I am delighted to be able to say that I was not, this year, interrupted over the Christmas holiday by a security of payment claim served on Christmas eve. And so, happily, I was able to enjoy a couple of weeks off.
But before and since then I have been “heads down” on a number of fronts, which means that I have not reported as fully as I might have done on some recent developments.
One of them was the issue of the report late last year in Western Australia of John Fiocco Security of Payment Reform in the WA Building and Construction Industry. This made a number of detailed recommendations about the way that the security of payment issue should be dealt with in Western Australia. Such State-By-State consideration may well turn out to be pretty much irrelevant in the event that the Federal Government enacts some legislation which applies throughout the country, and pretty much everyone agrees that that would be sensible. The Federal Government is still considering the Murray Report as to such federal legislation.
Diligent readers of these pages might recall that the Murray report includes a suggested treatment of Queen of Hearts clauses, and in particular adopts a suggestion of mine as to how such clauses might be prohibited. The Fiocco Report takes the same line, albeit with a small suggested tweak as to how the prohibition should be worded.
The relevant section of the Fiocco Report is as follows:
6.11. Unfair contracting terms
Stakeholders were consulted on recommendation 84 in chapter 16 of the Murray Report that:
The legislation should void a contractual term that purports to make a right to claim or receive payment, or a right to claim an extension of time, conditional upon giving notice where compliance with the notice requirements would:
- Not be reasonably possible; or
- Be unreasonably onerous; or
- Serve no commercial purpose.677
The relevant discussion paper provided some commentary to assist stakeholders to consider this recommendation. The discussion paper noted that the CCA does not currently contain any provisions to this effect, and that in some circumstances provisions in Schedule 2 of the Competition and Consumer Act 2010 (Cth) on unfair contract terms (the UCT laws) may apply. The discussion paper also noted that determining the ‘reasonableness’ of a notice provision may be open to varying interpretation, particularly by adjudicators, as adjudicator decisions are not published.
6.11.1. Responses from stakeholders
The recommendation to prohibit unreasonable time bar clauses was supported by most stakeholders.
AMCA, MEA, RI, MPDA, LSWA, SWA, MBA, and the CFMEU all supported prohibiting unreasonable time bar clauses. The CFMEU stated that “it is the CFMEU’s experience that time-bar clauses are regularly used to avoid payment obligations of major or head contractors”.678 CCF expressed concern with the consistent application of the prohibition by adjudicators, but considered that the Government could remedy this by mandating the use of standard form contracts for its projects.679
But the, the stakeholders who supported prohibiting unreasonable time bars had differing views on how best to implement it. AMCA, MEA, MPDA, SWA, MBA, and the CFMEU support the prohibition as Mr Murray recommended, without modification. However, RI and LSWA submitted that the wording should be modified to clarify when the prohibition would operate to void an unreasonable time bar clause. RI considered that “the provisions proposed by the Murray Report are vague and may create disputation”.680 RI submitted that the issue could be clarified “by providing that a principal may not rely upon a failure by a contractor to comply with a time bar of less than 10 working days, unless it establishes it has been prejudiced by the non-compliance”.681
LSWA was also concerned with the risk of inconsistent interpretation of the three-pronged test proposed in the Murray Report to determine when a notice requirement is void. LSWA considered that criteria (c) – that is, whether the notice requirement would “serve no commercial purpose” – was “vague and, more than the other criteria, likely to result in disputation and uncertainty in operation”.682 On this basis, LSWA suggested deleting the phrase “serve no commercial purpose”, and replacing it with “a new provision that, in effect, would excuse non-compliance with the notice requirements where this would not result in any prejudice to the other party”.683
The only stakeholders who opposed prohibiting unreasonable time bars were HIA and AIB. HIA were concerned that this prohibition would unduly impede freedom of contract, and stated that “where small business contractors require statutory protection, such clauses are already susceptible for review under the business to business application of the unfair contract provisions of the Competition and Consumer Act”.684
AIB submitted that:
… AIB is of the view that legislating for what is considered to be reasonable is problematic and suggests that other options may be considered, for example, clause 41.2 of AS 4000 refers to the failure of one party to comply with a notice provision does not invalidate the party’s entitlement, but does entitle the other party to damages for breach, with such damages having to be proved by the party seeking to apply said damages.685
SoCLA abstained from commenting, advising that “there is not unanimity within SoCLA membership on introducing prohibitions on unreasonable time bars”.686
6.11.2. Discussion and recommendations
There is significant support from stakeholders – including subcontractor groups, the CFMEU, MBA and legal bodies – for prohibiting unreasonable time bars.
Chapter 16 of the Murray Report provides a detailed explanation of why such a prohibition ought to be enacted in legislation. The issue is balancing freedom of contract with the commercial reality that “everyone wants to defer payment to the party down the contractual chain for as long as possible”.687
Due to the significant level of stakeholder support for the proposal, I recommend that legislation prohibits unreasonable time bar clauses in WA. I agree with the reasons outlined by Mr Murray – curtailing freedom of contract to relieve parties in the contractual chain from the “harsh consequences of failing to give a required notice”688 is warranted. If one accepts that parties higher in the contractual chain present contracts to subcontractors on a ‘take it or leave it’ basis, then government intervention is warranted to “protect the weak from the strong”.689
I recognise, however, that prohibiting unreasonable time bar clauses is not unanimously supported by stakeholders. HIA reiterated its objection to any reform that it considered to impede freedom of contract. It submitted there are already laws governing the issues the proposal seeks to address, namely that unreasonable time bars “are already susceptible for review under the business-to-business application of the unfair contract provisions [UCT laws] of the Competition and Consumer Act”.690 I am not persuaded by this argument. The laws have a very limited application in the building and construction industry, they apply only where:
at the time of entering to the contract the counterparty is a small business (i.e. employs fewer than 20 people) and the upfront price payable does not exceed $300,000; or
the contract period is over 12 months and the upfront price does not exceed $1 million.
Given the limited application of the UCT laws, the end result is that many industry participants are still going to be bound to unreasonable time bars in their contracts. Accordingly, I do not consider that the notion of freedom of contract should be preferred over enacting laws to specifically prohibit unreasonable time bar clauses.
AIB also opposed adopting this recommendation, because “legislating for what is considered to be reasonable is problematic”.691 However, the Murray Report does not propose legislating a general standard of reasonableness. Rather, the recommendation preserves the freedom of contract for parties to set notice requirements to claim or receive payment, or to claim an extension of time. Parties are not obliged to consider a legislated standard of reasonableness when entering into contracts. But, if a time bar clause included in a contract is not reasonably possible to comply with, or is unreasonably onerous, then it shall be voided by law. Put simply, it shall be void because it would be unfair that a contracting party be held to a bargain that would make its right to payment conditional upon compliance with an unfair requirement under a contract.
Having addressed the grounds of opposition, I now turn to the question of how a prohibition on unreasonable time bar clauses, as recommended by Mr Murray and supported by most stakeholders in this process, should be implemented. I am mindful of LSWA and RI’s concerns on the need to clarify when the prohibition will be enlivened. The Murray Report proposes a three-part test to determine when a notice requirement will be voided by the prohibition. It is to occur where compliance with the notice requirement would “a) not be reasonably possible; or b) be unreasonably onerous; or (c) serve no commercial purpose”.692
I am satisfied that the concepts of “not being reasonably possible” to comply with, and of being “unreasonably onerous”, provide sufficient guidance as to when a notice requirement may be prohibited. However, the third test, of “serving no commercial purpose” concerns me. A time bar clause serves a commercial purpose – the question to consider in applying the third test is ‘to what extent is the commercial purpose of the notice requirement outweighed by other factors?’ I consider that this question is an unnecessarily complex test.
|A simpler solution is to adopt LSWA’s proposal and substitute the third part of the test with ‘non-compliance would result in prejudice to the other party.’ The concept of ‘prejudice’ is a legal term with an established meaning that can be factually tested. It connotes something that would substantially affect someone’s rights in a way that cannot be undone. In my view, to substitute it into the test proposed by the Murray Report for unreasonable time bars would provide a higher level of certainty as to when the prohibition on such terms should be enlivened. Recommendations:|
21. The Government should adopt recommendation 84 in the Murray Report, with element (c) amended to ‘non-compliance would result in prejudice to the other party’.