Looking forward to the year ahead – legislative changes on the horizon in 2022

From 1 August 2022, the construction industry in Western Australia will operate under a new regime when the Building and Construction Industry (Security of Payment) Act 2021 (WA) (SOP Act) comes into force.

The SOP Act will replace the well-established Construction Contracts Act 2004 (CCA). For a number of years, the old and new security of payment regimes will operate in tandem. The CCA will continue to apply to contracts entered into prior to 1 August 2022. As those contracts are closed out, the CCA will slowly be phased out.

To be ready for the introduction of the SOP Act in August, construction industry participants will need to:

a) consider the SOP Act and what impact it will have on their operations;

b) implement measures to ensure they are not caught out by the new requirements; and

c) be ready to deal with different regimes operating concurrently in the market.

As with any transition, this is likely to bring challenges to the industry, especially while parties are coming to terms with the operation of the very different SOP Act.

What is changing?

The regime under the SOP Act brings changes for principals, contractors and subcontractors alike. We have summarised the most significant changes below.

New payment claim requirements

As in the case of the CCA, a payment claim must be for construction work carried out, or goods and services supplied, under a construction (sub)contract. 

Under the SOP Act, the provisions of the (sub)contract will not govern the rights or entitlements of the (sub)contractor to make a progress claim or to receive a progress payment – as is the case under the CCA. Instead, a (sub)contractor will exercise its right to a progress claim by serving a payment claim that complies with the SOP Act. 

To comply with the SOP Act, main contractors and subcontractors will have to:

a) submit their claim in writing in the approved form (if any is designated);

b) clearly articulate a claimed amount;

c) adequately describe the construction work undertaken or related goods and services provided;

d) state that the claim is made under the (new) SOP Act; and

e) comply with any regulations that are implemented.  

We recommend that contractors use the next six months to familiarise themselves with the requirements of the SOP Act and prepare templates for claims under new (sub)contracts signed on or after 1 August 2022.

New payment schedules

A respondent (principal or main contractor) will have to issue the claimant with a payment schedule within 15 business days of the payment claim being made or such shorter time as may be required by the relevant construction contract. This is a strict statutory requirement and time cannot be extended. 

Responding to a claim with reasons

The principal or main contractor will have to give reasons if it does not intend to pay a claim in full or in part. Those reasons must be set out in a payment schedule.  This represents a significant departure from the regime under the CCA.

The requirement for a respondent to issue a payment schedule closely reflects the regime which applies under the Security of Payment legislation in the eastern states of Australia (the so-called East Coast Model). 

Notably, if one or more reasons for withholding payment is not given in the payment schedule, such reason cannot be raised to defend the claim in any subsequent adjudication of the payment claim.

Respondents will need to ensure that, in responding the payment claims, they are ready to communicate all reasons upon which they rely to justify not paying the claimed amount in full.

Under the SOP Act, a respondent will have to issue a payment schedule within 15 business days. 

Failure to do so will result in the full amount sought in the payment claim becoming due and payable by the respondent to the claimant on the due date prescribed by the statute.

Respondents should use the next few months to create pro forma templates which will:

a) clearly identify the payment claim;

b) identify the claimed amount;

c) indicate the amount of the payment;

d) make provision for the inclusion of reasons for withholding some or all of the payment; and

e) comply with any other requirements of the regulations (yet to be promulgated).

All principals and main contractors should update their administrative processes in preparation for having to respond to payment claims under both regimes, as the CCA will continue to operate for some time after the commencement of the SOP Act.

Statutory deadlines for making claims

Currently, there are no statutory deadlines for bringing payment claims under the CCA (although time bars can apply under other provisions, including limitation periods.) 

This will change under the SOP Act as follows:

• In the case of progress payments or milestone payments (generally during the course of the works), a main contractor or subcontractor has a statutory right to make a payment claim on or after the last day of each month during the course of the project, unless the contract or subcontract specifies an earlier date. 
   
• A new statutory deadline applies to progress payments.  No progress claim can be made after the later of:
  (i) the date specified in the contract; or
  (ii) more than six months after the relevant work was carried out.
   
• A statutory deadline likewise applies to final payment claims.  That deadline is the latest of:
  (i) the date specified in the contract or subcontract;
  (ii) six months after the completion of all of the work; and
  (iii) within 28 days of the expiration of the defects liability period (DLP) under the contract or subcontract. 

The new statutory deadlines allow (sub)contractors to bring progress claims for work up to six months after the relevant work was carried out (which may be significantly later than the time allowed for making payment claims specified in the (sub)contract).  However, a delay in making a progress claim (or final payment claim) will result in a commensurate delay in payment. 

The statutory deadline for final payment claims will, in many cases, be tied to the expiry of the DLP.   The CCA does not contain such a provision. In some cases, this might extend the time for making final payment claims beyond the time currently permitted under the CCA regime.

These statutory deadlines will provide a degree of additional certainty for principals and main contractors.  In some cases, they may also provide additional impetus for contractors or subcontractors to finalise their claims earlier than is currently required. 

Making payments – new statutory deadlines

Once a payment claim is made in accordance with the SOP Act:

• a principal will have to pay the head contractor within 20 business days of the head contractor making a payment claim, or earlier if the contract specifies an earlier date; and 
• a head contractor will have to pay a subcontractor within 30 business days of that subcontractor making a payment claim, or earlier, if the subcontract specifies an earlier date. 

The SOP Act will override any (sub)contract provisions, which stipulate a later date than that set out in the SOP Act.

Upstream payment claims only

The SOP Act removes certain statutory remedies which are available to principals and main contractors under the CCA.   For example, the SOP Act excludes claims down the contractual line (e.g. a claim by a principal levying liquidated damages against a head contractor, or claims by a contractor against a subcontractor).  Effectively, the SOP Act allows upstream claims only, which is a significant change for principals and main contractors who have become accustomed to the provisions of the CCA.

Clyde & Co has significant experience in construction adjudication, both in Western Australia, and in other jurisdictions using the East Coast Model (as well as other global jurisdictions where similar regimes apply).