It will come as little surprise to many that subcontractors are often forced to deal with head contractors who are larger and in a more powerful bargaining position than what the subcontractor is themselves.
Nor is it surprising that some subcontractors who find themselves in such positions feel a sense of hesitation when it comes to enforcing their rights with regard to payment under Security of Payment law.
With that in mind, a proposal to make it unlawful for a head contractor to attempt to bully or intimidate a subcontractor out of using the Security of Payment Act has been put forward in South Australia under a review of security of payment legislation in that state being conducted by the Small Business Commissioner.
In his consultation paper put out in June as part of the review process, the Commissioner put forth the idea of a new provision in the Act which would make it unlawful for a contractor to threaten to blacklist a subcontractor from future projects on the basis that the subcontractor in question had used the Act to recover payment. Any contractors found to partake in this behaviour would be subject to maximum fines of $100,000 or two years’ imprisonment.
The Commissioner's recommendation follows a review of the Building and Construction Industry Security of Payments Act (the Act) in South Australia by retired district court judge Alan Moss. In his report, Moss stated that he had received a number of oral submissions which stated that subcontractors were concerned about retribution in the event that they opted to use the Act. He added that there were a number of major firms who subbies believed would never employ a subcontractor again should the Act be used against them. Whilst he was unable to discern how well founded these fears are, Moss said he had little doubt that the fears were genuine.
In the paper, the Commissioner himself said that on the basis of his own conversations with subcontractors, he had formed the view that such behaviour is more widespread than what was generally acknowledged within the industry and that legislative intervention is needed in order to address the problem.
Not surprisingly, the proposal finds support from a number of organisations representing subcontractors. In its submission to the review, the Masonry Contractors Association says it supports the imposition of these penalties and indeed would further push for a Queensland style system of demerit points against a contractor’s licence for serious breaches of the legislation. Though it notes challenges associated with regard to evidence gathering, the Master Plumbers Association of South Australia also backs the move, arguing that the inference that there are types of intimidation by the head contractor to prevent the use of the Act ‘is in fact true’ and that standover tactics are ‘evident with discussions within the industry’.
Perhaps most enthusiastic of all is the National Electrical Communications Association of South Australia (NECASA), representing electrical and telecommunications contractors.
“NECASA agrees with the Moss Review in regard to the existence of a fear of retribution amongst subcontractors if they were to use the Act to recover payments in fact we have been informed on many occasions that intimidation occurs at the time of tendering prior to entering a contract,” the group said in its submission.
“We would therefore agree with the recommendation to include a penalty provision in the Act to bring about behavioural change…”
Not surprisingly, such proposals have elicited opposition from building industry lobby groups. The Master Builders Association of South Australia, for instance said the provision could "potentially become better known for its ability to waste investigative resources, resulting in the underlying scheme being maligned by prosecutors and the broader industry." The Housing Industry Association, meanwhile, argued that it is not aware of any widespread intimidation practices, at least within the home building sector of the market, and that any form of intimidation which does occur should be dealt with through the criminal justice system as opposed to specific provisions in a form of civil legislation such as the Act.
Other commentators agree that there are concerns.
Referring to the proposal as ‘another pointless piece of rubbish,’ Contractors Debt Recovery managing director Anthony Igra said these types of legislation often sound good on paper but in fact tend to be rarely used in practice and therefore tend to be of limited effect. In New South Wales, for example, there are significant penalties for making false declarations about subcontractor payment, provisions that allow for department officials to swoop in on contractors and confiscate documents in respect of subcontractor payments, as well as jail time for serial offenders with regard to false declarations. Yet no fines or prosecutions have actually been issued and no jail time has actually been served, he said.
Moreover, Igra said there were problems with the proposal at a practical level.
First, intimidation would be almost impossible to prove. For one thing, any form of intimidation often takes place via face to face conversations or phone calls and thus is not evident in writing. Moreover, there are problems associated with defining exactly what intimidation is and what would in fact constitute proof of this.
On any given project, contractors have the right to choose or not to choose to use a given subcontractor on future projects, Igra said. Therefore, a simple refusal to use a particular subcontractor on the next project cannot in itself be taken as evidence that bullying or intimidation has indeed occurred.
Moreover, Igra says, once use of security of payment becomes entrenched within the industry, people became used to the system and actual retribution against subcontractors using it has become rare or indeed virtually non-existent. Instead, he says regulators should focus their efforts upon broadening the use of the Act, which is widely used in states such as New South Wales but rarely used in South Australia.
“I don’t think intimidation happens at all as often as people think and if it does happen, you can’t prove it and people are unlikely to prosecute,” Igra said.
Others, too, have expressed reservations. The Society of Construction Law Australia, for example, says it is ‘of the view that there are significant practical and legal difficulties with framing the proposed offence to enable it to operate fairly and evenly for all parties.’ It noted that contractors make engagement decisions regarding subcontractors based upon multiple criteria and a subcontractor who is unsuccessful in tendering for work is likely to be one of multiple subcontractors who had in fact tendered.
Distinguishing a refusal to engage a particular subcontractor for work due to previous use of the Act as against for reasons of an alternative subcontractor simply making a better offer would be extremely difficult, the society argued. Where contractor/subcontractor relations have broken down over payment disputes, as well, distinguishing between the contractor who refuses to engage a subcontractor on future projects on the legitimate basis that the relationship has broken down as opposed to one who refuses to engage a subcontractor for reasons of punishment associated with use of the Act presents further problems.
Even some subcontractor organisations are wary. The South Australian branch of the Air Conditioning and Manufacturing Contractors Association, for example, says it is open to discuss what such a clause would look like but was concerned that the gathering of sufficient evidence in order to secure a successful prosecution would be extremely difficult. Because of this, AMCA says it would need to see further investigation into the issue before it would support the proposed change and it would not support the change ‘as a Stage One issue’ (out of a proposed three-stage process of reform).
Threats and intimidation against subcontractors using the Security of Payment Act to recover money owed to them, it seems, is an issue on the agenda for regulatory reform.
Thus far, however, it seems that there are doubts about how this would work and how effective or otherwise it indeed would be.