Construction Disputes & Litigation

Security of Payment for contractors in WA – change coming for the construction industry

After being passed by the Legislative Assembly, on 26 May 2021 the Building and Construction Industry (Security of Payment) Bill 2021 was introduced to the Legislative Council for final review.   The Bill is expected to pass through Parliament this year and come into effect.  

The Bill is a reform of the existing Construction Contracts Act 2004 (WA).  It will make the WA security of payment laws more consistent with other Australian states and territories, and adopt some of the best practice recommendations from the Commonwealth Government’s 2017 national review.  

The Bill is not intended to have retrospective effect, so there will be a transitional period between the old system and the new amendments.  Contractors should not assume they are covered by the new system.

Among other things, the Bill includes measures such as:  

• increasing the statutory protections available to contractors and shortening the time for payment of contractor claims.  Contracting parties will need to be aware of these changes when drafting their contracts, and 'payers' should be aware of the shortened timeframes for voicing disputes and providing associated details;
• an adjudication review process (in essence, an appeal process) that was not previously available outside of the court system;
• protecting retention money in the event of insolvency through a deemed trust scheme that applies across the contracting chain; and
• expanding the powers of the Board to take action against building service providers who fail to pay court and adjudication debts, and to exclude those with a history of financial failure from holding a registration.

For more information on how these changes may affect you, or if you require any assistance, please contact Dominique Engelter of our office. 

Williams + Hughes Earns Recertification in Meritas, the Leading Global Alliance of Independent Business Law Firms

Williams + Hughes is pleased to announce that it has been awarded recertification in Meritas, a global alliance of independent business law firms. Williams + Hughes joined Meritas in 2014 and, as a condition of its membership, is required to successfully complete recertification every three years. 

Meritas is the only law firm alliance with an established and comprehensive means of monitoring the quality of its member firms, a process that saves clients’ time validating law firm credentials and experience. Meritas membership is selective and by invitation only. Firms are regularly assessed and recertified for the breadth of their practice expertise, client satisfaction and high standards of cybersecurity to keep legal information safe. Meritas’ extensive due diligence process ensures that only firms meeting the tenets of Meritas’ unique Quality Assurance Program are allowed to maintain membership. The measurement of the firm’s performance, based on input from clients, is reflected in a Satisfaction Index score, which is available online on the Meritas website.

“Our values of quality service and client satisfaction align with the Meritas mission to provide a safe and responsive global offering to clients,” said Damian Quail, Director. “We’ve successfully collaborated with colleagues in many jurisdictions around the world to solve client issues and help them seize opportunities outside of this market. We look forward to keeping those vital connections through membership in Meritas.”

The recertification process Williams + Hughes completed to maintain its membership status included exacting self-assessment, peer review by other law firms and client feedback.  

“Businesses trust the Meritas alliance of law firms for top-tier quality, convenience, consistency and value,” said Sona Pancholy, president of Meritas. “Williams + Hughes has demonstrated its commitment to world-class legal standards, and therefore has successfully earned its recertification in Meritas.”

For more information about our our membership in Meritas, please see here

About Meritas 

Meritas’ global alliance of independent, market-leading law firms provides borderless legal services to companies looking to effectively capture opportunities and solve issues anywhere in the world. Companies benefit from local knowledge, collective strength and new efficiencies when they work with Meritas law firms. The personal attention and care they experience is part of Meritas’ industry-first commitment to the utmost in quality of service and putting client priorities above all else. Founded in 1990, Meritas has member firms in 259 markets worldwide with more than 7,500 dedicated, collaborative lawyers. To locate a Meritas resource for a specific need or in a certain market, visit Meritas.org or call +1-612-339-8680

Meritas Welcomes DMAW Lawyers, Adelaide, to the Membership

Leading Adelaide commercial Firm, DMAW Lawyers has been selected to be South Australia’s representative firm for Meritas, the premier global alliance of independent law firms.

DMAW Lawyers will become an integral part of the Australia & New Zealand network of firms as well as the worldwide network of 191 law firms located across 96 countries.

This alliance will enhance DMAW Lawyers’ ability to support South Australian business interests both nationally and internationally.

DMAW’s Lawyer’s Managing Director, Mr Leo Walsh said “One of most attractive benefits of belonging to this network was the opportunity for our lawyers to participate in national and global conversations on business and legal issues. Not only does this expand our thinking, and add to our technical skills, but it help our lawyers build trusted, reliable relationships with lawyers in the regions that matter to our clients. Already we’ve participated in meetings with Insolvency experts across the country and with Senior Partners in Shanghai and Tokyo.”

Mr Mike Worsnop, Partner with Martelli McKegg in New Zealand and Co-Chair of Meritas ANZ: “We are delighted to have DMAW Lawyers join our group. Not only was their quality apparent but they’ve been very easy and responsive to deal with during our discussions.  They clearly demonstrated the type of service clients look for when using a firm in a different market.”

“DMAW Lawyers had to meet the rigorous requirements to become members of Meritas, the only law firm alliance with a Quality Assurance Program that ensures clients receive the same high-quality legal work and service from every Meritas firm.”

Meritas membership is extended by invitation only, and firms are regularly assessed for the breadth of their practice expertise and client satisfaction.

Ms Sona Pancholy, Meritas CEO: “In today’s environment having a commitment to a reliable network is more important than ever. Independent law firms, Corporate Counsel, Business Owners and their Commercial Advisors, all choose their portfolio of trusted legal relationships to match the issues and the markets they want to navigate. For 30 years, Meritas has cultivated a group of the best firms for this purpose.”

About DMAW Lawyers

DMAW Lawyers was established in Adelaide in 2002. The firm has ten Principals and a team of 50 staff. DMAW Lawyers focus on three areas of specialization being Corporate, Transactions, and Disputes for Business Clients.

Website: DMAW Lawyers

About Meritas

Founded in 1990, Meritas is the premier global alliance of independent law firms. As an invitation-only alliance, Meritas firms must adhere to uncompromising service standards to retain membership status. With 192 top-ranking law firms spanning 96 countries, Meritas delivers exceptional legal knowledge, personal attention and proven value to clients worldwide.  

Website:  Meritas 

In Australia and New Zealand, Meritas is represented by leading independent commercial law firms in each of these six major capital cities:

In Australia

Adelaide DMAW Lawyers

Brisbane Bennett & Philp

Melbourne Madgwicks Lawyers

Perth Williams+Hughes

Sydney Swaab  

In New Zealand

Auckland Martelli McKegg

COVID-19: Temporary relief for financially distressed individuals, companies and directors

The Australian Federal Government has announced temporary amendments to insolvency and bankruptcy laws, effective from 25 March 2020, to lessen the economic impacts of COVID-19 on individuals and businesses and to allow for business continuity. The legislation passed is called the Coronavirus Economic Response Package Omnibus Act 2020 (Cth) (the COVID-19 Legislation).

The new measures are intended to avoid unnecessary bankruptcies and insolvencies by providing:

• a safety net to help businesses to continue to operate during a temporary period of illiquidity, rather than entering voluntary administration or liquidation;  and
• a safety net to individuals to assist them with managing debt and avoiding bankruptcy.

The temporary amendments that will apply for 6 months from 25 March 2020 until 24 September 2020 include:

• increasing the threshold at which creditors can issue a statutory demand against companies from $2,000 to $20,000, and the time for responding to a statutory demand from 21 days to 6 months;
• relief for directors and holding companies from personal liability for new debts incurred during the period the company trades while insolvent (provided that the debt is incurred in the ordinary course of the company’s business);
• providing targeted relief for companies from provisions of the Corporations Act 2001 (Cth) (the Act) to deal with unforeseen events that arise as a result of the COVID-19 health crisis; and 
• a temporary increase in the threshold for a creditor to initiate bankruptcy proceedings from $5,000 to $20,000, and an increase in the time period for debtors to respond to a bankruptcy notice, as well as extending the period of protection a debtor receives after making a declaration of intention to present a debtor’s position (both of which are extended from 21 days to 6 months).

Statutory Demands (companies)

A failure to respond to a statutory demand creates a presumption of insolvency under the Act, and the company may be placed into liquidation.  The Government has temporarily increased the timeframe for a company to respond to a statutory demand from 21 days to 6 months, thereby lessening the threat of actions that could push a business into insolvency.

The amendments will not prevent the right of creditors to enforce debts against companies or individuals through the courts.  However, creditors will not be able to rely upon a failure to pay to commence winding up proceedings until the expiration of the 6 month period, if the statutory demand is served on or after 25 March 2020. 

Insolvent Trading (companies)

The introduction of a new section 588GAAA into the Act provides temporary relief to directors from personal liability for insolvent trading in respect of debts that are incurred by their company if the debt is incurred:

• during the 6 month period from 25 March 2020;
• in the ordinary course of the company’s business;  and
• before any appointment of an administrator or liquidator over the company (during the 6 month period).

According to the Explanatory Memorandum to the COVID-19 Legislation, a director is taken to incur a debt in the “ordinary course of the company’s business” if it is necessary to facilitate the continuation of the business during the 6 month period.  This could include a director taking out a loan to move some of the business operations online or incurring the debt to pay employees during the COVID-19 pandemic.

While the new provision of the Act provides protection during the 6 month period, a person wishing to rely on the temporary safe harbour in a court proceeding in which unlawful insolvent trading is alleged will bear an evidential burden in relation to that matter.  This means producing evidence to support their reliance on the temporary safe harbour.   

A holding company may also rely on the temporary safe harbour provisions for insolvent trading by its subsidiary if it takes reasonable steps to ensure the temporary safe harbour applies to each of the directors of the subsidiary, and to the debt, and if the temporary safe harbour does in fact apply as a matter of law.  The holding company must establish this by producing evidence to support their reliance on the temporary safe harbour.

Bankruptcy Proceedings (Individuals)

To assist individuals, the Government has made a number of changes to the personal insolvency system regulated by the Bankruptcy Act 1966 (Cth). These include:

• the threshold for the minimum amount of debt required for a creditor to initiate bankruptcy proceedings against a debtor will temporarily increase from $5,000 to $20,000;
• the time a debtor has to respond to a bankruptcy notice is increased from 21 days to 6 months; and    
• the period of protection a debtor receives after making a declaration of intention to present a debtor’s petition is extended from 21 days to 6 months.  

These temporary measures will apply for 6 months from 25 March 2020 until 24 September 2020.

Temporary Powers given to the Treasurer

The COVID-19 Legislation enables the Treasurer to provide short term regulatory relief to classes of persons that are unable to meet their obligations under the Act or the Corporations Regulations 2001 (Cth) by:

• ordering that specified classes of persons are exempt from specified obligations;  or
• modifying specific obligations under the Act to enable specified classes or persons to comply with their obligations during the COVID-19 crisis.

The Treasurer can exercise this power if they are satisfied that it would not be reasonable to expect the persons in the class to comply with provisions because of the impact of COVID-19, or the exemption or modification is otherwise necessary or appropriate in order to facilitate continuation of business in circumstances relating to COVID-19, or to mitigate the economic impact of COVID-19.

This is a temporary provision to facilitate the continuation of business during the coronavirus.

For specific legal advice regarding the new safe harbour provisions, including regarding issuing or responding to a demand to or from your creditors or debtors, please contact Leanne Allison or Cameron Sutton. 

This article is general information only, at the date it is posted.  It is not, and should not be relied upon as, legal advice.  This article might not be updated over time and therefore may not reflect changes to the law.  Please feel free to contact us for legal advice that is specific to your situation.

Covid 19- an overview of the JobKeeper wage subsidy scheme

The core component of the Federal Government’s business support package in response to the Covid-19 pandemic is the JobKeeper scheme. This scheme is intended to help employers retain employees on their books, with the objective of ensuring money continues to circulate in the economy during these challenging times.

The JobKeeper legislation was passed by the Federal Parliament on 8 April 2020.  Rules dealing with administering the scheme were made by the Treasurer on 9 April 2020.

The JobKeeper payment is, in a nutshell, a AUD$1,500 per fortnight per employee wage subsidy paid by the Federal Government to employers until 27 September 2020. 

The estimated cost of this measure is AUD $130 billion. The Government has stated that $1,500 per fortnight is the equivalent of about 70% of the median Australian wage and represents about 100% of the median Australian wage in some of the most heavily affected sectors, such as retail, hospitality and tourism.

The scheme operates via a reimbursement system. Participating employers make wages payments to their employees and are then reimbursed in arrears $1,500 by the Government per eligible employee per fortnight. The Government does not pay employees direct. The JobKeeper payment cannot be claimed in advance. The first payments to eligible employers will commence in the first week of May 2020.The first payment is for the fortnight of 30 March - 12 April 2020 i.e. the scheme commences from that date.

Employers who wish to participate in the scheme must register their interest through the Australian Taxation Office website here by 31 May  2020.

Key Eligibility Requirements

• The employer must be an "eligible employer"

The employer must pursue their objectives principally in Australia.

An employer is not eligible for the JobKeeper payment if any of the following apply:

• the Major Bank Levy was imposed on the employer or a member of its consolidated group for any quarter before 1 March 2020
• the entity is an Australian government agency (within the meaning of the Income Tax Assessment Act 1997)
• the entity is a local governing body i.e. a local government council
• the entity is wholly owned by an Australian government agency or local governing body
• the entity is a sovereign entity
• the entity is a company in liquidation
• the entity is an individual who has entered bankruptcy.

The effect of the second and third exceptions listed above is that employees of State and local Governments are excluded from benefiting from the JobKeeper scheme.

The scheme is not limited to companies. Partnerships, trusts, not for profit organisations, sole traders and other legal entities are eligible to participate in the scheme. Special rules apply to payments to business owners and directors. 

• Most employers will be eligible if their business turnover falls by 30% 

In order to be eligible for JobKeeper payments, the projected turnover of the employer's business must fall by 30% as compared to the same period last year. In order to register for the scheme, a business must self assess that it has had or will have the necessary decline in turnover.  

A 50% turnover decline is required for businesses with revenue of AUD$1 billion or more.

Charities need suffer only a 15% decline in order to be eligible.

The turnover calculation is based on GST turnover, even if the employer is not registered for GST. The ATO has released detailed rules about calculations that must be made, and what documents and supporting evidence is needed.

• Employees need to have been engaged by the employer as at 1 March 2020. This includes full-time and part-time employees. Casual employees are only eligible if they had been employed on a regular basis for at least 12 months prior to 1 March 2020.

Eligible employees must be currently employed by the employer for the fortnights it claims for (including those employees who are stood down or re-hired). The subsidy cannot be claimed for employees who left employment before 1 March 2020.

Employees are only eligible if they are older than 16 and were Australian residents on 1 March 2020.

Many employers in the "gig economy" who are casual employees - including in hospitality, food services, retail and tourism - will be unable to benefit from the scheme if they are "recent hires" i.e. have been employed as casuals for less than 12 months as at 30 March 2020. 

Key legal obligations for participating employers

• Each employee must be paid at least AUD $1,500 per fortnight before tax.

Each employee in respect of whom an employer receives a JobKeeper payment must be paid at least $1,500 per fortnight before tax by the employer. This is the case even if the employee would normally receive less than $1,500 per fortnight.  The employer cannot keep the difference between the JobKeeper subsidy and the employee's usual wages. In effect, the wages of employees who usually earn below $1,500 per fortnight are increased to $1,500. 

It can be seen that for employees who earn less than $1,500 per fortnight, their continued employment through to 27 September 2020 essentially comes at no cost to the employer.

If an employer does not continue to pay their employees for each pay period, they will cease to qualify for the JobKeeper payments. For the first two fortnights (30 March – 12 April, 13 April – 26 April) wages can be paid late, provided they are paid by the employer by the end of April 2020.

• The JobKeeper payment can only be received by one employer for an individual

Only one employer can claim the JobKeeper payment in respect of a person. Where a person works multiple jobs, a choice will need to be made as to which employer receives the subsidy. The employee makes the choice. An employer cannot claim the JobKeeper subsidy without an employee's consent.  

If an employee is a long-term casual and has other permanent employment, they must choose the permanent employer.

• An "one in, all in" principle applies

If an employer decides to participate in the JobKeeper scheme, it must nominate all of its eligible employees. The employer cannot choose to nominate only some eligible employees. However, individual eligible employees can choose not to participate.

• Tax must still be deducted on employee's wages

No deduction for JobKeeper payments received is made when calculating and deducting PAYG tax payments on employee's wages.

• Superannuation is not payable on "top up" payments 

New rules are being introduced by the Government with the intention to not require the superannuation guarantee to be paid on additional payments that are made to employees as a result of JobKeeper payments.

JobKeeper Enabling Directions

The JobKeeper scheme gives eligible employers the authority to make what are described as "JobKeeper Enabling Directions" in respect of eligible employees. These directions are designed to provide greater flexibiliity to employers to manage the hours, duties and location of their workforce in the face of the significant Covid-19 related challenges.

JobKeeper Enabling Directions available to eligible employers include: 

• standing down employees (including reducing days and hours)
• changing the duties performed by the employee
• changing the employee’s location of work.

If you need legal assistance in relation to the JobKeeper scheme, please contact Damian Quail in our office.

This article is general information only, at the date it is posted.  It is not, and should not be relied upon as, legal advice.  This article might not be updated over time and therefore may not reflect changes to the law.  Please feel free to contact us for legal advice that is specific to your situation.

Clarifying the ability of trustees to expand their powers: the decision in Re Application of Country Road Services Pty Ltd

In this article (published in the December 2019 edition of the Law Society Brief magazine) Jonathan Haeusler, Special Counsel, and Michelle Hankey, Solicitor, discuss the court’s decision in Re Application of Country Road Services Pty Ltd [2019] NSWSC 779 regarding a trustee’s role and their ability to expand their powers as trustee. 

The trust instrument that created a trust is the primary source of the trustee’s duties, obligations and powers.  A trustee’s primary duty is to administer the trust in accordance with the terms of the trust instrument.  If a trustee acts outside the terms of the trust instrument, the trustee’s acts will be "ultra vires" i.e. invalid.  In certain circumstances, a trustee may apply to the court for, among other things, an order conferring additional powers on the trustee where it would be “expedient in the management and administration” of the trust property to do so.

However, a trustee cannot seek additional and new powers so that it might administer the trust in a different way from that contemplated in the trust instrument. The trustee should not seek to question the terms of the trust or seek to improve them.

The court’s decision in Re Application of Country Road Services Pty Ltd serves to remind us of the trustee’s function in making applications to the court for orders conferring additional powers on trustees.  In particular, the court’s observations remind us that the trustee’s role is to administer the trust in accordance with the terms of the trust instrument, not to seek to change the trust instrument.  Further, that the usual role of a trustee should be one of neutrality.  

The key take-aways from the court’s decision are set out in Jonathan’s article, which is available here.  

If you have any queries regarding trust administration, please contact Jonathan Haeusler or Michelle Hankey of our office. 

This article is general information only, at the date it is posted.  It is not, and should not be relied upon as, legal advice.  This article might not be updated over time and therefore may not reflect changes to the law.  Please feel free to contact us for legal advice that is specific to your situation.

Superannuation guarantee amnesty: one last chance to pay compulsory superannuation for non-complying employers who employ "contractors"

Employee versus contractor? Are you sure?

Over the past decade many Australian companies have retained the services of people who claim they are "contractors" not employees. Usually the "contractor" wants to be paid a gross fee/remuneration, stating that they will take care of income tax, superannuation and other payments. 

The attraction for the employer is a lower total cost of retaining the person as compared to bringing them on as an employee, as well as perceived flexibility in options for ending the relationship as compared to traditional employment (the thinking is that no redundancy or leave entitlements need to be paid and no notice period applies).

Such practices were common in the IT, marketing, construction and other industries, particularly so called “digital industries”. The “gig economy” has seen the practice gain pace.

The legal reality is that many "contractors" are actually employees, particularly where they turn up to work at the same place each day, take their instructions from "a boss" at the company, are paid by the hour rather than for delivering an end product, and don't have to redo their work at their cost if the deliverable is not done to the required standard.

In such cases, income tax and compulsory superannuation guarantee payments must be paid by the employer for "contractors" who are, legally, employees. If the payments are not made, significant penalties accrue over time and must be paid to the Australian Tax Office (ATO).

Often this superannuation liability only hits home when the employer tries to sell their company and the buyer's due diligence experts point out the problem. Significant superannuation shortfall payments and ATO penalties loom large for the seller, as well as a reduction in the sale price, or at least a significant escrow sum demanded by the buyer.

A superannuation guarantee amnesty is potentially available.

Legislation has been reintroduced to Parliament providing an amnesty for employers who have not paid superannuation guarantee (SG) payments. The proposed amnesty will allow fines to be avoided, provided the SG payments are made.

The Treasury Laws Amendment (Recovering Unpaid Superannuation) Bill 2019 (the Bill) was re-introduced into the House of Representatives on 18 September 2019. The Bill was then referred to the Economics Legislation Committee for further inquiry. The Committee released its report recently - available here.

The Bill provides employers who have previously failed to pay SG contributions and failed to disclose the shortfall to the ATO with a “second chance” to self-correct any historical non-compliance. 

This amnesty operates as a way for the ATO to encourage employers to disclose unpaid SG amounts for the period during which the amnesty applies - without fear that they will be liable for fines typically associated with non-compliance. 

What are my SG obligations generally?

The Superannuation Guarantee (Administration) Act 1992 (SGAA) requires that employers pay a certain percentage of an employee’s earning into the employee’s superannuation fund. A Superannuation Guarantee Charge (SGC) is imposed on employers who fail to pay the required SG amount i.e. the SGC is the shortfall plus interest and administration costs, and this is payable by the employer to the ATO each quarter. 

Employers can also be liable for penalties for failing or refusing to provide a statement or information as required under the SGAA, which can be up to 200% of the amount of the underlying SG amount (known as Part 7 Penalties). 

How will the proposed amnesty work?

The first step is disclosing unpaid SG to the ATO. An employer who discloses SG non-compliance and pays an employee’s full SG entitlements plus any interest (which may incude nominal interest and a general interest charge (GIC)) will be entitled to the amnesty, and will avoid liability for penalties normally associated with late payment and non-compliance.  

The employer with an outstanding SG liability can either: 

• pay the unpaid SG amounts, GIC and nominal interest directly to the ATO; or 
• pay the unpaid SG and the nominal interest to the employee's superannuation fund, and then elect to offset these amounts against their liability for SGC and GIC (if any).

However, if employers have an existing SGC assessment for a quarter, or are otherwise unable to contribute directly into their employee’s superannuation fund, they will be required to pay the SGC to the Commissioner directly.

If the employer makes a disclosure under the amnesty, the administration charge component of the SGC will be waived (see example 1.1 in the Explanatory Memorandum). 

The amnesty is proposed to extend to all reporting quarters from the quarter commencing 1 July 1992 to the quarter commencing 1 January 2018. 

The disclosure to the ATO must be made in the correct form, and the employer must pay the amount of the disclosed SG to the employee or the SGC to the ATO (see above) within the required period. Failure to pay will mean the employer will not be able to rely on the amnesty and will be subject to the normal penalties imposed. 

It is expected that employers will be given from 24 May 2018 to 6 months after the date the Bill receives Royal Assent to make disclosure and pay the shortfall and interest (the Amnesty Period).  

In summary, in order to benefit from the amnesty the unpaid SGC must: 

• Not have been previously disclosed to the ATO; 
• Have been incurred between 1 July 1992 and 31 March 2018; and 
• Not be under examination by the ATO previously.

The employer must also:

• disclose the shortfall to the ATO within the Amnesty Period; and
• pay the shortfall plus interest within the Amnesty Period. 

If the employer does the above things for eligible SG shortfalls, they will not be liable for Part 7 Penalties. SG amounts paid during the Amnesty Period will be tax deductable. 

If the Bill is passed, employers who have failed to comply with their SG obligations in the past should take advantage of this opportunity to avoid liability for such penalties.

Employers who fail to disclose during the Amnesty Period 

Employers who do not disclose and pay unpaid SG and interest within the Amnesty Period will be subject to higher penalties. Generally, the Commissioner has discretion to remit Part 7 Penalties. However, from the day after the Amnesty Period ends the Commissioner’s ability to remit Part 7 Penalties will be limited. According to the Explanatory Memorandum, the Commissioner will not be able to remit penalties below 100% of the amount of SGC owing by the employer for a quarter covered by the amnesty. The penalty will include interest and an administration fee. 

What does this mean for my business?

The amnesty is a one-off second chance for employers to reduce their exposure to penalites for unpaid SG. Employers who are aware that they have failed to comply with their SGC obligations, or are unsure whether they have fully complied since 1 July 1992, should ensure that they keep informed of the progress of the Bill. 

In particular, employers who have utilised the services of “contractors” who look-and-feel like employees should consider taking advice on whether the persons involved were legally employees for the purposes of tax, superannuation and other legislation.

If you would like further information regarding the new laws or any other issue please contact Damian Quail or Cassandra Bailey.

This article is general information only, at the date it is posted.  It is not, and should not be relied upon as, legal advice.  This article might not be updated over time and therefore may not reflect changes to the law.  Please feel free to contact us for legal advice that is specific to your situation.

Security of Payment Reform in the Western Australian Building & Construction Industry

On 31 October 2018, the State Government’s Industry Advisory Group published its report on ‘Security of Payment Reform in the WA Building and Construction Industry’.

The Report was a response to recent high-profile corporate collapses in the building and construction industry such as Diploma and Builton, which left numerous contractors and subcontractors without payment for work performed. In addition, despite significant regulation already existing, subcontractors continue to face significant difficulties in getting paid in full and on time without legitimate cause, in circumstances where their principals or head contractors hold greater financial power.

As the industry continues to transition further away from directly employed workforces and towards greater use of external subcontract relationships, those at the lower end of the contractual chain of payment remain vulnerable. Statistical evidence indicates that the industry has one of the highest rates of insolvency and payment delinquency.

For those people who may from time to time be involved in negotiating variations, perhaps the most significant recommendation in the Report is that all contracts valued at $20,000 or more (including variations) be in writing and contain specified information, unless an exception applies such as extreme urgency. If implemented, this will significantly limit the scope for oral variations. 

Other key recommendations from the report include:

• permitting disciplinary action against builders that fail to pay undisputed or determined debts;
• introducing a demerit point system which will empower the State Administrative Tribunal to suspend or cancel registration of builders who demonstrate poor payment practices;
• granting the Building Services Board the power to exclude individuals and companies with a history of business failure from remaining registered as builders;
• implementing steps to encourage greater use of standard form contracts;(again, this means subcontractors will be protected upon insolvency of the head contractor); and
• mandating that any security withheld under a construction contract be returned no later than 12 months after practical completion.

For further information on how these changes may impact on your business please contact Chris Bailey, Special Counsel on 08 9481 2040 or chris.bailey@whlaw.com.au
 

This article is general information only, at the date it is posted.  It is not, and should not be relied upon as, legal advice.  This article might not be updated over time and therefore may not reflect changes to the law.  Please feel free to contact us for legal advice that is specific to your situation.

Case Note - Swinburne v Boase [2016] WASC 299 - Always Support the Caveat with a Charging Clause or Some Other Express Grant of a Proprietary Interest

It is not uncommon for loan and residential construction agreements (or similar) to include a clause noting the lender is entitled to lodge a caveat over land. Sometimes this happens where a borrower deletes the charging provision/s but retains the provision entitling the lender to lodge a caveat.

The question arises whether the lender actually has, in these circumstances, a ‘caveatable interest’ in land for the purposes of section 137 Transfer of Land Act 1893 (WA) (or equivalent provisions in other jurisdictions); perhaps more importantly whether the lender has an effective security interest in the land by reason of the contractual right to lodge a caveat.

Historically the answer to the question was “no”. In more modern times the courts have been willing, on a case by case basis, to imply the grant of a proprietary interest alongside the express contractual acknowledgment of a right to lodge a caveat.

Accordingly, there are three possible outcomes where a document permits the lodgement of a caveat over land without expressly granting a charge (and there is a subsequent challenge to the caveat):

• The best outcome for the lender is that it has an equitable charge – making it a secured creditor and giving it some albeit restricted enforcement rights.
• Alternatively, the lender may not have an equitable charge but nonetheless have an interest in and sufficient to support a caveat – for example a right to be repaid from proceeds of sale of the land if the borrower ever decides to sell (but without the lender having rights to apply to the court for possession of the land or to compel sale).
• Finally, the lender may have no interest in the land at all; the contractual acknowledgement of the right to lodge a caveat being nugatory.

In the recent decision of Swinburne v Bose [2016] WASC 299, the plaintiff sought to extend the operation of a caveat lodged over the defendants’ property. The caveat was lodged after the first defendant defaulted on payments owed to the plaintiff under two loan agreements.

The loan agreements had been drafted without the help of lawyers. The relevant clause in each agreement was:

“If there is any default in repayment for more than 2 months… (the lender) has the legal right to take caveat over… [the property]”.

The interest claimed in the caveat was an ‘equitable charge’.

Issue

The questions for the Court were, firstly, whether a provision in loan agreements for a caveat to be lodged upon default in payment granted a caveatable interest in land and, if so, whether the plaintiff’s application to extend the operation of the caveat should be accepted.

Reasoning

The Court noted:

• In the absence of express intent, it is for the court to determine whether an intention to create an equitable charge can be implied.
• Authorisation to lodge a caveat does not create by necessary implication, the conclusion the parties intended to create an equitable interest, of for any such interest to equate to a charge over the property.
• Whether or not the relevant intention to grant an interest in land can be implied will always depend upon the terms of the relevant contract in the particular circumstances to hand.

Ultimately the Court decided there was a sufficiently arguable case, the link in the loan agreements between the authority to caveat and the obligation to pay the plaintiff reflected an intention to create an equitable charge. The operation of the caveat was extended.

Main points to take away

• Clients with the benefit of the caveat clause, in the absence of an express charging clause, ought to be advised of the risk their position is not secure.
• A contractual right to lodge a caveat should put a caveator in a position where they have an arguable case to extend the operation of a caveat on an interim basis (subject to the balance of convenience). This will in turn give the caveator some bargaining power to negotiate a commercial outcome. Whether the caveat is sustainable on final analysis is another question.
• A right to lodge a caveat, on its own, does not automatically create an equitable interest in land.
• Whether a provision granting such a right also creates an equitable charge is a matter to be determined on construction of the provision itself and the surrounding circumstances.
• The court will try to determine whether, on the facts of the case, it was the parties’ intention to create an equitable charge or some other caveatable interest in land.
• The interest claimed in any caveat should be drafted in sufficiently wide terms to catch not only an equitable charge, but also a general right to be paid from any proceeds.

This article is general information only, at the date it is posted.  It is not, and should not be relied upon as, legal advice.  This article might not be updated over time and therefore may not reflect changes to the law.  Please feel free to contact us for legal advice that is specific to your situation.