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Haste makes waste – why section 42E should be scrapped

Michael Chesterman
Michael Chesterman January 13, 2020

‘Haste makes waste’ is an old proverb and means that rushing into a decision may cause mistakes that waste more time than would have been taken by proceeding more carefully.

In my view, it is an unfortunate fact that many of the SOP initiatives contained in the Building Industry Fairness (Security of Payment) Act 2017 (BIFA) have suffered this fate.

In a previous article entitled SOP reforms fail the ‘pub test’, I stated:

“As I have previously stated, I am not questioning the desire of the government to deliver SOP reforms through BIFA. However, in my view there can be no ‘sugar coating’ the fact that the initial Bill that gave rise to BIFA had serious policy failings, the majority relating to PBA.

How else can all the subsequent amendments and implementation delays be explained?”

It is true that I have also praised the government for cautionary proceeding with the implementation of outstanding reforms now that issues have come to light. In an article entitled Cautious roll out of SOP reforms is a welcome development, I stated:

“While I appreciate the frustration many subcontractors may be experiencing with what they believe are unnecessary delays in these BIFA reforms, I believe that there is real potential for subcontractors to be adversely affected if implementation of them is rushed.

I am of the view that subcontractors have already suffered unfavourable outcomes as a result of the implementation of a BIFA reform specifically intended to assist them, namely the abolition of the requirement for claimants to endorse payment claims.”

To be clear, I have grave concerns about the policy process that was undertaken in the initial development of these SOP reforms. However, on the emergence of issues, I am very pleased that the government has committed to attempt to rectify any identified issues with amendments to BIFA and proceed with caution in their implementation.

Nevertheless, there is one very significant SOP initiative contained in BIFA which I have always viewed as extremely dubious and ill founded. Furthermore, I believe that a recently signalled proposed amendment to this initiative will only result in additional complexity and uncertainty as to how it will operate.

For reasons I will outline below, I believe this initiative cannot be salvaged and should be scrapped.

New QBCC contractual provision.

The passing of the Building Industry Fairness (Security of Payment) Act 2017 (BIFA) also resulted in a consequential amendment to the QBCC  Act 1991, namely the enactment of a new provision (section 42E) relating to the avoidance of contractual obligations causing significant financial loss.

It states:

(1) This section applies to a person who is a party to a building contract.

(2) The person must not, without reasonable excuse, cause another party to the building contract to suffer a significant financial loss because the person deliberately avoids complying with, or fails to comply with, the contract.

Maximum penalty—350 penalty units.

In a report by the Parliamentary Committee charged with the responsibility to review BIFA, it is stated that:

“The explanatory notes advised that this provision was ‘necessary to address a problematic trend in the building and construction industry of poor payment practices and contractual deficiencies which can have a detrimental impact for both licensees and consumers.”

Furthermore, in the same report it also stated:

“The HIA submitted that the proposed new provision is ‘completely flawed as is the Government’s justification for it’ and seeks clarification on a number of the terms used in the provision. Additionally, the HIA claimed ‘to the extent that the QBCC is empowered to determine ‘contractual rights’, the provision offends the doctrine of separation of powers:

‘The division of power between different bodies (that it is up to the elected legislature via Parliament to make law, it is up to executive government and its public service to implement the law, and it is the role of an independent judiciary to interpret the law and resolve disputes between citizens), is a cornerstone principle of our system of government. As to the argument that the provision is necessary because some subcontractors do not pursue contract claims for fear of being “blacklisted” this does not make sense – whether or not the matter is pursued by the QBCC or courts there will still be an underlying dispute which gave rise to the breach of contract in the first place. Both builders and subcontractors need to co-operate in the course of a building project or risk their future business relationship.’ “

Special Taskforce.

On 27 March 2019, the government established a special taskforce (Taskforce) to investigate allegations of fraudulent behaviour relating to subcontractor non-payment in the construction industry and considered whether current legislation was adequate to address conduct of this nature.

In a report, the findings and recommendations of which are summarised on the Department of Housing and Public Works website, it is stated:

“The Taskforce also concluded that the existing supervisory powers of the building regulator, the Queensland Building and Construction Commission (QBCC), are generally sufficient to address fraudulent behaviour relating to subcontractor non-payment.”

However, despite the above ‘tick of approval’ in relation to the existing supervisory powers of the QBCC, it did find:

“Some legislative provisions may not operate as intended, constraining the QBCC’s ability to target offending behaviour and to mount successful prosecutions.”

In this regard the Taskforce zeroed in on section 42E of the QBCC Act where the report stated:

“Since section 42E became law on 10 November 2017, no prosecution has been started and its interpretation is untested in the courts. A few features of section 42E merit attention.

First, the provision is not confined to unpaid debts. It extends to any deliberate contractual default resulting in significant financial loss to a party. As the Bar Association of Queensland said, section 42E is an “extraordinary provision of remarkably broad scope”.

Secondly, the causal element—“because the person deliberately avoids complying with, or fails to comply with, the contract”—has a curiosity: it is difficult to conceive of a situation where someone avoids complying with the contract where that outcome did not also involve a failure to comply. In other words, “avoids complying with, or…” looks to be otiose.

Thirdly, a successful prosecution depends on proof, beyond reasonable doubt, of absence of a “reasonable excuse” for failure to perform a contractual obligation. That burden is onerous because the circumstances that could give rise to a “reasonable excuse” will usually not be known to the prosecution.

The third factor means that using the legislation to its full intended effect may prove difficult in practice. There is, however, a workable, principled solution to the problem.

 Section 42E will become a more effective deterrent to deliberate noncompliance with a contractual obligation if the “without reasonable excuse” issue is left to be discharged by the defendant rather than proved by the prosecution.

In considering whether to amend section 42E to reverse the burden of proof on the “without reasonable excuse” question, the fundamental legislative principles under the Legislative Standards Act 1992 must be taken into account. These principles underlie a parliamentary democracy based on the rule of law. They include requiring that legislation have regard to individual rights and liberties.”

Taskforce recommendation.

“That the government consider amending section 42E of the Queensland Building and Construction Commission Act 1991 (QBCC Act) to place the burden on the defendant to show a reasonable excuse for a deliberate failure to comply with a building contract.”

Government’s response.

“The government accepts this recommendation. This provision is aimed at addressing conduct such as poor payment practices and deliberate avoidance of contractual obligations, which often cause significant financial loss to innocent parties. It is important that the QBCC can effectively enforce such conduct.

The Taskforce acknowledged that reversal of the onus of proof must be justified. Given that a reasonable excuse for failure to perform a contractual obligation would be within the particular knowledge of the defendant, the government agrees that placing the burden on the defendant is appropriate in this case.”

Significant proposed action.

In a publication entitled Principles of good legislation: OQPC guide to FLPs -Reversal of onus of proof, various factors are outlined where such a dramatic departure from the legislative norm may be considered appropriate.

I am not going to delve into whether, in this circumstance, such a proposed course of action is likely to satisfy the principles outlined in the above publication. However, I will shed light on the information the Panel has relied upon to settle on such a recommendation.

Of the 146 submissions received by the Panel, 69 submissions disclosed breaches (some multiple) of relevant legislation. This resulted in 108 referrals to 9 prosecuting authorities.

Regarding the QBCC Act, 38 possible breaches were identified of which section 42E was one of nine sections and one part of relevant provisions. The report (page 20) does not provide an exact number of possible breaches of section 42E referred to the QBCC but it is not unreasonable to conclude that it would only have been a handful.

Final thoughts.

This provision is very problematic for all of the reasons outlined by the HIA and Bar Association of Queensland. Now as I have said before, I am not a lawyer… but, the proposed reversing of the onus of proof on the defendant to show a reasonable excuse for a deliberate failure to comply with a building contract, in my view, makes this provision even more convoluted.

I am of the view that the vast majority of builders would never under any circumstances, deliberately and unreasonably seek to avoid their contractual obligations, and in the process cause subcontractors serious financial losses.

It has been my experience that only ‘rogue builders’ deliberately avoid complying with their contractual obligations on a systematic basis, and thereby cause subcontractor’s to sufferer significant financial losses. I believe, based on my experience, only approximately 5% of builders are ‘rogue builders’.

However, there are many builders who on occasions, will delay or deny payments to a subcontractor in circumstances where they believe they have a contractual entitlement to not pay them because of alleged performance reasons. In these circumstances the builder should be able to make that decision solely based on how they believe the contract operates. They should not have to worry about in making such a  decision, whether the QBCC, with the benefit of hindsight, will put them to some ‘reasonable excuse’ test if a subcontractor complains that they have suffered  serious financial loss as a result of their decision to not pay them.

I am aware of many instances where builders have applied their knowledge and understanding of the contract, and in good faith, refused to pay a subcontractor because of alleged performance issues. However, they have only partially been successful in defending a subsequent adjudication application brought by the subcontractor.

My takeaway from this is that some builders misinterpret their contractual position, and this only comes to light when their position is tested in a court, tribunal or adjudication.

However, this is very distinct to a builder deliberately and without any reasonable basis, avoided their contractual obligations to subcontractors.

In these circumstances, the subcontractor may still have suffered a significant financial loss even after the builder complies with the adjudication decision and pays them the awarded amount.

I also have grave concerns in these circumstances, some subcontractors may bring the matter to the attention of the QBCC to investigate for retribution reasons.

Under no circumstances do I believe that the QBCC should be placed in a position of having to decide whether a builder had a ‘reasonable contractual excuse’ for initially denying payment to a subcontractor.

Furthermore, I believe that this provision may also cause some subcontractors to experience even greater difficulty in getting paid by ‘rogue’ builders.

Why am I of this view?

Quite simply, once a ‘rogue’ builder becomes aware that they could be fined a maximum of $46,708 (350 penalty units at $133.45 each unit, current as 1 July 2019) for an alleged offence of this nature, I think a number may become even more unreasonable and demanding on subcontractors who elect to work for them. While I find this behaviour abhorrent, I am of the view that this contractual provision, with all its good intentions, may have the unintended effect of causing a number of desperate, ‘rogue builders’ to contractually mistreat their subcontractors on even a larger scale then is presently the case.

Why do I say this?

Because ‘rogue builders’ have always been prepared to ‘roll the dice’ when it comes to behaving in an appalling manner. Typically, when confronted with a new legislative threat of this nature, it has been my experience that many ‘rogue builders’ double down in terms of their shameful behaviour towards subcontractors.

The QBCC should certainly consider cancelling the licence of a ‘rogue builder’ who behaves in such an appalling manner on the grounds that they are not ‘fit and proper’ to hold a licence. However, this is a reactive action that will not do anything to assist subcontractors get paid who are unfortunate enough to be working for such a builder.

While the cancelling of the licence of any ‘rogue builder’ is a very welcomed outcome, it has been my experience that they will be replaced by another builder devoid of honesty and integrity.

Over the 25 years I have been working in the construction industry, I have not seen a decline in the number of ‘rogue builders’. As I have previously indicated, I believe they represent approximately 5% of all builders. I consider this to be the case even though over this period, builders have been subject to increasing legislative accountability consequences for poor or illegal behaviour. With respect, I do not think that this provision will result in an overall reduction in the number of ‘rogue builders’ operating in the Industry.

I can hear some readers ask, how do ‘rogue builders’ get licensed in the first instance?

When applying for a license to carry on a building business, an applicant primarily needs to demonstrate relevant experience, necessary formal qualifications and information proving they meet the Minimum Financial Requirements. They also have to disclose any previous accountability ‘black marks’ that they may have picked up as a result of previous business dealings. Outcomes of this nature can be grounds for the QBCC refusing a licence application. However, if an applicant has no past accountability issues and providing, they satisfy the licensing criteria, then the QBCC must issue them with a licence.

Once licensed and conducting a business, builders will then have to decide whether they will act in an ethical and legal manner in dealings with subcontractor’s and other parties. Unfortunately, some builders fall well short of expectations and requirements in this regard.

As a side note, somewhat surprisingly, based on a QBCC publication entitled Contractual obligations, demerit points and bans (August 2019), section 42E is not presently a demerit point offence. It is stated in this publication that:

“A person who accumulates 30 demerit points within a three-year period will face disqualification from holding a QBCC licence for three years. If they again, within 10 years of the first ban, accumulate 30 demerit points over a three-year period, they will be disqualified from holding a QBCC licence for life.”

I am all for any effective and targeted legislation that will deliver improved payment outcomes for subcontractors. However, for the reasons I have outlined above, I have very grave concerns that section 42E of the QBCC Act will be open to exploitation by some subcontractors.

The proposed remedial action, in my view, is recognition of the fact that the provision was initially poorly conceived and drafted.

As I have already indicated, I believe that this provision cannot be salvaged and must be scrapped.

I am also of the view that there must be better and more robust policy work undertaken in the development of future SOP legislation, where detailed analysis and due diligence of proposed initiatives is performed through an entirely new framework.  I have views on what needs to be done in this regard that I will outline in a subsequent article.

As always, I welcome comments and views.

Not intended as legal advice. Read full disclaimer.
Michael Chesterman
Michael Chesterman January 13, 2020

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