. “They are generally extending time frames because they think it makes is fairer whereas in fact it makes no difference except to make the poor old claimant wait longer.”

Subcontractors Alliance president Les Williams sees several of the above changes as part of a broader and longer term campaign on the part of peak industry groups to erode the protections of small businesses within the sector regarding the receipt of prompt payment for services rendered. Whilst ANA removal was part of this, Williams said, any focus solely upon this area misses a larger point about the rights of suppliers and subcontractors being eroded more broadly.

The amended legislation in Queensland in 2014, Williams said, attacked the payment rights of small business, the right to recover retention money deducted from their earnings and the fair right to adjudication. He said any notion that attempts to remove ANAs in South Australia constitutes anything other than a planned attack on small business payment rights, meanwhile, is ‘nonsense.’

“Like QLD there were no supporting statistical  analysis or impact assessments carried out – just smear and input from groups that benefit from ANA’s abolition,” he said.

In a number of ways, momentum toward increasing protection for subcontractors and other claimants under security of payment legislation is growing.

In several other ways, however, it appears that the ability of SOP legislation to protect subcontractor and supplier payment rights could be being undermined.

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3
  1. Trent

    Just another reason why Australia has never landed on the moon.

  2. Les Williams

    Good article Andrew. It is also good to see federal LABOR — XENOPHON – GREENS AND LAZARUS have supported the recommendations to implement uniform security of payment laws to stop peak industry groups from eroding industry small business rights at a state level. I think we need to be clear Security of Payment does not exist –just the name.
    The increased red tape and costs argument put forward by peak industry groups is complete rubbish. It doesn't wash. In recent times we have rightfully seen increased red tape and costs associated with compliance with WH&S and environmental laws but we cannot commit to ensuring that 350,000 industry small business that employ 2,000,000 are paid for the work they do. That is obscene and an indictment on our politicians and peak industry groups.
    The use of pre-packaged liquidation coupled with small business unsecured payment terms make them a prime target for fraud now rife in the industry. But still they watch. What needs investigation also is the involvement of IP's and corporate advisors who feed of this yearly scam.
    I notice, but not surprised, that the creditors of Tagara in South Australia are to get no dividend whilst the debt has increased. The South Australian small business commissioner seems intent on blaming the subcontractors for lack of knowledge. Great support from the office that is supposed to represent Small Business. This individual appears to support the removal of ANA's there and further erosion of subcontractors rights. He should be on the front foot demanding protective legislation for his constituents — but no — too difficult He needs to resign.

  3. Darcy

    I actually wonder whether the complex claims system in QLD has actually worked. Current figures suggest that the process is drawn out ie up to 91 working days (4 months ! QBCC April 16 results) The question should be asked is it really benefiting the industry..? as it was solely introduced to protect the PC against large sub contractor claims and has since backfired for Principle Contractors to completed their claims… which effects the supply chain and cash flow of those underneath them.. I realy dont know whether the 2014 reform in QLD is a base model.. or a white elephant for our national industry….. the current results are interpertable on the effectiveness of the Newman government to actually implement change and industry reform…