BIFA Delay. SOP Confusion.

Michael Chesterman June 25, 2018
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All contractors should note a six month delay in the implementation of significant SOP reforms because of the need for amendments to the Building Industry Fairness (Security of Payment) Act 2017 (BIFA). Contractors will need to carefully monitor BIFA developments during this period so they are aware of their rights and obligations once BIFA comes into full effect.

Background

The Building and Construction Industry Payments Act 2004 (BCIPA) and the Subcontractors Charges Act 1974 were initially scheduled to be repealed on 1 July 2018 and replaced with provisions contained in BIFA. In a press release the QBCC Commissioner Mr Brett Bassett stated:

“Project bank accounts on Queensland Government funded projects with a value between $1 and $10 million begin on 1 March 2018, and from 1 July 2018, there will be changes to the payment claims process. The payment claims changes starting in July will affect everyone in the State’s building and construction industry. The Building and Construction Industry Payments Act 2004 and the Subcontractors Charges Act 1974 will be repealed and provisions have been moved and updated as part of the new Building Industry Fairness (Security of Payment) Act 2017.”

In a press release the responsible Minister, The Hon Mick de Brenni (‘Minister’) stated:

“The second phase of the reforms takes effect from 1 July 2018 and includes new procedures for payment claims, responses and adjudication of disputed claims”.

Delay

In a press release dated 12 June 2018, the Minister stated:

“In the interests of business confidence, we will commence these reforms in tranches, and following industry consultation on the next tranches, I will introduce BIF Act amendments into the House to progress the next stages of reform. I intend for these provisions to commence from 17 December 2018”.

The need to introduce BIFA amendments before it is fully implemented has surprised a lot of people given that the Government:

The Minister also stated in this press release that “a discussion paper will be released for industry consultation in coming weeks”.

I believe that the discussion paper will:

  1. address several major issues with proposed amendments to BIFA; and
  2. consult on a number of very important regulations that have to be made and notified before BIFA can take full effect.

1. BIFA Issues

Language

In my article published 3 October 2017 entitled QLD Security of Payment is a minefield… but it might surprise you who is in danger I identified six BIFA ‘unintended consequences’ and I am of the opinion that all these issues are still relevant.

However one issue in particular relating to the language used in BIFA is of significant concern for all parties to adjudication, but particularly for subcontractors since according to the latest published statistics from the QBCC approximately 68% of adjudication applications are lodged by subcontractors. In this article I stated:

While wording changes may seem a trivial matter that will not affect subcontractors, this is simply not the case as uncertainty of interpretation will cause more issues not less for subcontractors. If there is some uncertainty as to the correct position, unsuccessful parties will be more likely to apply to the Supreme Court to overturn adjudication decisions. While all this is happening, normally the subcontractor will not be paid the adjudicated amount”.

I hope the opportunity is taken to address key wording changes in relation to the payment regime and also a number of wording inconsistencies in the different chapters of BIFA.

Contract Uncertainty

In anticipation of these reforms coming into effect on 1 July 2018, contractors were making changes to contracts, redesigning contract administration processes and upskilling and retraining staff.

However, in the performance of these tasks, many contractors and clients were struggling to understand their obligations and responsibilities with regard to one particular significant last minute amendment tabled by the Minister during the final stages of the parliamentary debate of the BIF Bill. The Minister stated (page 3395 of transcript):

“Last night I told the House that the government’s amendments would create a further incentive to pay in full and on time by making it clear that if a business has done what they need to do they will be freed from the obligation to issue a payment schedule. Today, with the support of all stakeholders, the government has mildly fine-tuned this provision that delivers this incentive. Clause 76 will provide that if a subcontractor provides a payment claim to a head contractor the head contractor must respond to the payment claim by giving the subbie a payment schedule before the end of the response period. However, a payment schedule will not be required if a payment occurs in full before the end of the response period. Importantly, the response period will now be the time identified in the contractual requirement for responding to the subbie or no longer than 25 days after the claim is given. This ensures consistency with mandatory payment time frames which are already set under the QBCC Act.”

Commercial Building Contracts

Section 76 of BIFA does not use language like “subcontractor” or “head contractor”. Rather the words “claimant” and “respondent” are used. The significance of this is that section 76 also applies to contractual relationships between clients and head contractors (commercial building contracts).

Consequently, under section 76 of BIFA a client has 25 business days to either pay the head contractor the full amount claimed or provide a payment schedule disputing the amount owing.

However under a different legislative provision, namely section 67W of the QBCC Act, if a client was to amend their contracts to reflect the payment period of section 76 of BIFA, such a contractual provision may be be void “to the extent it provides for payment of a progress payment by a contracting party to a contracted party later than 15 business days after submission of a payment claim”.

I am not a lawyer so I do not intend to offer an opinion on the legal issues at play in this matter. However I would like to make an observation that these provisions appear to be inconsistent.

Subcontracts

I am of the view that section 76 of BIFA is problematic in terms of the effect it has on disrupting well established payment and contractual obligations and responsibilities between head contractors and subcontractors under subcontracts in respect of standard payment claims.

A standard payment claim under both BCIPA and BIFA is a claim less than $750,000 (exclusive of GST). A payment claim greater than this amount is know as a complex payment claim.

According to the latest published QBCC statistics, for the 2017/2018 financial year a total of 370 adjudication applications have been lodged, of which 349 were of a standard payment claim nature (94%).

For the purpose of this article I am only going to focus on standard payment claims because in terms of the payment schedule response period for such claimed amounts, there has been no change since 2004.

As the person who gave drafting instructions for BCIPA in 2004, I know exactly how much thought went into ensuring all the different subcontract payment and contractual requirements complemented each other and the regime worked in a consistent and effective manner.

Section 67U of the QBCC Act states:

“a provision in a construction management trade contract or subcontract is void to the extent it provides for payment of a progress payment by a contracting party to a contracted party later than 25 business days after submission of a payment claim”.

Under BCIPA if a head contractor wishes to dispute payment in respect to a standard payment claim they may serve a payment schedule on the subcontractor within 10 business days of receiving the claim.

By encasing the ‘opt in’ standard payment claim response period of 10 business days within the maximum QBCC 25 business day payment period that can legally apply in subcontracts, subcontractors get an early line of sight on the intentions of the head contractor should they be proposing to pay them less than the claimed amount.

If the subcontractor does not like what the head contractor is proposing to pay them then they have 10 business days from receipt of the payment schedule to lodge an adjudication application.

This 15 business day period affords the parties an opportunity to reflect on the matter in dispute. A subcontractor does not have to rush off and lodge an application. They have 10 business days to take this action. This is a “cooling off” period where the parties can negotiate a settlement of the dispute and avoid the need for it to proceed to adjudication or indeed any other form of dispute resolution.

While it is impossible to identify how many disputes have been settled during this period, it is my opinion that it would be in the thousands since 2004.

In the event that a head contractor fails to serve a payment schedule within the 10 business day response period of time, they become liable to pay the full amount on the due date for payment, normally 25 business days after the serving of the payment claim.

A payment period greater than 25 business days in a subcontract is considered illegal and voided, meaning it has no legal effect. In these circumstances, under section 15(1)(b) of BCIPA a default payment period of 10 business days applies.

Imposing a default payment period of 10 business days on a head contractor to have to pay a subcontractor several weeks earlier than what they tried to illegally do under the subcontract serves as a penalty on them for trying to unfairly delay payment to the subcontractor.

I am aware that under section 76 of BIFA, some head contractors and subcontractors are confused as to what their responsibilities and obligations are around the 25 business day period after a subcontractor serves a standard payment claim on a head contractor because:

  1. Any payment provision in a subcontract that provides for payment of a progress payment by a head contractor to a subcontractor later than 25 business days after the submission of a payment claim is void.
  2. Unless a shorter period is stipulated in a subcontract, the head contractor must provide a payment schedule to a subcontractor before the end of 25 business days after the day the payment claim is given to the subcontractor.
  3. However a payment schedule is not required to be given by a head contractor to a subcontractor if they pay the full amount stated in the payment claim to the subcontractor before the end of 25 business days after the day the payment claim was given to the subcontractor.

I am not a lawyer so I do not intend to offer an opinion in respect to how these provisions may be legally interrupted but I can understand why some head contractors and subcontractors are confused as to their rights and obligations.

I have also noted another significant issue for subcontractors if a head contractor delays providing them with a payment schedule until just prior to before the end of the 25 business day period. In these circumstances this will be the earliest a subcontractor could proceed to adjudication, namely 25 days after serving a payment claim on the head contractor.

Under section 76 of BIFA, when a head contractor exercises their legislative entitlement to serve a payment schedule on a subcontractor disputing full payment of a standard claim at the latest possible time, a subcontractor has to wait an additional 15 business days (10 business days under BCIPA, 25 business days under BIFA) to be entitled to lodge an adjudication application than is the case presently under BCIPA.

2. Consulting on Regulations

BIFA has a significant number of sections where certain matters are prescribed by regulation, including:

  • section 8 — the definition of ‘building work’ can include work prescribed by regulation. A ‘state authority’ also does not include an entity prescribed by regulation;
  • section 14 — a building contract may, by regulation, be declared a PBA contract if the principal for the contract is the State or a State authority;
  • section 16 — that the definition of ‘residential construction work’ can include other building work prescribed by regulation;
  • section 28 — a head contractor may only deposit money into a PBA for particular purposes or as prescribed by regulation;
  • section 31 — a head contractor may only withdraw money from the PBA for particular purposes or as prescribed by regulation;
  • section 32 — where there are insufficient funds in the PBA, the head contractor is prohibited from paying itself or making another payment as prescribed by regulation;
  • section 36 — in dealing with amounts payable if a dispute occurs a head contractor must ensure that the amount transferred under subsection (2) is not paid to any person other than the subcontractor beneficiary or to another person in the circumstances prescribed by regulation;
  • section 50 — the head contractor must, within 5 business days after establishing the project bank account, give the principal the information prescribed by regulation. The maximum penalty for breaching this provision is 200 penalty units;
  • section 51 — applies if a head contractor gives a financial institution an instruction about a payment from a trust account for a project bank account;
  • section 50(3) provides that the copy of the instruction need only include the information prescribed by regulation;
  • section 54 — provides the circumstances in which the section applies if a PBA is established for a building contract. Pursuant to clause 54(d) the section also applies to another circumstance prescribed by regulation;
  • *section 65 — the definition of ‘Construction work’ can include any other work of a kind prescribed by regulation;
  • *section 66 — provides that the meaning of related goods and services can include ‘of a kind prescribed by regulation’;
  • *section 68 — apart from the matters listed, a payment claim for a progress payment, is a written document that includes other information prescribed by regulation;
  • *section 79 and 82 — a regulation may limit the number and length of submissions that may accompany an adjudication application or an adjudication response;
  • *section 122 — a notice of claim must be in the approved form and include other information as prescribed by regulation;
  • *section 161 — an adjudicator must achieve an adjudication competency standard as prescribed by regulation from a body also prescribed by regulation;
  • *section 165 — requires adjudicators to comply with the continuing professional development requirements prescribed by regulation as a condition of registration;
  • *section 258 amends the QBCC Act to require licensees to comply with minimum financial requirements prescribed by regulation; and
  • *section 276 inserts new sections 67GA and 67GB into the QBCC Act — section 67GA provides that a building contractor must not enter into a building contract that does not include the conditions (mandatory conditions) prescribed by regulation for inclusion in that type of building contract and pursuant to section 67GB a building contractor must not enter into a building contract that includes a prohibited condition prescribed by regulation.

The only BIFA regulations made and notified to date relate to Project Bank Accounts. Highlighted by * are the adjudication related regulations, as well as others concerning the Subcontractors’ Charges Act, minimum financial requirements for licensing and contractual clauses in building contracts, that have not been made or notified to date.

It should be noted that in relation to minimum financial requirements for licensing, the Minister in his 12 June 2018 press release stated “an approved regulation for Minimum Financial Requirements will operate from 1 January 2019.”

The Parliamentary Committee that reviewed BIFA made a recommendation (number 5) to the Government that:

“The committee recommends the Minister consult with the building and construction industry when developing the regulation that will mandate and prohibit certain conditions for building contracts and with regard to any subsequent amendments to the regulation”.

The Government responded by accepting this recommendation and indicated that “provisions that will mandate and prohibit certain contract conditions will be developed in consultation with the Ministerial Construction Council”.

The committee made another recommendation in relation to regulations (number 7), namely:

“The committee recommends that the Minister in his second reading speech provide examples of any proposed regulations that he intends to make should the bill be passed”.

The Government also responded by accepting this recommendation and reiterated that:

“any such future regulation will be developed with appropriate consultation with the Ministerial Construction Council”.

Who is on the Ministerial Construction Council?

According to the Government’s response to the Parliamentary Committee’s recommendations into BIFA, the Council consists of representatives from:

Australian Institute of Building Surveyors; Plumbing and Pipe Trades Employees Union QLD/NT; Australian Institute of Architects; Air Conditioning and Mechanical Contractors’ Association; Engineers Australia; Housing Industry Association; Master Builders Association Queensland; Master Plumbers Association of Queensland; National Association of Women in Construction; Master Painters Queensland; Master Concreters Australia; Australian Manufacturers and Workers Union; National Fire Industry Association; Association of Wall and Ceiling Industry Queensland; Queensland Building and Construction Commission; Landscape Queensland; Construction, Forestry, Mining and Energy Union; Queensland Council of Unions; Subcontractors Alliance; Master Electricians Australia; and Electrical Trades Union.

Panel Established

In his press release of 12 June, the Minister also announced the establishment of the Building Industry Fairness Reforms Implementation and Evaluation Panel (‘Panel’) to assist the Government.

The explanatory notes relating to the establishment of the Panel under section 200A of BIFA states:

“New clause 200A is inserted regarding a review of the suite of 2017 building and construction reforms. The review must be conducted by a panel of not more than 4 appropriately qualified persons appointed by the Minister. The review must be started no later than 1 September 2018, and it must be tabled in the Legislative Assembly as soon as practicable following its completion”.

The Terms of Reference for the Panel are to determine:

  1. the effectiveness of the government’s implementation of the suite of building industry reforms;
  2. the effectiveness of the legislative framework in achieving policy intent;
  3. opportunities to realise improved security of payment outcomes for industry prior to the commencement of project bank accounts in the private sector; and
  4. the indicative economic impacts and outcomes of the building industry reforms.

Summing Up

I am of the view that in relation to BIFA going forward:

  1. Issues associated with the language used in BIFA and the application of section 76 will be addressed by way of BIFA amendments.
  2. Given the fact that the necessary BIFA amendments means the Government has to delay the adjudication trench of reforms, it makes sense to use this period for the government to also consult on all the outstanding regulations.
  3. The Ministerial Council will be the main forum for industry consultation on proposed BIFA amendments and development of all the regulations.
  4. The Panel will provide the Government with high level strategic advice on the implementation of BIFA and also I note from a closer read of its terms of reference, non conforming products legislation.

I would encourage all contractors and clients to follow developments in regard to these very significant SOP reforms. The saying “the devil is in the detail” has real significance with regard to BIFA.

For example the regulation that relates to section 68 of BIFA will determine what will be a valid payment claim. The regulation could be worded to ensure any invoice from a claimant, with only scant and vague details, will satisfy the legislative threshold in this regard.

Alternatively the regulation could be very prescriptive in terms of the requirements for a valid payment claim to ensure the respondent is fully aware of all the alleged circumstances in which they are requested to pay a respondent.

We at Helix Legal will be carefully monitoring BIFA developments over the next six months because they will settle how licensing, contractual, payment and adjudication regimes will operate post 17 December 2018.

However in the meantime it is business as usual in terms of claimants relying on BCIPA to pursue payment for work done and respondents defending their payment positions.

Should you wish to discuss the current operations of BCIPA or the proposed new licensing, payment and adjudication regime under the BIFA please feel free to contact Michael Chesterman at michael@helix.legal and Earl Tan at earl@helix.legal.

Not intended as legal advice. Read full disclaimer.
Michael Chesterman June 25, 2018

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