Defects and Retention changes to the QBCC Act arising from Building Industry Fairness reforms

Feb 2019 |

Changes arising from the Building Industry Fairness (Security of Payment) Bill (Qld) (Bill) commenced operation on 17 December 2018. Most are aware that, as a consequence, the second tranche of the Building Industry Fairness (Security of Payment) Act 2017 (Qld) (BIF Act) has now come into effect and has replaced the Building and Construction Industry Payments Act 2004 (Qld) and the Subcontractors’ Charges Act 1974 (Qld).

However the Bill also led to significant amendment of the Queensland Building and Construction Commission Act 1991 (QBCCA) to strengthen obligations regarding defects liability and the release of security by way of retention.

The QBCCA already placed restrictions on the amount of security able to be held under construction contracts in Queensland. Subject to some specific exception the restrictions are 5% of the contract price for head contracts (s 67K) subject to an ability to contract out in writing and 5% for subcontracts (s 67L) with amounts under both levels of contract to be reduced to 2.5% after practical completion (s 67N).

The amendments now expand obligations with respect to both retention and defects liability.

The QBCCA amendments apply to defects liability periods and security release from 17 December onwards (irrespective of when the contract was executed).

New provisions on Defects Liability and Retention under QBCCA

The QBCCA amendments introduce three new sections:

  1. Section 67NA, which provides that where a contract under which retention or security is provided in respect of the correction of defects, does not specify a defects liability period, then a default defects liability period of 12 months will apply starting from the date of practical completion.
     
  2. Section 67NB provides penalties will apply if a contracting party does not pay a retention to a contractor (without a reasonable excuse) in accordance with the building contract i.e. at practical completion and at the end of the defects liability period (final completion).

This does not apply to money withheld under the Building industry Farness (Security of Payment) Act 2017 or the subject of a dispute (or as noted above – where the party holding the retention has a reasonable excuse). 

A failure to comply has penalties of up to 200 penalty units ($26,110) or one year imprisonment.

  1. Section 67NC makes it a requirement that the person withholding a retention under a building contract must provide a notice (in an approved form) at the end of the defects liability period to the person they are withholding retentions from within:
  1. 10 business days of the end of the defect liability period; or
  2. Five business days where the release is linked to 'the' defects liability period under another building contract.

This obligation does not apply to a contracting party who enters into a building contract as a principal.

The approved form must state:

    1. The date the defects liability period ends;
    2. The amount to be paid to the contracted party at the end of the defects liability period , if no amount is required to correct defects in the building work under the contract; and
    3. The date the retention amount is proposed to be paid.

A failure to comply has penalties of up to 100 penalty units (presently $13,055).

What are the implications of the amendments?

Section 67NA may have little practical effect on larger subcontracts. Most defect liability periods are already 12 months and if parties want longer periods they are generally specified in the contract. It will simply give certainty in circumstances of very simple building contracts or purchase orders where there is retention or security and no specified defects liability period. This is an important consideration for contractors who would usually expect to receive their retention back just after completion of their works. If they do not specify this in their contract then they could inadvertently be subject to a 12 month defects period.

Section 67NB could be more problematic and as it carries a potential prison term for non-compliance, careful consideration is essential.

The first point to note is that it applies to retention only. It does not reference other forms of security such as bank guarantees, insurance bonds, letters of credit or cash bonds (where cash is given up front rather that retained from payment claims). Although it may not always be possible to obtain forms of security other than retention from smaller contractors, if it is possible to do then limitations and penalties under s 67NB will not apply.

An important consideration is that the payment of the retention must be in accordance with the terms of the building contract. The clause does not impose a blanket obligation to return the retention in full. If a right to call on retention arises under a contract then this may be enforced (subject to compliance with the notice requirements of the contract and s 67J of the QBCCA). For example if there is a debt due to the Principal under the contract equal to 50% of the retention value at the time when retention is due to be released, then the Principal may only be required to release the balance 50% retention.

If there is a reasonable period for release then this will likely apply also. Usually this is linked to other steps under the contract (i.e. 14 days after issue of the final payment certificate).

Most contracts will also have administrative or notice preconditions for release that must occur or be complied with. For example the issue of certificates of practical or final completion, relevant payment claims and then certificates or schedules confirming the amounts due to parties and provision of executed deeds of release. There is the further potential that an additional notice or certificate confirming agreed retention to be released (with deductions) could be required to be provided by a subcontractor to enliven the obligation for release under the contract. This type of process puts the onus on the party entitled to return of retention to actually claim it.

What if there is a dispute as to what retention is to be released?

The existence of a dispute is grounds for not releasing the retention and therefore if there is a dispute about amounts owed then this is likely to be  ground to retain the retention (until resolved). However the term 'dispute' is not defined, so the formality required is unclear. It is advisable to ensure that any dispute is clearly set out in writing and confirmed as a basis for withholding retention equivalent to the amount in dispute.

Lastly, the obligation to release retention will not apply where the party releasing has 'a reasonable excuse'. Again, what amounts to a reasonable excuse is not defined. The explanatory notes to the Bill do not provide any assistance in this regard. A reasonable excuse (in circumstances where money otherwise due to the contractor has been withheld) is likely to be very narrowly construed and we would urge caution in relying on this provision without advice.

Section 67NC, places the onus the party holding retention or security to give notice. The purpose being to ensure subcontractors are made aware of the end of the defects liability period to allow them to pursue their retention.  

The obligation does not apply to principals, so primarily it will apply to head contractors and construction management contractors, but it could also apply to subcontractors who have secondary subcontractors on whom they are holding retentions.

In a practical sense, contractors will need to ensure that they have a standard compliant notice form and that they have a call up process to ensure that the forms are completed and issued within the time frame required. A simple way of managing this may be to ensure that subcontractors give notice of the expected date of practical completion 15 business days in advance, ensuring that the contractor has sufficient advance warning.

Section 67NC, provides for a shorter time frame for notice where the defects liability period is linked to another contract (generally the head contract) and notice under that contract is given in sufficient time to allow giving the 10 business days notice otherwise required. A consideration here will be the prohibition on pay when paid provisions under s 74(2)(c) of the BIF Act.

A recent High Court decision of Maxcon Constructions Pty Ltd v Vadasz [2018] HCA 5 confirmed in respect of provisions in the security of payment regime in the South Australian jurisdiction, that an equivalent pay when paid voiding provision will apply to monies held as retentions if the contract (the subcontract in this case) provides for their release on the occurrence of an event dependent on the head contract (which includes the Head Contract reaching practical completion or final completion). Any 'linked' provisions with respect to retention should be reviewed to ensure they are not void. This will not apply to security that is not retention.

Summary

If you wish to have a defects liability period, longer or shorter than 12 months, then you must specify it.

Retention must be released in accordance with the terms of the contract and a failure to do so could result in significant penalty or even a prison sentence of up to one year. However there is scope to draft contract terms in a manner that provides for reasonable preconditions to release. Release is not required where there is a dispute or reasonable excuse but care must be taken in applying these limitations as they are not defined and yet to be considered by courts in this context.

Contractors must give prior notice of the end of defects liability periods and will need to ensure that they have approved forms and an appropriate call up mechanism in place to ensure compliance. Contractors will need to exercise care in linking retention release to head contract time frames to ensure that they are not void pay when paid provisions.

 

For further information on the BIF Act, please read our previous Constructive Notes® newsletter - Next tranche of Building Industry Fairness reforms to commence on 17 December 2018.

 

This article may provide CPD/CLE/CIP points through your relevant industry organisation.

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