Some feedback on the Society of Contraction Law Australia Linkedin Discussion page prompts me to expand a little on the ways that a head contractor might avoid the very unwelcome risks associated with the supporting statement requirements in the latest NSW SoP amendments.  There was also some discussion about this at the SoCLA event in Sydney last week at which I was a panelist and which, I am told, attracted the biggest response ever for a NSW SoCLA event.

There may be a number of approaches, but at least two seem to me to be obvious contenders: payment disclaims and babushka contracting.

Payment disclaims have been the subject of a previous post. Given subsequent comment, I might just add this: that it is plainly optional for a head contractor (or any other party in the contractual chain) to make a statutory payment claim. Section 13 of NSW Building and Construction Industry Security of Payment Act 1999 provides that a person entitled to a statutory progress payment may serve a payment claim (not must). Until these amendments, it is easy to opt out of making a statutory payment claim, simply by not including the weasel words, “This is a payment claim under the Building and Construction Industry Security of Payment Act 1999”. Now, it is still easy: a document is only a payment claim under section s13 if it indicates the amount of “progress claim” (defined by the Act to mean the statutory entitlement to a progress claim) which the claimant claims (section 13(1)(b)). So a head contractor can opt not to make a statutory progress claim simply by making clear that he is not claiming any statutory entitlement.

Is this approach susceptible of attack under the anti-avoidance section, s34? I think not. All section 34 does is render void any provisions in any agreement that modifies etc the Act. But there is no such provision in any agreement here. All the contractor is doing is choosing not to make a progress claim under the Act. There is no clause in any agreement which could be voided so as to undo that choice.

An alternative is babushka contracting. Babushka dolls are those Russian toys in which, inside every hollow wooden granny, there is another which looks the same, but which is a fraction smaller. So, here is the scheme. ABC Constructions Pty Ltd, a head contractor, lets the whole of the work to its associate company. ABC Operations Pty Ltd, and ABC Operations in turn lets the work to the various subcontractors who will do the groundwork, framework, envelope etc. There will then be no great difficulty about ABC Constructions, as head contractor, providing a supporting statement say that it has paid ABC Operations – that is simply an internal transfer of funds. ABC Operations does not have to provide a supporting statement, because it is not a head contractor.

Is this approach susceptible of attack under the anti-avoidance section, s34? Again, I think not. As before, all section 34 does is render void any provision in any agreement that modifies etc the Act, and again there is no such provision in any agreement here. There are provision in some anti-avoidance tax legislation that has the effect of unwinding and reformulating contractual structures, but there is nothing like that in section 34. Again, there is no clause in any agreement which could be voided so as to undo the contractual hierarchy that the parties have chosen. Could ABC Operations be treated as a head contractor? Again, I think not: the new definition of a head contractor in section 4 is clear: a head contractor is a person who contracts with the principal. Section 34 can avoid contractual terms, but it cannot create contracts.

Some might this that these devices are a shade artificial, and as such to be treated with suspicion. But these things are comparative. Which is the greater risk: having project managers run the risks of submitting supporting statements – the details of which are often outside their personal knowledge – with hefty fines or imprisonment as a sanction, or choosing a scheme which avoids those risks?

It would, of course, be open to the legislature to change the law yet again. But these amendments are deeply flawed, are already widely recognised as such, and it is hard to see that the NSW parliament would be dumb enough to dig itself further into this hole. A much better strategy would be for it read the SoCLA Report on all of this, and go for a sensible national adjudication scheme.

In the meantime, the more or less universal view at the SoCLA event was that the Queensland reforms are thoroughly welcome, and the NSW reforms are thoroughly unwelcome.  It is an example of the largely random nature of Australia’s curious state system that one state can get things right, and its neighbour get things wrong.  And of course further evidence of the desirability of a sensible national system.