More substantial changes to Queensland’s security of payments regime

On 5 February 2020, the Queensland Government introduced its latest package of building industry payment reforms in the form of the Building Industry Fairness (Security of Payment) and other Legislation Amendment Bill 2020.

Most of this bill is as a result of a report of the review taskforce released in November last year. The Bill includes amendments which will enhance Queensland’s security of payment laws and covers a range of reforms of significance to local government, such as seeking to strengthen the building certification and inspection process in Queensland.

Here are some of the key points.

Project Bank Accounts

The major changes are in the area of project bank accounts, which are to become “statutory trusts”. Whilst there are significant legal implications arising from these changes, turning project bank accounts into “statutory trusts” should not have a substantial impact in terms of the day-to-day administration of construction contracts.

Cornwalls will provide more information on project bank accounts over coming months but in the meantime it is important to know that currently, certain government projects with a value of between $1 million and $10 million are within the project bank accounts system and that the system will now be extended throughout the Queensland industry.

Projects to which the project bank account system will progressively apply, are as follows:

  1. Phase 2 (from July 2020): All Government projects exceeding $10 million excluding GST or over;
  2. Phase 2A (from July 2021): Private projects exceeding $10 million or over are added;
  3. Phase 3 (from January 2022): Private projects in the range of $3 million-$10 million excluding GST are added; and
  4. Phase 4 (from July 2022): Private projects in the range of $1 million-$3 million excluding GST are added.

The changes in the Bill mean that principals, head contractors and first tier subcontractors will not be required to establish a retention account for each separate project. They will only need to establish one retention trust account for retention amounts withheld across all projects to which the project bank account regime applies. Further, if the Bill is passed as it is, principals, head contractors and first tier subcontractors will be the only participants in the contractual chain who may be required to establish retention trust accounts. The change from multiple retention trust accounts to just one single one, and further, clarity that such retention trust accounts are not required all the way down the contractual chain, is very welcome and will significantly reduce the administrative burden of establishing and administering multiple retention trust accounts.

The requirement for a disputed funds account for each project the subject of the project bank account regime will also be abolished. This is also good news particularly given they were effectively redundant.

Heavy penalties and personal liability of “executive officers”

The original Building Industry Fairness (Security of Payment) Act included significant fines and imprisonment for breaches of the Act. The new Bill adds more penalties making it even more important than it ever has been, to know and understand how the security of payment regime works in Queensland.

Under the new law it will be an offence to pay less than the amount which has been scheduled for payment in a payment schedule. That offence is punishable by a fine of up to 100 penalty units – which is currently $13,055.00.

A new regime of personal liability for company “executive officers” is to be introduced. An “executive officer of a corporation” is defined (rather unclearly) to mean a person who is concerned with, or takes part in, the corporation’s management, whether or not the person is a director or the person’s title  suggests that they are an executive officer.

Accordingly, if an “executive officer” does not take “all reasonable steps” to prevent a corporation committing an offence, they can be personally liable for certain offences under the Queensland security of payment laws.

The term “all reasonable steps” has been defined by the courts in a number of cases in relation to the now repealed provisions in the Queensland Building and Construction Commission Act 1991 (Qld) relating to permitted individual applications.  If those cases are applied in cases about what an “executive officer” has to do in order not to be guilty of an offence, it might be difficult to demonstrate that a person took “all reasonable steps”.

Beware state managers, regional managers and project managers as these provisions will almost certainly apply to you personally.

All “executive officers” can be liable under these provisions and could have significant fines imposed on them personally including for example, when:

  • The company does not open a trust account when it is required to do so under the Act
  • The company does not pay money into the trust account when it is required to do so under the Act
  • There are unauthorised withdrawals from the trust account
  • Withdrawals from the trust account are not paid to the subcontractor when they should be
  • There are unauthorised withdrawals of moneys from the retention trust account; and
  • Moneys are withdrawn from the retention trust account before the defects liability period expires.

As the system expands the potential for smaller players with inadequate payment administration systems to be caught, grows.

Changes to adjudications

Where an adjudicated amount remains unpaid after the due date for payment:

  1. Claimants may serve a payment withholding request on a party higher up the contracting chain which attaches to any amount that is or will become payable by that party to the respondent (including an ability for head contractors to serve a payment withholding request on the principal’s financier). This is like the current subcontractor’s charge.
  2. Head contractor claimants may have a charge registered over the principal’s real estate on which the construction work the subject of the adjudicated amount was carried out, if the principal or a related entity is the registered owner of the property. The Bill allows a claimant head contractor to apply to a Court for an order for the sale of the property.

Another change is also made in relation to head contractors. A payment claim by a head contractor must be accompanied with a “supporting statement” declaring that all subcontractors have been paid as at the date of the payment claim or stating the full amount owed giving their details and the sums outstanding as well as reasons for non-payment in full and several other details. However, failure to provide the supporting statement will not affect the validity of the claim.

Court action

The provision relating to commencing proceedings where no payment schedule is served will be amended. Currently a notice of intention to sue must be served within 20 days of the due date of payment. Under the new law, the period will be extended to 30 business days. The continuing effect of this section is that if the notice is not served within 30 business days there is no ability to rely upon the default by the respondent to take court action.

Ongoing work on security of payment reform

Cornwalls continues to lobby for improvements in the security of payment laws of Queensland and other jurisdictions. Indeed, Cornwalls has been invited to appear before the Transport and Public Works Parliamentary Committee on Wednesday 4 March, to be heard in relation to submissions recently made by Cornwalls’ aim to improve the new Bill. We will keep you informed of further developments as they occur.

Conclusion

These are significant changes, but this is not an exhaustive list. There are a number of other changes with which subcontractors, contractors and principals need to become familiar and apply in their day to day business.

The changes set out in the Bill, whilst intended to increase the extent to which contractors and subcontractors are paid properly and on time, do make the regime more complex and the adverse consequences for those who do not comply with the regime are even greater than they were.

Every principal, contractor and subcontractor needs to understand what these changes will mean to them in practice. To register your interest in a workshop covering the changes to the security of payment regime in Queensland, please email constructionlaw@cornwallsqld.com.au.

Queries
If you have any questions about this article please get in touch with the author or a member of our Building & Construction team.

Disclaimer
This article is general commentary on a topical issue and does not constitute legal advice. If you are concerned about any topics covered in this article, we recommend that you seek legal advice.

The Building and Construction team has extensive experience in dealing with the regulatory regime confronting the building industry. Our presence in Brisbane, Sydney and Melbourne means that we have detailed, ‘on the ground’ knowledge of the regulatory environment in the areas where we practice, and the ‘boots on the ground’ to deal with your matter in a timely and efficient manner. If you have a regulatory issue, we have probably seen it before, and can provide you with strategic advice to assist you in achieving outstanding outcomes.

The Author

Michael Cope

SPECIAL COUNSEL, BRISBANE

Key Contacts

Ian Heathwood

PARTNER, BRISBANE

Paul McCann

PARTNER, SYDNEY

Richard Hutchings

PARTNER, MELBOURNE