RESPONSE TO REVIEW OF THE CONSTRUCTION CONTRACTS (SECURITY OF PAYMENTS) ACT (NT): ISSUES PAPER OCTOBER 2017

HIA Submission to the Department of Attorney-General & Justice RESPONSE TO REVIEW OF THE CONSTRUCTION CONTRACTS (SECURITY OF PAYMENTS) ACT (NT): ISSUES PAPER OCTOBER 2017 28 November 2017

1. EXECUTIVE SUMMARY...3 2. RESPONSE TO QUESTIONS POSED IN THE ISSUES PAPER...3 Housing Industry Association contact: Neilia Humphries Executive Director - NT Housing Industry Association Ltd 651 Stuart Highway Business Park, Berrimah NT 0820 Phone: 08 8995 6303 Email: n.humphries@hia.com.au - i -

1. EXECUTIVE SUMMARY HIA welcomes the opportunity to comment on the Issues Paper for the Statutory Review of the Construction Contracts (Security of Payments) Act 2004 (NT). HIA supports the view that every entity in the building process whether the builder or contractor - has a right to be paid for the work that they have performed in a timely manner and in accordance with their contractual rights. Where a payment is genuinely disputed, HIA supports the implementation of mechanisms that enable the fast and cost effective determination of such disputes. Largely, HIA supports the current security of payment of laws in operation in the Northern Territory. The WA/NT model is much preferable to the pay now, argue later model in operation in the Eastern states. Modelled after the west coast model of adjudication in place in Western Australia, these laws have largely operated as intended and unlike the legislation adopted in states like Queensland and NSW have not been subject to ongoing, confusing and almost annual change and amendment. There are however aspects of the current model that can be improved. A key improvement is to increase the education and awareness of the legislation. When used it can provide an effective mechanism for securing payment. Other improvements include better clarity on the timeframes that apply and an extension of certain timeframes to enable greater access and use of the laws. HIA otherwise responds to relevant questions posed in the Issues Paper below. 2. RESPONSE TO QUESTIONS POSED IN THE ISSUES PAPER Question 1 Generally, do the policy objectives of the NT Act remain valid and its terms remain appropriate for security its objectives? The Act provides that its object is to promote security of payments under construction contracts. This is achieved by: (a) facilitating timely payments between the parties to construction contracts; and (b) providing for the rapid resolution of payment disputes arising under construction contracts; and (c) providing mechanisms for the rapid recovery of payments under construction contracts. HIA considers that these are sound objects that do not require changing. Page 3 of 14

Question 4 Should the name of the Act and section 3 (Objective provision) be amended to reflect the Act s functions? For example, Construction Contracts (Payment Disputes and Statutory Provisions) Act, Construction Contracts Act (as per the name of the WA Act) or something similar? HIA does not see any need to make window dressing or potentially confusing changes of this nature. The current NT Act commenced on 1 July 2005 and has been operating with the same name including the words security of payment for at least 12 years. The phrase security of payment is generally well understood within the construction industry to describe the entitlement of sub-contractors, contractors, consultants or suppliers in the contractual chain to receive and pursue progress payments due to them under construction contracts when undertaking work or services. Further, apart from Western Australia, every other State and Territory uses security of payment within the name of the relevant Acts. Question 5 Should the Act have other provisions that provide for greater security? In responding to this question, the Issues Paper does not specifically set out what it means by greater security although it references the possibility of creating a statutory trust. HIA notes that last year the flawed Cureton (desktop) review of the industry recommended statutory trusts. HIA did not support such considerations at this time and does not support such considerations as part of this review. The application of statutory construction trusts, whether in mode suggested by Bruce Collins in NSW in 2011 or the project bank account approach, would not be fair to the entire industry. Nor are they practical, cost effective or workable. Although there are some groups lobbying for trust schemes, most arguments are based on claims of emotion and of faith rather than a result of careful analysis. The increase in red tape associated with any type of trust arrangements is unworkable for many small builders in the residential construction industry. Builders will pass on not only the increased overheads as result of the new red tape and administration costs but also increase their contract prices to reflect their additional business risks under this new environment. The ultimate impact of introducing such measures would be the increase in housing prices and decrease in housing affordability. Feedback from HIA s territory members last year was that statutory trusts would drive many scrupulous and legitimate builders out of the industry. Page 4 of 14

A fundamental problem with mandatory trusts is that they distort risk allocation and commercial arrangements. Construction trusts provide a payment mechanism to only one part of contractual chain. It ignores everyone else with payment rights in the contracting process. Trust arrangements also only superficially provide greater security for subcontractors. In reality, it places additional risks on the overall viability of the building contractor s business and exposes them to financial challenges. The reality is that the normal practice in the residential construction industry is that both builder and trade contractor are paid periodically and in arrears during the execution of the works. Both essentially act as financiers of a sort. A builder receives progress payments from a client for work performed under the contract with the owner. However it is the builder that carries the contractual risk and statutory liability to the owner for that work. If these progress claim funds are to be held in a trust account for the benefit of particular subcontractors (even if not yet due and payable) builders will incur additional financing costs for working capital. The use of trust funds will not stop unethical conduct or unscrupulous behaviour nor stop spending of moneys purportedly held in trust. Question 6 Does the 90 day period in which applications can be made adversely affect the speedy resolution of payment disputes? In most circumstances, the 90 day period is appropriate. There is however some uncertainty as to when the timeframes run from as the trigger for the 90 day timeframe is a payment dispute. There needs to be improved clarity on when precisely this occurs. Question 7 Should the period in section 28 of the NT Act for a response be extended? HIA agrees that it is incongruent for the claimant to have 90 calendar days to prepare a claim whilst the respondent only has 10 working days to prepare a response. The time for a respondent to respond should be extended. Page 5 of 14

Question 8 If so, would: (a) 20 working days be appropriate for large contracts; and (b) 15 working days be appropriate for other construction contracts; or (c) Some other period be more appropriate? HIA notes that in most states and territories, respondents only have a very short time within which to respond to the adjudication application. In New South Wales, Victoria and South Australia, the time for submitting a response is the later of five business days after receiving a copy of the application or two business days after receiving notice of an adjudicator s acceptance of the application; In Western Australia, the time for submitting a response is 14 days after receipt of an adjudication application; In Tasmania, the time for submitting a response is 10 business days after receipt of an adjudication application or five business days after receiving notice of an adjudicators acceptance of the application; In Australian Capital Territory, the time for submitting is seven business days after receipt of an adjudication application or five business days after receiving notice of an adjudicator s acceptance of the application. HIA considers, in these circumstances, 15 working days is appropriate. Question 9 Should the timeline in section 33 for making of a determination by an adjudicator be extended? In most jurisdictions, adjudicators have 10 business days. For simple claims, this should be appropriate. For claims involving detailed consideration of complex material such as materials relating to variation disputes, then HIA supports the adjudicator having additional time, yet in any event the decision should be made within 10 days as prescribed by the Act. Question 10 Should section 33 be amended so that adjudicators have the right to extend the time for making a decision by a period of up to 5 working days? As stated above, 10 business days is appropriate for simple claims. Section 34 (3)(a) allows an adjudicator to seek consent from the Registrar to extend the time for making a determination. HIA does not think it is necessary to create further amendments in the circumstances. Page 6 of 14

Question 11 Are there any current or potential problems regarding the operation of section 28(2) for minor procedural flaws in an application? Subsection 28(2) requires the party filing an application to either: state the details of the construction contract in the application or attach the construction contract to the application; and either state the details of the payment claim that has given rise to the payment dispute or attach the payment claim that has given rise to the payment dispute. These rules are fairly clear on their face. Whilst technical requirements should not invalidate applications unnecessarily, HIA does not consider it appropriate that adjudicators be empowered to effectively exercise a judicial discretion in permitting applications that fail to comply with the statutory criteria. Question 12 Should section 27(a) be amended to make it clear that a previous application in relation to that dispute, including one that has been withdrawn, precludes a further application; or should section 27(a) be limited to matters that have already been determined by an adjudicator? It is HIA s view that an applicant should be not precluded from making a further application if the application is withdrawn before an adjudicator is appointed. Sometimes it is necessary for an applicant to withdraw their application if it does not comply with the technical requirements. This is especially the case if the applicants are not legally represented. Otherwise HIA agrees with the general principle behind section 27, namely that applicants do not forum shop or attempt to agitate the same matter twice. Question 13 Should section 45 be amended to enable the enforcement of an adjudicator s determination to return a bank guarantee or other non-monetary security as an order for a court of competent jurisdiction? As section 33(1)(b)(ii) of the Act already contemplates adjudicators making determination for the return of security, this should extend to bank guarantees. Question 15 Should the NT Act be amended to allow for an adjudicator to consider multiple payment disputes arising under the one contract simultaneously? Page 7 of 14

In HIA s view, it would be cost effective and reasonable for an adjudicator to be able to consider multiple payment disputes arising under the one contract simultaneously. However, the consideration and determination of multiple disputes should only be permitted where compliance with the contractual preconditions is met for a valid payment claim under the contract. Question 17 Are there any issues regarding the adjudicators having a power to award liquidated damages? HIA does not consider that it is appropriate for an adjudicator to determine and deal with liquidated damages. Although the NT model is much more inquisitorial than the restrictive east coast approach, the purpose of adjudication is to have a fast and cost effective means of deciding whether the monies subject of a claim are due and owing. In essence, an adjudicator s decision is an interim determination relating to monies owed for construction work and services completed under a construction contract. In making an adjudication for liquidated damages such as elongation claims under a contract an adjudicator would likely need to consider much more information than is currently before them. This would confuse the process and slow down the process. Question 19 Should the legislation be amended so as to remove the exemption concerning artistic works? HIA supports the amendment to remove the exemption concerning artistic works. It is HIA s experience that there are many high rise buildings that have murals or artistic works painted on the walls. There are no good reasons why these activities should be treated any differently to other construction activities. Question 20 Should the NT Act be amended to provide an alternative process for complex/high value payment disputes? Rapid adjudication by its very name suggests that most matters should proceed swiftly from claim to decision stage. Most jurisdictions afford a responding business 10 business days to submit a payment schedule in response to decision stage. In the NT, the responding party has 14 days. As a general rule, this usually is enough time, particularly when the disputed claim is already known to the business. Page 8 of 14

However for complex claims 14 days can compromise the capacity for a fair hearing particularly if expert reports, quotations for remedial work or legal advice may be required to adequately respond. It must be kept in mind that a claimant can prepare their paperwork on their own timetable. Claims relating to latent conditions or time-related costs can often be more difficult to respond to, adjudicate and assess than a million dollar claim that relates to one progress stage. Additional time may be necessary. In such cases, HIA does not necessarily agree that a statutory rapid adjudication system is the appropriate forum for handling such complex claims at all. Question 21 The definition of complex/high value contract/dispute could either refer to the value of the contract or the value of the dispute or, alternatively, the type of contract, to extend the period of time a party must respond to a claim from 10 business days to 20 business days, with the adjudicator/registrar to have discretion to approve a further 10 days. In 2014, Queensland amended its Act to provide more flexibility for complex claims based on monetary threshold of $750,000. The earlier version of the Queensland changes however also included claims relating to latent conditions or time-related costs. This was ultimately removed from the amended legislation. Although HIA does not necessarily agree that a claim is complex merely because it exceeds an arbitrary monetary threshold, HIA supports the distinction of different types of claims. In HIA s experience, small claims may still be complex to adjudicate due to a latent condition or a time related cost. On the other hand, a relatively simple claim, albeit involving a significant sum of money and in excess of $1 million, may not necessarily be complex. HIA acknowledges that the consideration of what is determined to be a complex claim must be balanced against the underlying rapid adjudication principles of the Act. Questions 22/23 Another option could be to exclude high value contacts from the operation of the NT Act. Another option would be to provide an exemption in relation to contracts the contain their own approved speedy dispute resolution processes. HIA does not agree that high value contracts need necessarily be excluded but HIA does agree that different rules could apply, including limited contracting out provisions. Parties to multi-million dollar contracts are likely to be in a better position to negotiate dispute resolution terms and conditions that Page 9 of 14

suit themselves and the project. The one-size-fits all statutory adjudication model may not necessarily be the best approach. For instance, the parties may wish to have final and on interim dispute mechanisms. Question 24 Should the NT Act be amended to require Appointers to consult with the parties about the adjudicator proposed to be appointed in complex/high value payment disputes or should a grading system be considered? Currently, parties have the power to choose their own adjudicator. This is in stark contrast to the Eastern state model where parties are not allowed to agree on the identity of the adjudicator. Instead, the claimant must obtain a nomination from an Adjudicator Nominating Body (ANA). It should be noted that in the NT where the parties have not agreed on the identity of the adjudicator, the claimant is able to make an application to a prescribed appointer who then nominates an adjudicator on a random basis. The imposition of the requirement that prescribed appointers consult with the parties about the adjudicator proposed undermines the rapid adjudication process. What happens when the parties in consultation with the appointer cannot settle on the identity of the proposed adjudicator? This is likely to cause further delays. HIA does not support this amendment. Question 25 Should the NT Act be amended to enable the appointment of an alternative adjudicator in cases where the appointed adjudicator is incapacitated or otherwise unable/unwilling to continue with the adjudication? HIA supports this amendment. There is no reason why the parties to the dispute should be prejudiced if an adjudicator cannot accept the appointment if they are busy or unwilling to adjudicate the matter. Questions 26/27 Should the implied provisions be retained? Should he any of the current implied terms be amended? Page 10 of 14

As a general rule, contracting parties should be free to agree to their own terms rather than relying on rights or terms implied by statue. But HIA is unaware of any problems with the current provisions. They should remain as is. Question 28 Should the NT Act be amended so as to provide penalties for a contractor responsible for including clauses that do not comply with Part 2, Division 1 of the NT Act? HIA considers that it is inappropriate for an adjudicator to determine penalties. If a party intends to rely on the prohibited clauses in their claim or defence to the adjudication, the adjudicator has the power to determine make findings of fact including the power to read down the clauses. Question 29 Should there be a requirement that, for implied clauses regarding retention monies, the retention monies be held in trust by an independent 3 rd party? Retention monies are monies held to secure performance of the contract. They are not monies held on trust unless the contract so provided for in the contract. Most residential building contracts and subcontractors do not require or involve retentions. HIA however does not support retention monies, or retention trust monies, being quarantined to a separate bank account or be held by a third unless so required under the contract. In HIA s experience, the NSW statutory retention model has largely been cumbersome and confusing for parties subject to these obligations. Should the retention trust option be genuinely considered, it should also incorporate any retention held by the Principal for performance by the head contractor to ensure all parties in the contractual chain are subjected to the same mandatory requirements. Question 30 Should adjudicator registration be limited to fixed periods and/or a fee be required for the purposes of maintaining registration? Adjudicators should be required to pay an annual registration fee. The fee should be nominal to encourage adjudicators to remain active and current. Page 11 of 14

Question 31 Should the NT Act be amended to provide specific powers and processes for the Construction Contracts Registrar to de-register adjudicators? If the Registrar has the power to register a person as an adjudicator then it is reasonable that they also have the power to deregister an adjudicator if that adjudicator is no longer active or accepting determinations/matters. Question 33 Should the NT Act be amended to standardise the reference of days to business days? HIA supports this proposal. HIA has come across members and their legal advisers who have been confused by the current approach where some days run by the calendar and others are treated as business days. Question 35 Should the provisions dealing with the publication of adjudicator determinations be amended so that they are either published in full or not at all? Publishing the decisions of adjudicators makes them more transparent and accountable. At the same time, rapid adjudication is an interim resolution of a private civil dispute. The mere fact that a party is subjected to the adjudication process and may be ordered to pay an adjudicated sum is not conclusive of any wrong doing. The Registrar should have discretion to not publish determinations if it is unreasonable to do so. Question 36 Should the Registrar be specifically permitted to share information with the ABCC and others? HIA understands that sharing of information is common between state/territory agencies and the Commonwealth. In principle, HIA does not object to the sharing of information provided it is limited to relevant matters and those that the ABCC has jurisdiction over. For instance, the ABCC does not have jurisdiction over the detached housing industry, so there would be no need to provide this information to the ABCC. Page 12 of 14

Question 42 Should the adjudicator appointment process in the NT Act be changed? HIA notes that the structure of the NT and WA Acts are similar regarding prescribed appointers. The provisions differ in so far as the NT regulations have prescribed profit making bodies as prescribed appointers, whereas WA legislation provides only for industry or professional bodies. It is HIA s preference that the powers of all prescribed appointers be transferred to the Registrar. This means that where the parties are unable to agree on the identity of the adjudicator, the claimant can make an application to the Registrar to nominate an adjudicator. This eliminates any perceptions of bias where the adjudicators are appointed by the for-profit prescribed appointers. Question 45 Should the NT Act be amended so that it is more consistent with the dominant Australian model or the current version of the Western Australia legislation? HIA acknowledges that there are various arguments being presented in support of a uniform approach. These arguments mainly come from the legal profession. HIA questions the need for national laws or uniformity for small businesses who operates solely in the Northern Territory. These businesses are already quite used to dealing with different licensing laws, planning and development requirements and other state differences. Security of payment laws are just a further matter to take into account when operating their business. Harmonisation is only desirable if the new legislative regime results an improvement. In terms of the best model, there are pros and cons with each model. The Eastern state model is based on default namely a failure of the respondent to provide paperwork within a set period of time. As this model is largely geared towards maintaining the contractor s cashflow, many decisions are made by adjudicators in the absence of a response and without any real resolution of the dispute underlying the failure to make payment in the first place. Often there is much more focus on the process, rather than the substance. There is also no ability for the parties to seek a mutually appointed adjudicator. On the other hand, under the Western model rapid adjudication is only available after payment as due under the contract has not been made. Parties are able to refer a broader range of matters to adjudication and can select the adjudicator. This can lead to greater confidence and trust in the final result. On balance, HIA considers the western model preferable. HIA notes that Robert Fenwick Elliot regards the UK model (which the Western model is based upon) as a success. He has set a good summary of differences below: Page 13 of 14

There has been a proliferation of detailed adjudication rules, all incorporating the 8 essential elements, but differing in detailed procedures. Only very rarely have there been attempts to introduce markedly loaded provisions. Claims can be brought by employers against contractors (and contractors against subcontractors) and vice versa. Such claims include reverse ambushes, whereby employers who are impatient of contractors spending too long preparing claims can adjudicate on what, if anything, is due. Most claims however have been for payment of sums due under the contract. Adjudicable disputes include those under professional engagements, including architects and engineers appointments. However these are fairly rare. The obligation on the adjudicator to use his initiative means that the UK adjudicators in larger cases regularly call meetings at which they ask questions of and listen to the parties. In valuation cases, these are in the nature of working meetings with the quantity surveyors. In other cases, there are mini-trial type hearings where lawyers represent the parties. The freedom from government regulation of appointments, and the involvement of lawyers from an early stage of the draft legislation, has led to many adjudicators, particularly in larger cases, being highly qualified lawyers or arbitrators. Adjudication appointers are regarded as more professionally prestigious than appears to be the case in Australia. In large or complex cases, the timetable is sometimes extended out to several weeks by agreement. The loser must write his cheque, unless he can impugn the whole adjudication process; there is no let-out if he commences litigation or arbitration, as under the original NSW and Victorian systems. It is rare for UK systems to allowed disputed sums to go to a trustee-stakeholder account, and indeed the government s January 2006 analysis proposes an outright legislative ban of the practice. There is very little scope in the UK system for a contractor to obtain a knock-out blow based on his employer s failure to follow some prescribed paperwork procedure such as the Australian payment schedule requirement. The employer loses his right to set-off if he fails to serve a setoff notice, but he still has the right to argue his valuation points in adjudication regardless of what notices or schedules he has served. Page 14 of 14