SECURITY OF PAYMENT IN THE BUILDING AND CONSTRUCTION INDUSTRY SUBMISSION BY THE HOUSING INDUSTRY ASSOCIATION LTD

Transcription

1 SECURITY OF PAYMENT IN THE BUILDING AND CONSTRUCTION INDUSTRY SUBMISSION BY THE HOUSING INDUSTRY ASSOCIATION LTD 30 OCTOBER 2006 Housing Industry Association Ltd 309 Liverpool Street Hobart Tel: Fax:

2 SUBMISSION CONCERNING SECURITY OF PAYMENT HOUSING INDUSTRY ASSOCIATION LTD. EXECUTIVE SUMMARY HIA submits that Security of Payment laws are unnecessary and potentially harmful to the Tasmanian building and construction industry. The industry s needs would be better met by: The creation of a specialist Domestic Building Tribunal to deal with disputes between owners and builders/contractors; and An education program to improve contracting practices generally, including the promotion of mediation agreements in all construction contracts. If, contrary to HIA s submission, the Tasmanian Government agrees in principle to implement Security of Payment Legislation, HIA submits that the West Coast model should be adopted in preference to the East Coast model. These models are discussed in more detail below. In this event, HIA submits that the following two key elements must be included: Payment disputes between builders and home owners must be covered; and The system should cover claims both up and down the contractual chain. HIA seeks the opportunity to participate in the process of developing any draft legislation and to comment in detail on any draft bill. Security of Payment Legislation Opposed HIA opposes the introduction of Security of Payment Laws ( SOPL ) as being both unnecessary and potentially harmful to the industry due to the industry s structure and small size. Security of Payment issues are not significant in the building and construction industry in Tasmania. Although such issues do exist, they do not exist to any extent that warrants regulatory intervention. The industry in Tasmania is different from that in states with larger populations: the industry as a whole is smaller and populated predominantly by very small businesses. The phenomenon of large contractors holding small subcontractors to ransom, as identified in other states, is not widespread in Tasmania. Because of the small size of the industry, there is a significant volume of repeat business between head contractors and sub-contractors. This means that head contractors generally cannot afford to deal unfairly with their sub-contractors. Most head contractors in Tasmania are small businesses. Where SOP issues do arise between head and sub-contractors, they are usually due either to workmanship issues or to the fact that the end customer has failed to pay the head contractor. In either case, the coercive mechanisms provided in SOPL are inappropriate.

3 It is our view that introducing SOPL, with mechanisms to force payments to be made, is likely to cause insolvencies, thereby making worse any SOP issues that do exist. As pay when paid and pay if paid clauses are not widely used in Tasmania, legislative intervention is not necessary. Domestic Building Jurisdiction and education are a better solution The key purpose of SOPL is to ensure prompt flow of payment: dispute resolution is an incidental, although important, aspect of it. However, it is submitted that, to the extent that there are payment problems in the building and construction industry, those problems could be addressed, at less cost and potential harm to the industry, by the creation of a low-cost dispute resolution mechanism. To this end, HIA supports the instigation of an independent Domestic Building Tribunal, along the lines of the Domestic Building List within the Victorian Civil and Administrative Tribunal. In the non-residential sector, the promotion of mediation and other low-cost means of dispute resolution is a preferable approach. If such measures were initiated, SOPL would be wholly unnecessary. HIA supports an education program, as recommended in the report of the Cole Royal Commission into the Building and Construction Industry (the Cole Report ). If SOPL is pursued If SOPL is to be introduced, HIA s position is as follows: The model adopted in Western Australia should be preferred to that adopted on the East Coast, as being the most recent model, the fairest and the least harmful to industry. It is also the model that provides the least contract interference and is closer to the original (and more successful) UK model. It is essential that claims should be able to be made both up and down the contractual chain, as in Western Australia. Claims under contracts between home owners and builders/contractors must be included, and provision must be made for owners to be joined to claims by subcontractors against head contractors. A separate and independent domestic building jurisdiction should also be instituted to deal finally with consumer-related claims.

4 PART 1 INTRODUCTION This submission is made in response to the Final Report for the Minister Administering the Building Act 2000 entitled Security of Payment in the Tasmanian Building and Construction Industry, issued by Stenning and Associates on 12 June 2006 ( the discussion paper ). HIA welcomes the opportunity to respond to the discussion paper. Although HIA contends that measures different from those recommended in the discussion paper should be adopted, HIA commends the Tasmanian Government for its willingness to examine options for improvement of the Tasmanian building and construction industry. About HIA HIA is a national association of over 42,000 businesses with around 1500 in Tasmania. HIA is the peak industry association for businesses in the residential, building, renovation and development industry in Australia. HIA members include builders and building contractors (residential and commercial), consultants, developers, manufacturers and suppliers. HIA employees are in contact with a wide range of HIA members and other participants in the Tasmanian building and construction industry. They are therefore closely in contact with payment issues and other matters affecting the industry. This submission has been prepared in consultation with a range of members, and drawing upon HIA s experience of SOPL from around the country. The Housing Industry in Tasmania The housing industry is a vital part of the Australian and Tasmanian economies, generating 4.4 per cent of gross domestic product ($32.5 billion in ) and providing work for 394,000 Australians. The housing industry accounts for the bulk of construction work, both nationally and in Tasmania. In Tasmania, housing accounts for 78% of building construction, and 55% of all construction (including engineering construction). Housing is an industry characterised by independent small businesses. There are more small firms in the building and construction sector than any other industry sector (19 per cent of all small businesses in Australia operate in building and construction). Ninety percent of all residential construction businesses in Tasmania are classed as small businesses (i.e. sole trader, partnership or employing fewer than 20 people), and an average, nationally, of 2.3 people are employed per firm. This means that the vast majority of head contractors are very small businesses.

5 This means that, in considering the introduction of Security of Payment Laws, particular attention needs to be given to: the needs of the housing industry, which accounts for the bulk of work done; and the needs of all small businesses, not just sub-contractor businesses. Legislative Intervention should only occur where there are no practical alternatives Cost of Regulation Regulations impose administrative costs, compliance costs and efficiency costs. HIA s members repeatedly tell us of the daily struggle to manage the paperwork and continuously changing regulations originating from all levels of government. The effect of over regulation is to reduce competition by limiting new entrants and making it difficult for existing business to keep operating. Regulation adds to the costs of existing businesses as they endeavour to keep abreast of and comply with the layers of regulation confronting them. Because regulation generates costs as well as benefits, regulation should only occur where it is necessary, where the benefits of doing so exceed the associated costs, and where the approach chosen is designed to yield higher net benefits to the community than other feasible options. The most obvious costs of regulation are the administration and compliance costs, while less obvious are the unintended costs, such as any discouragement of market delivered remedies and innovation. COAG principles for National Standard setting require that regulation must be the minimum necessary to achieve the objective. National Competition Policy dictates that unless it can be demonstrated that a net benefit arises from the existence of regulation and there are no other alternatives of achieving the same end that the regulation should not exist. Freedom of Contract Legislation of the kind proposed represents a significant interference in the ability of commercial parties to determine for themselves the terms of their business relationship. There are instances where such interference may be justified on sound public policy grounds: consumer contracts are the most obvious example. However, parties freedom to contract should not be interfered with by government without a clearly demonstrated need. It is important to bear in mind that the concept of freedom of contract remains part of the common law of Australia, as has been recently reiterated by the High Court of Australia: Ringrow Pty Ltd v BP Australia Pty Ltd; Ultimate Fuel Pty Ltd v BP Australia Pty Ltd [2005] HCA 71, [27], [31], [32]. The discussion paper contains no evidence to show that the SOP issue is of such significance in Tasmania to justify interference with parties freedom of contract. This submission demonstrates that other, less invasive, measures are available to improve security of payment within the building and construction industry in Tasmania.

6 SUMMARY OF RESPONSES TO RECOMMENDATIONS Recommendation Recommendation 1 The Tasmanian Government: formally adopt the 8 National Principles of Conduct applying to Security of Payment issues agreed by the APCMC in 1996; and incorporate these principles into its current procurement policy responses. HIA Response Supported Recommendation 2 The Tasmanian Government, through the Building and Construction Industry Council ( BCIC ), implement a training and information program to improve the industry s understanding of how to properly manage contractual arrangements and hence how to deal with or avoid security of payment problems. HIA supports the proposed training and information program. Such a program should be instituted instead of SOPL. HIA submits that BCIC should not implement such a program. It should be implemented through the Director of Building using Registered Training Organisations. Recommendation 3 The Tasmanian Government: agree in-principle to introduce SOP legislation along the lines of that which has been introduced in other jurisdictions; Opposed. SOPL is not necessary in Tasmania. SOP is not an issue of such significance as to justify the cost and risk to industry which SOPL would entail. establish a consultative forum to assist in the development of the legislation. The forum should involve BCIC and Consumer Affairs and Fair Trading ( CAFT ) agree the key principles to be observed in developing legislation: consistency with existing interstate legislation; ease of administration Supported: if SOP is to be pursued, a consultative forum should be established. HIA would wish to be included in the forum. The principles of ease/low cost and fairness/equity are supported, if SOP is to be pursued. HIA questions the principles of

7 and low cost to maintain; fair and equitable to all contracting parties affected by the legislation; to the extent possible, a sound basis for extending the concept of rapid adjudication to contractual issues other than those concerned with payment. Agree in principle that the SOP legislation should be linked to building practitioner accreditation, but only following investigation as to the best of way of achieving this link. consistency (see response to recommendation 4) and extension. Strongly opposed. Rapid adjudication is intended to be a quick and interim form of dispute resolution: to affect livelihoods on the basis of adjudication outcomes is totally inappropriate. Further, building accreditation is not comprehensive, which will create imbalance when possible outcomes are weighed in disputes between unaccredited sub-contractors or suppliers and accredited builders. Recommendation 4 The Tasmanian Government, when consulting with industry on the form of SOPL that may be introduced, should indicate an initial preference for legislation based on that used by NSW, Queensland and Victoria. Opposed. If SOP is to be introduced, the West Coast model should be preferred as being better suited to the characteristics of the Tasmanian industry. The West Coast model is the most recent model, is conceptually better and is less invasive in private contractual arrangements. Recommendation 5 When developing SOPL, alternative methods other than adjudicator registration be examined to determine mechanisms for ensuring that industry is able to identify and engage appropriately skilled adjudicators. Recommendation 6 When developing SOPL, discussions be held with CAFT regarding the potential for SOP legislation to provide the basis for a general alternative dispute resolution Supported. The concept of Authorised Nominating Bodies, as in Victoria, would be an appropriate model. Adjudicator registration is unnecessary if suitable nominating bodies are authorised. The keeping of a central government register of all adjudicators is costly and unnecessary. HIA agrees that an alternative dispute mechanism for residential building contracts is needed, and that owners should be covered by SOPL, if introduced.

8 process for residential building contracts. However, an independent specialist domestic building jurisdiction along similar lines to the Domestic Building List of VCAT in Victoria should be introduced to deal with residential building disputes, whether SOPL is introduced or not. Recommendation 7 Administrative responsibility for SOPL and the associated communications programme should be given to CAFT within the Department of Justice. HIA does not oppose this recommendation, but observes that administration by the Director of Building would seem more logical, as having a more direct link with the building and construction industry. Recommendation 8 When developing SOPL, arrangements should be put in place to enable the collection of relevant metrics relating to the performance of the legislation. These metrics should be consistent with those metrics collected by mainland jurisdictions that have SOPL. Supported. However, the extent of data collected should be kept to a minimum, due to potential cost impositions. Recommendation 9 An initial review of the proposed SOPL should be completed by the end of the first three years of operation of the legislation. Later reviews should take place at 5 year intervals. Supported Recommendation 10 There should be no user-pays funding mechanisms imposed to fund the government administration of the proposed SOPL for the initial three years of its operation. The potential should be investigated for funding the development and ongoing operation of the legislation through the Building Administration fund. Supported. However, user pays funding for Government administration should not be introduced at any time. Opposed. The development and ongoing operation of the legislation should be funded from general revenue.

9 RECOMMENDATION 1 APCMC PRINCIPLES PART 2 DISCUSSION OF RECOMMENDATIONS HIA supports the recommendation that the Tasmanian Government: formally adopt the 8 National Principles of Conduct applying to Security of Payment issues agreed by the APCMC in 1996; and incorporate these principles into its current procurement policy responses. RECOMMENDATION 2 TRAINING AND INFORMATION PROGRAM HIA supports the recommendation that the Tasmanian Government implement a training and information program to improve the industry s understanding of how to manage contractual arrangements properly and how to deal with, or avoid, security of payment problems. HIA does not support the recommendation that the program be implemented through the Building and Construction Industry Council. The program should be implemented through the office of the Director of Building. The discussion paper (pp. 29 to 30) states that educative approaches are always an important tool in resolving policy problems. It is further observed that there is significant potential for developing and implementing educative approaches in the Tasmanian industry. HIA agrees with these observations. Educational approaches were endorsed in the Cole Report as a suitable strategy for dealing with SOP issues, and an education campaign was recommended (Vol. 8, pp ). The position was summarised as follows: In the long term education and training may reduce the need for specific legislation to deal with security of payment issues. Such change is a long-term goal. Given the severity of the problem in the building and construction industry and the industry s low take-up of training it is not possible to rely on education alone. (Vol. 8, p.252) In Tasmania, the reservations expressed in this passage do not apply, for the following reasons: there is no evidence that the problem is severe (this issue is discussed further below); and the industry is sufficiently small that a concerted campaign of education has better prospects of success than in larger markets.

10 Education may be used to improve the contracting practices of the industry, particularly in the use of fairly drafted standard-form contracts. By expanding the use of such contracts, two benefits may be achieved, which would render SOPL unnecessary: proper provision for progress and final payments may be made; provision for mediation and cost-effective dispute determination procedures may be included. It is acknowledged that not all building practitioners and sub-contractors are accredited under the Building Act Many sub-contractors are either subject to specific regulatory requirements (plumbers and electricians), or are covered by industry associations (such as those listed on p. 19 of the discussion paper) through whom an education program may be promoted. For the reasons discussed below, legislation which interferes substantially in the contractual and business arrangements of the industry should only be enacted where there are no viable alternatives and the problem is of such severity as to require intervention. In Tasmania, the opportunity exists to pursue the educative option described in the Cole Report, thereby avoiding the need for specific legislation to deal with security of payment issues. RECOMMENDATION 3 ADOPTION OF SECURITY OF PAYMENT LEGISLATION First Sub-recommendation: That the Tasmanian Government agree in principle to introduce SOP legislation along the lines of that which has been introduced in other jurisdictions HIA opposes this recommendation. SOP legislation is not necessary in Tasmania. There is no evidence that SOP is an issue in the Tasmanian industry which is significant enough to justify legislative interference in contractual arrangements and the costs to industry which SOPL would entail. The industry conditions which have led to the adoption of SOPL in other jurisdictions, described and relied upon in the Cole Report, do not substantially prevail in Tasmania. In particular, the industry in Tasmania is small and the contractors involved in it are small. As a result, the David and Goliath situation described by the Cole Report is uncommon in Tasmania. Security of Payment Problems in the Tasmanian Industry In summary HIA s position as to the existence and nature of a SOP problem in Tasmania is as follows: although payment problems sometimes occur, there is no substantial evidence of a problem sufficient to justify the introduction of SOPL; the Tasmanian Government has previously taken a position indicating that it does not regard SOP as a significant issue: nothing has changed in the industry which would justify a change of that position;

11 to the extent that a SOP problem does exist, it is not a problem of large contractors failing to pay small sub-contractors: it is an issue of end customers failing to pay builders or contractors they have engaged; the problem should be dealt with by means of a specialist domestic building jurisdiction, and education to deal with the issue in the non-consumer contracting sector. Data relied upon are inadequate On the basis of a survey and telephone interviews, the discussion paper draws the following conclusion: the results suggest that, prima facie, the security of payments problem that exists in the Tasmanian building and construction industry is of a scale that warrants the Government s consideration of potential remedies. When the size of the sample, set out in Attachment C, is considered, however, it is clear that the data is wholly inadequate to draw any conclusion about the existence or otherwise of a SOP problem. Table 6 (p.60) shows that 100 completed questionnaires were received by the authors of the discussion paper, upon which the conclusions drawn in the paper are based. Given that HIA alone has 1,500 members in Tasmania, it is clear that this sample is unrepresentative and that no useful conclusion can be drawn from the data. Further, reliance is placed upon telephone interviews (p.21). However, only seven of these were conducted. Again, the number is too small for any reliable conclusion to be drawn from the interviews. Statistics in the discussion paper show there is not a SOP issue between building industry professionals As discussed above, the data contained in the discussion paper should not be relied upon as a basis for introducing SoP legislation, because of the inadequacy of the sample taken. Even if the data is relied upon, however, it does not support the introduction of SOPL. Although the discussion paper concludes that SOP is a sufficiently serious issue to justify the introduction of SOPL, the data included in the paper demonstrates that, in fact, there is not a significant SOP issue in Tasmania, and such issue as does exist is not of a kind that would appropriately be dealt with by SOP legislation. The fact that, as stated above, payment issues reside primarily in contracts directly with end customers is powerfully demonstrated by the data contained in the discussion paper, at page 20. It is there stated that, of businesses reporting security of payment issues last financial year, 63% were engaged (solely) by the end customer, and a further 24% were engaged both by end customers and other building professionals (although with no indication of the proportions of each). This means that 87% of businesses reporting SOP issues are carrying out work for the end customer.

12 Only 12% of businesses reporting SOP issues worked solely for other building professionals. This data is consistent with HIA s experience of the industry. If payment problems do arise between building professionals, they are generally due either to workmanship problems or the head contractor s inability to pay, resulting from the failure of the owner to pay. SOPL, with its focus on cash-flow, is not the best mechanism for dealing with workmanship issues between building industry professionals. Nor would it provide a lasting solution to payment problems which stem from the withholding of payment by the end customer. Typically, where the end customer refuses to pay, a dispute exists which is broader than the interim payment issues which rapid adjudication is designed to deal with. It may be expected that further litigation would result from rapid adjudications in such cases. Tasmanian Government s position and the public sector The Cole Report contains the following passage concerning the position of the Tasmanian Government on SOP: South Australia and Tasmania both indicated, at a June 2002 meeting of the Australian Procurement and Construction Ministerial Council, that they have no present intention to introduce security of payment legislation. The Tasmanian Government informed the Commission that [the BCIC, responsible for formulation of an industry plan, had assigned SOP strategies] a low priority in the short to medium term. Clearly the government cannot be bound to maintain that stance if circumstances change. However, the government s position in 2002 shows that, at that time, Security of Payment was not a significant issue in the Tasmanian industry. There is no evidence that anything has changed in the industry since 2002 with the effect that SOP has become significant. There is therefore nothing to warrant a change of approach. The statement which appears on page 18 of the discussion paper is also noteworthy: Officers from the Department of Treasury and Finance and two of the major agencies involved in building and construction procurement advised that they were not aware of any payment problems relating to government building and construction contracts. The discussion paper states that almost one-third of the value of all non-residential building activity and 64% of the value of engineering construction activity (excluding telecommunications) falls within the public sector. There is, therefore, a major sector of construction activity for which, in the view of the Government s own officers, SOP is not a problem.

13 Not a David and Goliath situation As discussed above, any security of payment problem that exists in Tasmania exists, not between suppliers or sub-contractors and head contractors, but between contractors and principals. The argument in favour of SOP legislation proceeds on the assumption of a David and Goliath situation between a sub-contractor and a head contractor. This may be illustrated by a quotation from the Cole Report (p.229, quoted at p.11 of the discussion paper): Commission investigators have repeatedly been told of the suffering and hardship caused to subcontractors by builders who are unable or unwilling to pay for work from which they have benefited. The subcontractors who experience payment problems are often small companies or partnerships. Frequently they do not have the expertise or resources to enforce their legal rights, because enforcement would require protracted litigation against much better resourced and more sophisticated companies. Consequently, subcontractors that have operated profitably and well for many years can be forced into liquidation through no fault of their own, often with devastating consequences for the owners of these businesses, their families, their employees and their creditors. Although such situations occasionally occur, this description does not accurately describe the situation as it exists in the industry in Tasmania, and especially in the housing industry. As indicated above, the industry is marked by the prevalence of small head contractors, just as much as of small sub-contractors. The balance of commercial power is typically not one of inequality, as is generally assumed. Rather: in the case of disputes between suppliers and contractors (whether sub- or head contractors), the supplier who seeks payment is likely to be a larger and better resourced entity than the contractor; sub-contractors are no smaller or less well resourced than many of the head contractors for whom they work and have typically incurred less cost in the performance of work than those head contractors; the Tasmanian industry is marked by a shortage of trades, resulting in significant bargaining power in favour of the sub-contractor; because the Tasmanian industry is small, there is substantial repeat business between contractors and sub-contractors, with each party being, to some extent, dependent upon the other. This means that a significant SOP problem does not exist between suppliers or subcontractors and head contractors. Where SOP problems do arise, they usually arise between contractors (builders or trade contractors) and building owners. The most common instance is the refusal of the owner to make a final payment.

14 If circumstances changed and SOP became a significant issue in Tasmania, there would be opportunity to introduce SOPL at that time. Tasmania would be able to observe further developments in other jurisdictions in developing its own legislation. Domestic Building Jurisdiction a better solution The data contained in the discussion paper indicate that the majority of respondents not only deal directly with the end customer, but operate in the residential sector: around 50% of respondents conducted the majority of their business in the residential sector, with only 16% in the primarily working in the commercial sector. It is clear that most respondents to the survey who reported SOP problems work in the residential sector and work for the end customer. This being so, SOPL would only have a meaningful impact on SOP problems if it included payment claims by contractors against home owners. If SOP is to be introduced, rapid adjudication must include such claims. However, HIA submits that disputes between contractors (both builders and trade contractors) and owners would better be dealt with by an independent domestic building jurisdiction, similar to that which operates in Victoria within VCAT. The reasons are as follows: rapid adjudication does not provide a final solution to construction disputes: the opportunity for litigation remains open and rapid adjudication is likely to result in duplication of cost; proceedings in a Tribunal can more readily accord an opportunity for all parties to be fully heard; domestic building disputes rarely involve only payment issues: workmanship disputes and other matters are often involved; the trade-off between speed and legal accuracy inherent in rapid-adjudication is not well suited to disputes involving home-owners; sub-contractors, suppliers and others who may be relevant to a dispute may be joined to proceedings in a Tribunal: this is impracticable in a rapid adjudication; the Victorian example demonstrates a policy decision which prefers a Tribunal to rapid adjudication for domestic building disputes. Cost and potential harm to the Industry of SOPL There are a number of costs which inevitably come with the introduction of Security of Payment Legislation.

15 Adjudication costs The most obvious cost is the cost of the rapid adjudication process itself. The rapid adjudication process is essentially a private process in which the parties engage an individual to carry out the adjudication. Although the process is greatly truncated in comparison with, for example, arbitration, the parties must still bear the burden of the adjudicator s fees. In the case of the relatively modest amounts which represent the majority of claims which would be amenable to rapid adjudication, this cost is likely to make the process uneconomic. Anecdotal evidence indicates that the system in Western Australia has been little used, for this very reason. For most claims in Tasmania, it would remain more economical for proceedings to be initiated in the Minor Civil Claims division of the Magistrates Court, where costs are minimal. Rapid adjudication does not provide a conclusive resolution of a dispute: it is merely an interim determination designed to facilitate cash-flow. This means that, in cases where either party is dissatisfied with the adjudicator s decision, the cost of litigation will be incurred in addition to the cost of adjudication. As a result, the high cost of resolving disputes is increased. An example of what can happen may be found in the NSW Supreme Court case John Holland v RTA [2006] NSWSC 874. In that case, three separate adjudications had been conducted, in connection with a single project, by three different adjudicators. The dispute then proceeded to the Supreme Court of NSW. In a large market such a NSW, the cost of such proceedings might be sustainable. In a small market such as Tasmania, it is not. Insolvencies A more significant cost to the industry in Tasmania, however, is the potential cost to cash-flow for small builders and other contractors. The essence of SOP legislation is to extract cash from one party for payment to another. As stated above, in Tasmania payment claims between sub-contractors and builders are likely to involve small businesses with similar levels of resources. Usually the failure of a builder (or trade contractor) to pay a sub-contractor is due to the failure of the end customer to pay the builder. In this situation, forcing one building professional to pay another before the underlying issue has been resolved creates a danger of insolvency. This is the very problem which security of payment is intended to avoid. As stated in the discussion paper (p.11), the financial failure of any enterprise effects (sic) other enterprises and suppliers and adds to the cost of building and risks to consumers. The SOP process is not suitable for the Tasmanian industry because the sector is mostly populated by small contractors who are just as financially fragile as sub-contractors. The availability of SOP to contractors will transfer such cash-flow problems as arise and

16 increase the danger of financial failure identified in the discussion paper. This will disadvantage the sub-contractors whom SOP legislation is intended to protect. The danger of insolvency would remain, even if builders were able to refer payment disputes with home owners to rapid adjudication, because of the coercive aspects of SOPL. Second Sub-recommendation: Consultative forum If, contrary to HIA s submission, the government agrees in-principle to introduce SOPL, HIA supports the recommendation that the Government should establish a consultative forum to assist in the development of the legislation. It is essential that the forum should involve representative industry bodies, including HIA, in addition to the Building and Construction Industry Council and Consumer Affairs and Fair Trading. Third Sub-Recommendation Key Principles If, contrary to HIA s submission, the government agrees in-principle to introduce SOPL, HIA agrees that the legislation should be: easy to administer and low cost to maintain; fair and equitable to all contracting parties that are affected by the legislation. HIA agrees in principle that the legislation should be consistent with existing interstate legislation. However, there are significant difficulties in putting this principle into practice, as existing interstate legislation is not uniform or consistent. Under these circumstances, consistency is less important than ensuring that the legislation is (so far as possible) appropriate for the Tasmanian industry. This is discussed further in connection with Recommendation 4. Concerning the principle that, to the extent possible, the legislation should provide a sound basis for extending the concept of rapid adjudication to contractual issues other than those concerned with payment, such extension would be inappropriate for domestic building disputes. The reasons are discussed in the section of this submission dealing with recommendation 6. Further, it would be necessary to consider the extent to which such extension of rapid adjudication would cut across: the operation of other, contractual, dispute resolution mechanisms which may be working effectively (especially following any education campaign which may be undertaken); and the functions of a specialist domestic building jurisdiction.

17 Fourth Sub-Recommendation Linking of SOP to Building Practitioner Accreditation HIA opposes this recommendation most emphatically. There should be no agreement inprinciple that such a link should be formed: such a link is entirely inappropriate. Any such link would be inappropriate because it would be inconsistent with the purpose and character of SOPL. The sole purpose of SOPL is (or should be) to maintain cashflow within the industry. Its purpose is not to resolve disputes, nor to pass any judgment on the conduct of parties to a payment dispute. Because of this fundamental purpose, a key feature of both Australian and UK SOPL is the provision of a rapid adjudication system. Maintaining cash flow necessarily requires that adjudications be rapid. This, in turn, requires that adjudications cannot provide a conclusive determination of any dispute. As a result, adjudications have been described as quick and dirty. More elegantly, it has been judicially recognised that adjudications are not finally binding and may give wrong results: The legislature intended the process of dealing with progress claims to be speedy. In many human activities, speed and error are natural companions. Section 32 [of the NSW Act, allowing for restitution in subsequent proceedings of money awarded in adjudication] is the legislative recognition of the potential application of that truism to the scheme of adjudication of disputes and the Act (at least implicitly) recognises that adjudicators may err. That is why an adjudicator s determination is not finally conclusive of rights and liabilities under the contract. John Holland v RTA, [2006] NSWSC 874, [37] and [50], per MacDougall J. The second reading speech for the Construction Contracts Act 2004 (WA) is to similar effect: The rapid adjudication process is a trade-off between speed and efficiency on the one hand, and contractual and legal precision on the other. (Legislative Assembly, 3 March 2004, p.275, Ms A.J.MacTiernan MLA). It is essential to recognise that the accreditation of building practitioners has the capacity to affect the capacity of practitioners to practice their profession and to earn a living. Dealing adversely with accreditation can have drastic consequences for professional reputations. Therefore, to link accreditation to a process which involves a recognised risk

18 of error is wrong and is opposed. Such a link would be a misuse of the rapid adjudication process for an extraneous purpose. A further difficulty with linking accreditation and SOPL is that it would create an imbalance in the rapid adjudication process. Accreditation of building practitioners is not comprehensive: it does not cover all who operate in the building and construction industry. A link between accreditation and SOPL would create an imbalance of outcomes in disputes between unaccredited sub-contractors or suppliers and accredited builders. RECOMMENDATION 4 PREFERRED MODEL HIA opposes the recommendation that the East Coast Model should be preferred. West Coast Model should be preferred If, contrary to HIA s submission, the government agrees in-principle to introduce SOPL, the legislation should be based on that enacted in Western Australia. The West Coast model should be preferred as being both a conceptually better model and better suited to the characteristics of the Tasmanian industry. The following points should be noted: the West Coast model is the most recent model, developed in the light of experience in the Eastern states and the UK; it is closer than the East Coast model to the original UK model, which is more successful than the legislation adopted in the Eastern states of Australia; it is less invasive of private contractual arrangements, allowing contracting parties to agree their own terms concerning payment, subject to a limited number of prohibited provisions; it is fairer to the parties because it does not incorporate a default payment entitlement. The East Coast model provides a default payment entitlement triggered by the failure of the recipient of a claim to issue a payment schedule. The West Coast model provides for the adjudication of all disputes on the merits, which is inherently fairer. The East Coast model gives force to possibly unmeritorious claims merely because of failure to issue a document on time. Such a mechanism could result in the insolvency of small builders if employed in a small market such as Tasmania. If parties desire a default payment mechanism, they are free to incorporate one into their contract (Australian Standard Conditions of Contract, such as AS , clause 42.1, provide such a mechanism): it should not be imposed by legislation.

19 The West Coast model embodies two essential features which are absent from the East Coast Model. These are discussed below. The lack of these features makes the East Coast model significantly less fair and effective as a tool for improvement of the industry. The discussion paper recognises (pp. 29 and 30) that the West Coast model has conceptual and practical advantages over the East Coast model. HIA agrees with that assessment. However, the paper goes on to advocate a preference for the East Coast model, on the basis that there are likely to be significant disadvantages in Tasmania adopting a different security of payments legislation model to that of the eastern jurisdictions. HIA disputes that such disadvantages would exist and that they would, in any event, be a sufficient basis on which to prefer the East Coast Model, for a number of reasons: The effectiveness and fairness of the proposed system, and its likely effect on the industry, are of greater importance than attempting to achieve a consistency with the Eastern jurisdictions which presently have SOPL; 98.9% of small businesses in Australia do not have interstate dealings (the figure is possibly higher in Tasmania due to a lack of border areas like Albury/Wodonga, Canberra/Queanbeyan or Tweed Heads/Gold Coast); Although there are common characteristics between the legislation in the Eastern states, each act is different: there is, in fact, no consistency. The Cole Report recognised that there could be no national consistency without Federal legislation (Vol 8, p.257). The current position in Tasmania is completely different from that in Eastern mainland states. There is no evidence that this has impeded the active migration of building industry participants referred to in the discussion paper (p.40) to date, and no reason to believe that subtle differences between SOP arrangements in those states and Tasmania would do so in the future. Differences in other aspects of industry regulation (such as accreditation/licensing) are of far greater significance. The Tasmanian Government s position hitherto has been that a nationally consistent approach to SOP is less significant than ensuring that arrangements are made that are appropriate to each jurisdiction. The Cole Report observes (p.256, vol. 8) that the only submission received by the Commission that questioned the benefits of a nationally consistent approach came from the State of Tasmania, and quotes that submission as follows: It is doubtful that any additional benefit would be realized from a uniform approach to the problem of security of payments for subcontractors. Any problems in this area are best addressed by each

20 jurisdiction, as solutions will very [sic] depending upon the extent of the problem and the size of the market. In principle HIA supports national consistency in legislation. Such consistency should not be achieved, however, at the cost of enacting inappropriate legislation. In this instance HIA agrees with the submission of the Tasmanian Government to the Cole Royal Commission, for the reasons stated above. A legislative approach that is appropriate to a large industry serving a large market should not be imposed upon a small industry, whose circumstances are different, merely for the sake of national consistency. Two key features If SOPL is to be enacted in Tasmania, two features, both of which are part of the West Coast model, are essential: Inclusion of disputes involving home owners; and Inclusion of payment claims both up and down the contractual chain. Home owner disputes It is essential that any SOPL in Tasmania should include domestic building contracts within its operation. In particular, SOPL must provide the opportunity for builders and other contractors who deal directly with home owners to submit payment disputes to rapid adjudication. The reasons for this are as follows: Disputes of this kind are far more common than payment disputes between building industry professionals (in HIA s experience disputes about final payment under domestic building contracts are more common than any other kind of building dispute): to exclude such disputes would render the legislation largely ineffective. Failing to include such disputes would result in insolvencies. A builder may be taken to rapid adjudication by a sub-contractor, in circumstances where the builder has not been paid by the owner. If the builder is unable to obtain rapid adjudication of the payment dispute with the owner, the builder may be in a position where it is forced to pay the subcontractor, without any practical means of securing funds due from the owner. This would result in the insolvency of some smaller builders. Where a rapid adjudication takes place between a builder and a sub-contractor, the builder should be able to join the owner of the relevant project to the adjudication: otherwise, separate proceedings between the builder and the owner may result in a result inconsistent with that in the rapid adjudication. This in turn could lead to financial stress or insolvency of the builder.

21 Up and down Under the East Coast model, only claimants further down the contractual chain than the respondent can submit a dispute to rapid adjudication. There is no reason in principle or justice why this should be so. Where a supplier of faulty materials or a sub-contractor who performs defective work causes cost to the party to whom they supplied the materials or work, the innocent party should not be forced to have recourse to the slow and expensive processes of litigation. The supply of defective work or materials can have a severely damaging effect on the cash-flow of a small business. As a matter of fairness and practicality, SOPL mechanisms should be available to address such cases. RECOMMENDATION 5 MECHANISMS FOR ADJUDICATOR SELECTION HIA supports the recommendation that mechanisms alternative to adjudicator registration should be examined. The concept of Authorised Nominating Bodies, as in Victoria, would be an appropriate model. Adjudicator registration is unnecessary if suitable nominating bodies are authorised. Such registration would add unnecessary cost. RECOMMENDATION 6 GENERAL DISPUTE RESOLUTION FOR RESIDENTIAL BUILDING CONTRACTS HIA strongly supports the inclusion of disputes between home owners and builders in any SOPL that is introduced. Any legislation that excludes such disputes will be impaired in its effectiveness and will be harmful to the industry, as discussed in relation to recommendation 4. HIA agrees that an alternative dispute mechanism for residential building contracts is needed. However, an independent domestic building jurisdiction along similar lines to the Domestic Building List of VCAT in Victoria would be a better solution. Rapid adjudication is not a suitable form of dispute resolution to deal generally with disputes under residential building contracts. HIA opposes the use of SOPL, and rapid adjudication in particular, as a general form of dispute resolution: it should be restricted to dealing with payment disputes. It is important to separate the two distinct concepts of Security of Payment and Dispute Resolution. The sole purpose of SOPL is to facilitate cash flow. The dispute resolution function under SOPL is ancillary and subordinate to that purpose. As a result, the dispute procedures under SOPL are developed with speed as a primary concern. When developing a dispute resolution system, although speed is desirable, other considerations should take precedence. Those considerations should include:

22 Procedural fairness; Giving each party an adequate opportunity to be heard, and ensuring that the parties perceive that they have had such an opportunity; Provision of conciliation or other means for parties to achieve resolution themselves; The need to receive oral evidence and submissions; Low cost; Finality; Any special considerations arising from the involvement of consumers. Although procedural fairness is an important consideration in rapid adjudication, because the process is not intended to be final, these considerations are less important under SOPL. Any attempt to merge the distinct purposes of SOP and general dispute resolution is likely to result in a system that fulfils neither function satisfactorily. HIA does not oppose the use of rapid adjudication in connection with domestic building contracts. To the contrary, if SOPL is to be adopted in Tasmania, payment disputes between builders/contractors and home owners must be amenable to rapid adjudication. It may also be appropriate that parties should have the option of employing rapid adjudication more broadly, by agreement. However, this should be an option for appropriate cases and not the only mechanism available for dealing with disputes. RECOMMENDATION 7 ADMINISTRATIVE RESPONSIBILITY HIA does not oppose the recommendation that administrative responsibility for SOPL should be given to Consumer Affairs and Fair Trading. However, it observes that payment disputes between building professionals appear to be outside the area of responsibility of Consumer Affairs and Fair Trading. Even more so would be any program of education. These functions would appear to be more closely connected with the Office of the Director of Building. RECOMMENDATION 8 COLLECTION OF METRICS HIA supports this recommendation. However, the data collected should be kept to a minimum, in order to avoid cost impositions on industry.

23 RECOMMENDATION 9 REVIEW HIA supports this recommendation. RECOMMENDATION 10 FUNDING HIA supports the first part of the recommendation and submits that there should be no user-pays funding for the government administration of SOPL at any time in the future. HIA opposes the second part of the recommendation. The Building Administration Fund should not be used for the development of legislation or for the performance of other normal functions of Government, such as the administration and ongoing operation of the legislation. CONCLUSION HIA does not dispute that payment issues sometimes arise within the building and construction industry in Tasmania. However, neither the information contained in the discussion paper nor HIA s own extensive knowledge and experience of the industry in Tasmania reveal a problem of such a magnitude as to warrant the introduction of Security of Payment Legislation: a system which is highly invasive of private contractual arrangements. Far from improving conditions in the industry, SOPL is likely to impose additional costs on the industry and may have the effect of causing a higher rate of insolvencies within the industry. This would be to the detriment of the industry and the community. Options exist for addressing the issues identified in the discussion paper which are less costly and less intrusive than Security of Payment Legislation. Those options should be pursued. Stuart Clues Regional Director-Tasmania