BUILDING AND CONSTRUCTION INDUSTRY

SECURITY OF PAYMENT BILL

Extract from Hansard (SA)

12th September 2007

The Hon. NICK XENOPHON obtained leave and introduced a bill for an act to provide for entitlements to progress payments for persons who carry out the construction work or who supply related goods and services under construction contracts; and to make a related amendment to the Commercial Arbitration and Industrial Referral Agreements Act 1986. Read a first time.

The Hon. NICK XENOPHON: I move:

That this bill be now read a second time.

This is an important piece of legislation for the many South Australians who work in the state's construction industry. It is also important in that we have been left behind the rest of Australia in the way that security of payment legislation has been dealt with. That has given a significant disadvantage to those who work in the industry, and it has caused significant hardship. Fundamental reform with respect to the issue of security of payments is long overdue. For the benefit of members, I will refer to a paper delivered in the recent national conference of the Institute of Arbitrators and Mediators of Australia, `New Horizons in ADR' (that is, alternative dispute resolution) held at Glenelg from 1 to 3 June 2007.

At that conference, the Adjudication Registrar for the Building and Construction Industry Payments Act 2004 of Queensland, Michael Chesterman, provided a definition of security of payment in his paper entitled, `Pushing out the boundaries'. In the paper that the BSA released in December 2001, it states:

The term `security of payment' is a term used mainly by subcontractors to describe the need to secure long-term guaranteed arrangements for payments for work performed or material supplied. The term arises from the contractual nature of the industry which operates under a hierarchical chain of contracts. The financial failure of any one party in the contractual chain can cause a domino effect on other parties, with those at the bottom most at risk in the event of a client or contractor defaulting.

The collapse of one element in the contractual chain or the failure to pass on moneys owed can create enormous financial strain on the other parties. Extremely tight margins in the industry, restricted cash flow and payment default can force contractors to carry bad debts or, if the burden of debt becomes too much, force contractors into some form of insolvency.

So, in a nutshell, that provides an explanation of what security of payments legislation is about, and the industry's urgent need for it in South Australia.

At the outset, I would like to acknowledge the cooperation and the work that has been done with key stakeholder bodies with whom I have been working for almost the past 12 months. I would like to thank Larry Moore from the National Electrical and Communications Association (NECA); Christopher Rankin from the Air Conditioning and Mechanical Contractors' Association; Bernie Biggs from the Association of Wall and Ceiling Industries of South Australia; Daryl Curyer from the Association of Wall and Ceiling Industries of South Australia; and Roger Stainer—initially and more recently from Port Worthington—from the Plumbing Industry Association of South Australia.

To give you an idea of how many people those organisations represent, NECA has some 500 members who represent 3 200 workers. The AMCA has 44 members who directly employ over 400 people and indirectly employ a further 2 000 subcontractors and suppliers. The AWCI has 750 members who represent 2 000 to 3 000 workers. Also, through the Master Painters, Signwriters and Decorators Association—represented by Bernie Biggs—there are a further 2 000 workers in that industry. There are 400 members of the Plumbing Industry Association who represent 2 000 workers. So, the groups I have consulted and worked with over the past year represent approximately 12 200 people working in the South Australian construction industry. South Australia-wide, it is estimated that there are 32 000 building contractors and an additional 22 000 industry employees.

At the outset I would also like to express my gratitude to Connie Bonaros from my office. She has spent many hours working with industry representatives and has played a key role in developing this legislation in terms of both its drafting and getting all the parties together, and I am very grateful to her.

In relation to the scope of this bill, not only is it the result of an extensive consultation process with key representatives of the industry, it is also an acknowledgment that this reform is long overdue—Bernie Biggs has told me that he has been lobbying for these changes for the past 19 years. It seems that South Australia is the last state to embrace these changes, and I will shortly give a run-down of the measures that have been implemented in other states. To put this in perspective, the efforts of these representative bodies follow on from recommendations made by the Cole Royal Commission into the Building and Construction Industry of several years ago. This royal commission was the first national review of the conduct and practices of the building and construction industry in Australia and its report was handed down in February 2003—some 4½ years ago.

The report demonstrated an urgent need for structural and cultural reform in various areas of the industry, including payment practices. The absence of security of payment for subcontractors and the need for legislation to improve security of payments to subcontractors were among some of the findings concerning conduct and practices within the industry. According to the Commissioner, it quickly became apparent that the issue of security of payment was one that critically affected the ability of participants in the industry to make a living and to be rewarded for work they have performed and services they have provided.

In the course of their investigations, commission investigators were repeatedly told of the suffering and hardship caused to subcontractors by builders who were unable or unwilling to pay for work from which they had benefited. It was also noted that contractors who experienced payment problems were often small companies or partnerships that frequently did not have the expertise or resources to enforce their legal rights because enforcement would require protracted litigation against much better resourced entities with much deeper pockets. Consequently, subcontractors that had operated profitably and well for many years could be forced into liquidation through no fault of their own—often with devastating consequences for the owners of these businesses, their families, their employees and their creditors. The issue is particularly important given that nearly one-third (or some 36 per cent) of the nearly 700 000 people engaged in the industry Australia-wide are subcontractors or own-account workers—most of whom (94 per cent) employ less than five employees. As the Commissioner observed, these subcontractors are `frequently undercapitalised and depend upon continuous cash flow for their continued existence'.

One of the recommendations made by the commission to address the problem of poor payment practices was that the commonwealth enact a building and construction industry security of payments act. While the commonwealth has not enacted legislation to address poor payment practices and security of payment, state legislation now exists in all mainland states other than South Australia. This is despite appeals by representatives within the industry for the government to enact similar legislation here.

In February 2006 the minister, the Hon. Michael Wright, wrote to these representatives advising them that an assessment was being undertaken to consider whether proposals for security of payment arrangements were desirable for South Australia. To date, and to the best of my knowledge, none of these groups has been contacted for the purpose of taking part in a consultation process with the government, nor have they received any further substantial feedback regarding assessments undertaken. I believe that, if nothing else, introducing the bill in this parliament will at least hurry up the process and will give real substance to the concerns of the groups referred to and to the many thousands of workers they represent.

I will give two examples of what is currently occurring. These two cases highlight the sorts of problems that local South Australian businesses are facing as a result of our lack of security of payment legislative framework, and are cases that I believe would not occur in any other mainland state. The first involves a ceiling and wall company which was awarded a government project in 1999. After months of delay and substantial variations brought about through no fault of its own, the company finally completed its work in May 2000. It was anticipated that there would be a payment of $75 000 by the end of June 2000, but when the payment was not made with the principal contractor a meeting was requested with the builder and his construction manager, who advised the company that there were no funds available to pay it for its work.

At a subsequent meeting the ceiling company offered to accept $20 000 less in payment in order to dispose of the matter but the offer was rejected. The matter eventually went to court, and my office has spoken to the principal of the company who told us this week that he had spent close to $750 000 in costs to pursue the matter, finally receiving a judgment in his company's favour. I am also advised that the builder in this case, who originally owed the company $75 000, spent close to $2 million defending the claim. This is something that could have easily been avoided with security of payment legislation.

The second case, which is currently before the courts, involves the construction of a car park. In this case, payments to the subcontractor during the course of the project were slow but consistent until a few months before the project was complete, when they stopped altogether. The contractor is owed some $230 000 and his business has spent approximately $70 000 in legal fees over the last three years. I am advised that the builders involved in the case have had almost a dozen actions taken against them and, in at least two of these cases, the subcontractors have been forced to close down their businesses as a result of non-payment. Several others have abandoned their legal claims due the prospect of long and costly court battles.

It is also worth reflecting on comments made by the Chief Justice of the Supreme Court of South Australia, the Hon. John Doyle AC, who, at the same conference (the Institute of Arbitrators and Mediators conference held in South Australia earlier this year), presented a paper entitled `Dispute resolution: is civil litigation part of the solution or part of the problem?" The Hon. Justice Doyle discussed at length the cost of litigation in civil cases and the cost of getting access to justice, in a sense, for those who wished their matters to be resolved. Chief Justice Doyle stated, in part:

Underlying the two propositions that I put before you is the idea that ADR is the senior partner, and civil litigation before the courts is a junior partner, to be consulted only if the senior partner cannot do the job.

The Chief Justice also made reference to the types of litigation that would be amenable to alternative dispute resolution. He made it very clear that there is a danger in over-simplifying matters in terms of finding an easy solution. However, he did make this point:

It is worthwhile trying to identify those categories of litigation as to which early review and tailor made approaches will be attractive to the players. That really is the issue. Unless we do that, nothing will change. And I mean here players on the record, and those off or behind the record, such as insurers, litigation funders, relevant industry groups and the like.

I believe those comments by the Chief Justice are very relevant to this industry. The fact that every other mainland state has security of payments legislation indicates that that is the approach we ought to adopt—an approach that is long overdue. It is also important to note that, in relation to what has occurred elsewhere, Tasmania, which does not have security of payments legislation, has had a government-initiated discussion paper out since last year. Clearly, that state is moving along.

We are the worst state in the commonwealth in terms of advancing at a government level the issue of security of payments legislation, and that is why we must act. The purpose of this bill is to reform payment behaviour in the building construction industry and ensure that payments owed to contractors by builders and developers are made on time and without having to go to court, thereby alleviating the hardship caused to contractors who do not have the cash flow to allow them to keep working while waiting for payment.

A particularly important aspect of this bill is the establishment of a dispute resolution process, which is designed to be efficient, expedient and much cheaper than litigation. These features are especially important in levelling out the playing field between contractors, subcontractors and suppliers on the one hand and builders or developers with deep pockets on the other. The bill achieves these objectives by ensuring that a person who carries out construction work or who supplies related goods and services under a construction contract is entitled to receive, and is able to recover, specified progress payments in relation to the carrying out of that work and the supplying of those goods and services.

The person entitled to receive a progress payment is granted a statutory entitlement to that payment in circumstances where the relevant construction contract fails to do so. The bill establishes a procedure for this that involves:

the making of a payment claim by a person claiming payment;

the provision of a payment schedule by the person by whom the payment is payable;

the referral of any disputed claim to an adjudicator for a determination;

the payment of the amount of the progress payment determined by an adjudicator; and

the recovery of the progress payment in the event of failure to pay.

In particular, the bill mandates good payment practices in the building and construction industries by:

prohibiting payment provisions in contracts that slow or stop the movement of funds through the contracting chain;

applying fair and reasonable payment terms into contracts that are not in writing;

clarifying the right to deal in unfixed materials when a party to the contract becomes insolvent; and

providing an effective and rapid adjudication process for payment disputes.

As outlined above, the building and construction industry is made up of various consultants, contractors, subcontractors and suppliers, all of whom work together to deliver buildings and infrastructure. This mutual dependence and cooperation makes security of payment a critical foundation for the industry. Failure to pay at any link in the contracting chain can be crippling to subcontractors and suppliers who are waiting to be paid for their work.

In many instances, they are forced to weigh up their prospects of timely payment with accepting a drastically reduced payment in an effort to avoid costly battles. In his paper entitled A Summary of Adjudication Acts in Australasia, Philip Davenport (an expert in this field) makes reference to the various models that are available Australia-wide. I will precis the work of Philip Davenport, but New South Wales, Victoria, Queensland, Western Australia and the Northern Territory have all enacted legislation regarding security of payment, and the ACT is also moving in that direction. The acts can be divided into two broad categories in terms of how they deal with security of payment.

There is what can broadly be called the `east coast model', which is New South Wales, Victoria and Queensland, and the `west coast model' (for want of better words), which is Western Australia and the Northern Territory. Further details of the difference between the two models will be outlined shortly. Tasmania is yet to enact security of payment legislation, but a report prepared by Stenning and Associates Pty Ltd in June 2006 entitled Security of Payment in the Building and Construction Industry, Final Report for the Minister Administering the Building Act 2000 recommended the introduction of legislation similar to the east coast model.

The report was released for public comment, and this process was finalised in October 2006. I understand that Tasmania is waiting for the government to act. In the ACT in June this year the ACT government announced funding over four years to establish a security of payment scheme for the ACT building and construction industry. The first stage in establishing the ACT scheme would be to undertake a scoping study of schemes in other jurisdictions in order to identify a model that would be most suitable for the ACT.

According to the Minister for Industrial Relations in the ACT (Hon. Andrew Barr), once that model is determined it is likely that the ACT government will also introduce legislation for the basis of the scheme. In New South Wales, Victoria and Queensland all three acts provide a similar statutory right for the party who is contracted to provide construction work or related goods and services, and the claimant is to make progress payments against the other parties to the contract—the respondent. They all create a statutory debt if the respondent fails to serve a payments schedule within 10 business days, and they allow the claimant to suspend work if the statutory debt is not paid on time.

The procedure for adjudication is very similar under each of those acts. The main difference in the Victorian act is that, after a determination, the respondent has the option of providing security for the adjudicated amount rather than paying it. The main difference in the Queensland act is that the act creates an adjudication registrar and the adjudicators and authorised nominating authorities must be registered. The Western Australian and Northern Territory acts (the second category of acts; what I describe as the west coast model) are in almost identical terms. Overall, they differ radically from the east coast acts; and, apart from bearing little resemblance to the acts, they provide, I believe, much less protection for the person who undertakes to carry out construction work or to supply goods and services.

Each of the adjudication acts, except the Western Australian act and the Northern Territory act, gives the party who carries out construction work a statutory right to make progress claims and provides that, if a payment schedule is not provided within the prescribed time, there is a statutory debt. Under the WA act, the contractor has a right to a progress payment only if the construction contract provides that right. The contract provides how the principal is to respond to a claim for payment. If a response is not provided or not provided within the time prescribed in the contract, the contractor is entitled to the claimed amount only if the contract so provides. There is no automatic statutory debt as exists under the other acts.

The liability to pay is no more than a contractual liability. The WA act and the Northern Territory act have no provision similar to that in the other acts to the effect that the claimant can recover the amount as a debt and, in proceedings to recover the amount, the respondent cannot bring any cross-claim against the claimant or raise any defence in relation to matters arising under the construction. There is nothing in the WA act or the Northern Territory act equivalent to that in the other acts to give the claimant the right to suspend work if there is no payment schedule and the claimed amount is not paid on time. The right to suspend work given by the WA act arises only if the principal fails to pay the contractor in accordance with a determination. My argument is that that is much too narrow. It is much better to adopt what I describe as the `East Coast model'.

The only similarity between the WA and Northern Territory acts and the other states is that, like the Queensland act, they create this registrar and provide for registration of adjudicators. The acts provide for adjudication of payment disputes. Under both acts, either party may initiate the adjudication. I should stress that a builder can also use the legislation to recover payments from building owners and that, to me, is only fair. Builders can use this security of payments legislation in a way that I believe is fair to all parties, based on the facts of the case, and based on a speedy resolution and an adjudication of the process without the need for protracted and expensive litigation.

This proposed legislation is a long overdue reform for the state's many thousands of building contractors and their employees. It is about fairness and equity and ensuring that South Australian contractors and their employees are not treated like second-class citizens compared to their colleagues interstate. I commend the bill.

The Hon. J. GAZZOLA secured the adjournment of the debate.

This report is extracted from Hansard.

The Bill is on the AGD web site.