Country updates – Construction Law International – March 2021

Australia

Closing the divide between East and West: Building and Construction Industry (Security of Payment) Bill 2020 (WA)

Spencer Flay, Perth
Michael Barnes, Perth
Kristy Eaton, Perth

Each Australian state and territory has security of payment legislation (not unlike the statutory adjudication regime in Malaysia, New Zealand, Singapore and the United Kingdom) which seeks to ensure the flow of money in the contracting chain.

As the esteemed authors of Hudson’s Building and Engineering Contracts observe: ‘The Australian adjudication legislation, although based upon the process introduced by the UK legislation, is subject to a broad dichotomy of approach.’¹

Western Australia (WA) and the Northern Territory have, since 2004, championed the ‘West Coast Model’ of security of payment legislation. The balance of the states and territories (the Australian Capital Territory, New South Wales, Queensland, South Australia, Tasmania, and Victoria) have, on the other hand, each (at different times) enacted legislation that broadly subscribes to the ‘East Coast Model’ of security of payment legislation.

At a very high level, the West Coast Model legislation seeks to uphold contractual freedom by giving primacy to the terms of the contract, including any contractual payment regime. The East Coast Model legislation is far more prescriptive. It establishes a statutory payment regime which runs alongside any contractual payment regime and treats very harshly a payment respondent that fails either to issue a payment schedule or include in its payment schedule any reasons for withholding payment.

Again, to quote words from Hudson’s:

‘The lack of uniformity resulting from this dichotomy and the variation in the details of the legislation made under each model have obvious disadvantages for parties involved in interstate projects resulting from a lack of familiarity with the relevant procedure.’²

Since at least 2003 (with the Cole Report³) and particularly since 2017 (with the Murray Report⁴ and the Fiocco Report⁵), there have been calls to harmonise Australia’s security of payment laws. It now seems extremely likely that the calls for national harmony will shortly result in the Northern Territory being the only Australian state or territory with West Coast Model security of payment legislation.

On 23 September 2020, the Government of WA introduced to Parliament the Building and Construction Industry (Security of Payment) Bill 2020 (WA) (Bill). The Bill passed the lower house (Legislative Assembly) on 10 November 2020. It now sits in the upper house (Legislative Council), where it will remain until after the WA state election on 13 March 2021. The Bill, which draws on many of the recommendations in the Murray and Fiocco reports, represents the most significant reform to WA’s security of payment laws in more than a decade. It seeks to replace WA’s current (2004) Construction Contracts Act with laws that better protect subcontractors and are generally more consistent with security of payment laws on the East Coast of Australia.

As currently drafted, the Bill proposes amendments in four key areas:

• regulating certain contract terms;

• reforming the payment dispute adjudication process;

• creating deemed trusts for retention money; and

• enhancing the powers of the Building Services Board to manage the commercial conduct and behaviour of registered building service providers under the Building Services Registration Act 2011 (WA).

Application of the Bill

The Bill proposes to apply to building and construction contracts entered into after its commencement. The substantive provisions are set to apply to construction contracts entered into after the date or dates on which they come into operation by proclamation. The Bill would not apply to some construction contracts, including:

• building contracts with homeowners worth less than AU$500,000;

• contracts between employers and employees for construction work or related goods and services;

• contracts relating to loan agreements with financial institutions;

• contracts for drilling for or extracting minerals, oil and gas-related works (this is a narrower exception than the current ‘mining exception’ in section 4(3) of the CCA);

• contracts to build watercraft; and

• contracts involving works where a party fails to hold a registration in contravention of the Building Services (Registration) Act 2011.

The narrowing of the so-called ‘mining exclusion’ is particularly significant and will likely expand significantly the ambit of security of payment laws in WA.

Contract terms

As with the existing legislation, the Bill contains a ‘no contracting out’ clause. Importantly, the Bill proposes to:

• give adjudicators, arbitrators and courts power to declare ‘unfair’ time-bar clauses void in prescribed circumstances;

• extend the prohibition in the current CCA of ‘paid-when-paid’ provisions; and

• create statutory rights (which may be inconsistent with the terms of a contract) to:

– receive advance notice of an intention to call on a performance security;

– substitute a performance bond for retention money;

– make progress payment claims (and provide minimum requirements and procedure for making progress payment claims); and

– require a principal to respond by way of a payment schedule.

Time bars

Notice-based time-bar provisions are common in construction contracts. The Bill proposes to regulate these provisions by giving an arbitrator, adjudicator or court the power to declare void any notice-based time bar provision that it considers unfair in the particular circumstances of each case.

A declaration that a provision is unfair (and thus void) in respect of one payment claim would apply only to that claim, and would not void the provision otherwise. The provision would continue to operate with respect to other payment claims.

The proposed power to declare unfair (and, therefore, void) a notice-based time bar provision is unique to the Bill. It would represent a significant departure from the current treatment of notice-based time-bar provisions in common law.⁶

The Bill considers the operation of a time-bar unfair where compliance with the provision ‘is not reasonably possible’ or ‘would be unreasonably onerous’. This is largely consistent with the recommendation in the Fiocco Report, which considered the Murray Report (Murray, J, Review of Security of Payment Laws, (December 2017), Recommendation 84) recommendation. The meaning of ‘is not reasonably possible’ and ‘would be unreasonably onerous’, however, is open to debate and will almost certainly consume pages of law reports, should the Bill become law in its current form.

A claimant seeking to argue that any notice-based time bar is unfair will bear the onus of proof.

‘Pay when paid’ provisions

As with the CCA, ‘pay when paid’ provisions will continue to be prohibited. The Bill proposes to extend the prohibition beyond contract terms that make payment dependent on payment from another party, to other provisions that are contingent or dependent on the operation of another contract such as the:

• due date for payment of an amount owing;

• making of a claim for an amount owing; or

• release of retention money or of a performance bond.

Performance security

A party seeking recourse to a performance security will be required to give a notice of intention to call to the party proving the security. The notice of intention must be given at least five business days before the party has recourse to the performance security (or any longer period provided for in the contract).

The notice of intention must:

• be in writing;

• identify the construction contract and the relevant provisions of the contract that the party relies on to have recourse to the performance security; and

• describe the circumstances that entitle the party to have recourse to the performance security.

The Bill proposes an entitlement to seek the release of retention money under a contract by substituting a performance bond for retention money in a payment claim. To do so, the payment claim will need to include a draft of the proposed performance bond (or multiple bonds) in a final form that meet minimum requirements prescribed in the Bill.

Right to make payment claims and receive payment

The Bill proposes that a party that carries out or undertakes to carry out construction work, or to supply related goods and services, has a statutory right to receive progress payments and to make a payment claim every month (or more often if provided for in the relevant contract). This is consistent with security of payment statutes in other states.

The Bill prescribes when and how payment claims may be made, and how a party receiving the claim must respond. They must do so in the form of a payment schedule to be provided within 15 days of receiving the payment claim. Any payment dispute may then be referred to adjudication.

Adjudication procedures

The Bill introduces an adjudication process that will be more consistent with those in most other Australian states and territories.

The adjudication procedures in Part 3 of the Bill remain broadly similar to those in the CCA. Their purpose is to determine payment disputes on an interim basis as quickly and inexpensively as possible, while ensuring the principles of natural justice are adhered to within the compressed timeframe. The key differences proposed by the Bill include:

• a requirement to provide notice of intention to apply for adjudication where a response to a payment claim is provided and the claimed amount is unpaid;

• shortening the time frame in which to bring an adjudication application to 20 business days following the payment claim and response procedure;

• penalising a party that does not provide a response to a payment claim in the form of a payment schedule or fails to provide reasons for rejecting the claimed amount by not allowing the responding party to submit an adjudication response where no payment schedule is issued, or restricting the adjudication response to only the reasons given in the payment schedule; and

• introducing a new review process, under which another (and, presumably, more senior) adjudicator may be appointed to review an adjudication determination. However, the parties still retain their full rights to litigate or refer the dispute to another form of dispute resolution in accordance with the construction contract.

Deemed retention trusts

The Bill introduces a retention money trust scheme to provide security for builders, contractors, subcontractors and suppliers if their immediate contractual counterpart becomes insolvent. The scheme grants a first priority to the retention money retained as security under a contract over other security interests, effectively ‘ring-fencing’ the money from being claimed by other creditors.

The Bill proposes requiring all construction contracts that exceed AU$20,000 to have retention money trust accounts established. A trust will not need to be established for construction contracts with government principals or home owners if the contract is for home building works worth more than AU$500,000 (with a few exceptions).

The retention money trust account works by having the party procuring the construction work or service (Principal or Trustee) retain money in a trust account in accordance with the construction contract. This is held as security for the other party’s (Contractor or Beneficiary) performance of works or services under the contract. The Bill contemplates allowing a Trustee to engage an agent to manage the trust account, at their own expense and at their own risk. A Trustee will be liable for an agent’s acts and defaults as if they were acts and defaults of the Principal themselves.

Enhanced powers of the Building Services Board

Finally, the Bill proposes to amend the Building Services (Registration) Act 2011 (WA) and the Building Services (Complaint Resolution and Administration) Act 2011 (WA) to give the Building Services Board enhanced powers to manage the commercial conduct and behaviour of registered building services providers.

The Building Services Board will be empowered to:

• declare an individual or non-corporate body an ‘excluded contractor’ where an event resulting in their insolvency has occurred;

• exclude people with a history of insolvency from registering as a building service contractor either temporarily (for a period of three years) or permanently in the case of repeated insolvency events; and

• discipline a building service provider for their failure to pay a ‘building service debt’ (a judgment debt or adjudication determination).

The Building Services Board’s powers to remove building contractors with a history of insolvency from the industry allows for the piercing of the ‘corporate veil’; the Building Services Board will have powers to exclude a corporation or non-corporate body in connection with an insolvency event which is tied to an officer of that body.

Notes

1 Nicholas Dennys and Robert Clay, Hudson’s Building and Engineering Contracts (Sweet & Maxwell, 13th ed, 2015) 1201 [11-016]).

2 Ibid.

3 Terrence Cole, Final Report of the Royal Commission into the Building and Construction Industry (February 2003).

4 John Murray, Review of Security of Payment Laws: Building Trust and Harmony (22 December 2017).

5 John Fiocco, Final Report to Minister for Commerce: Security of Payment Reform in the WA Building and Construction Industry (31 October 2018).

6 See CMA Assets Pty Ltd v John Holland Pty Ltd [No 6] [2015] WASC 217 (Allanson J, upholding a strict time bar even where the contractor would otherwise have been entitled to an extension of time).

United States

US Supreme Court rules that state-law principles allow non-signatory to enforce arbitration provision against signatory

In cases involving contracts between US companies, courts frequently allow a non-signatory to a contract to enforce an arbitration provision in the contract against a signatory, when the signatory to the contract relies on the terms of that agreement in asserting its claims against the non-signatory. On 1 June 2020, the US Supreme Court ruled unanimously that this principle – known as ‘equitable estoppel’ – may also be applied to international contracts governed by the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, also known as the New York Convention. This is because nothing in that Convention conflicts with the enforcement of arbitration agreements by non-signatories under domestic-law equitable estoppel doctrines.

The Supreme Court’s decision in GE Energy Power Conversion France SAS, Corp v Outokumpu Stainless USA, LLC,¹ overturned a ruling of the US Court of Appeals for the Eleventh Circuit, and resolves a split on this issue between the Eleventh and Ninth Circuits, on the one hand, and the First and Fourth Circuits, on the other.

GE Energy concerned a company that had entered into three contracts with F L Industries, Inc for the construction of cold rolling mills at a steel manufacturing plant in Alabama. Each of the contracts contained an identical arbitration clause, providing for arbitration of disputes to take place in German in accordance with the Rules of Arbitration of the International Chamber of Commerce. After executing these agreements, F L Industries entered into a subcontract agreement with GE Energy Power Conversion France SAS, Corp (GE Energy) for the design, manufacture and supply of motors for the cold rolling mills. The owner of the steel plant and its insurers filed suit against GE Energy in the Alabama State Court, alleging that the motors that it supplied failed, resulting in substantial damages.

GE Energy removed the action to federal court and then moved to dismiss and compel arbitration of the claims, relying on the arbitration clauses in the contracts between F L Industries and the original owner of the plant. The District Court ruled that GE Energy qualified as a party under the arbitration clauses because the contracts defined the terms ‘seller’ and ‘parties’ to include subcontractors and compelled arbitration.²

The Eleventh Circuit reversed, ruling that the New York Convention includes a requirement that the parties actually sign an agreement to arbitrate their disputes in order to compel arbitration.³ It then ruled that GE Energy could not rely on state-law equitable estoppel doctrines to enforce the arbitration agreement as a non-signatory because, in the Court’s view, equitable estoppel conflicts with the New York Convention’s signatory requirement. The Eleventh Circuit’s ruling on the equitable estoppel was consistent with an earlier Ninth Circuit decision,⁴ and inconsistent with decisions of the First and Fourth Circuits.⁵

The Supreme Court reversed. In a unanimous opinion written by Justice Thomas, the Court noted that it had previously ruled that the Federal Arbitration Act permits non-signatories to rely on state-law equitable estoppel doctrines to enforce an arbitration agreement. The Court ruled that nothing in the New York Convention prohibits the application of domestic equitable estoppel doctrines to international contracts providing for arbitration, and that the treaty’s silence on that issue was dispositive. The Court also found support for its interpretation by looking to decisions by courts of other New York Convention signatories, which it found also permitted enforcement of arbitration agreements by entities that did not sign the agreement.

Because the Eleventh Circuit concluded that the New York Convention prohibited enforcement by non-signatories, it did not determine whether GE Energy could enforce the arbitration clauses under principles of equitable estoppel or which body of law governed that determination. The Supreme Court remanded the case to the Eleventh Circuit to make those determinations.

The Supreme Court’s decision therefore resolved an issue on which the federal appeals courts were split. It also brings the enforcement of arbitration provisions in international contracts into conformity with the enforcement of such provision in domestic contracts in regard to the potential for non-signatories to compel a signatory to bring its claims in arbitration, rather than to litigate against the non-signatory in court. The decision provides non-signatories with an option to compel arbitration when the conditions for equitable estoppel are met.

Notes

1 Case No 18-1048 (1 June 2020).

2 Outokumpu Stainless USA LLC v Converteam SAS, 2017 WL 401951 (S D Ala 30 Jan 2017).

3 Outokumpu Stainless USA LLC v Converteam SAS, 902 F 3d 1316 (11th Cir 20218).

4 Yang v Majestic Blue Fisheries, LLC, 876 F 3d 996 (9th Cir 2017).

5 Aggarao v MOL Ship Mgmt Co, 675 F 3d 355 (4th Cir 2012); Sourcing Unlimited, Inc v Asimco Int’l, Inc, 526 F 3d 38 (1st Cir 2008).

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