The building industry in Australia is facing the toughest time it has seen in many years. All parties in the construction supply chain are feeling the pinch, so it pays to make the most of the legal protections that exist in Australia. Paul Cott comments.

With the ever-increasing material costs, labour costs, difficulty to source materials and manpower, and the increased scrutiny by lenders to approve loans, the industry is crippling. The harsh effect of this hostile environment is evident from the recent collapse of Australia’s thirteenth largest builder, Porter Davis Homes. The story of Porter Davis is only one among many. Building companies going bust has become so common now that homebuyers waiting for their houses to be constructed are in constant fear of hearing the dreadful news that their builder has gone under. When a building company files for liquidation, the existing customers are also at risk of having to pay a higher amount than what was agreed with the bankrupt builder, to another builder who agrees to take over construction from the bankrupt builder and finish the house for the customer. Finding a replacement builder is a task in itself; builders might be wary of taking over another company’s work due to warranty-related issues that may arise in the future.

Such a grim situation not only affects the building companies that are going under and their customers, but also the tradespeople involved in the builder’s projects. Usually, there is not enough importance given to the troubles faced by tradespeople in these situations. There need to be measures in place to ensure that they are well protected in such events.

BARGAINING POWER

It is important to analyse the bargaining power possessed by tradespeople in terms of their engagement contract. Many tradespeople would have signed contracts with builders prior to the current volatile market situation and increased cost of living. It is pertinent to see if it is possible for a tradesperson to negotiate the terms of their engagement with the builder to suit the present economic needs and demand. Tradespeople can most certainly not insist on alteration of their contracts. However, they can negotiate with the builder to amend the contract to reflect the needs of the present situation. The builder is within their rights to refuse the tradesperson’s suggestions as long as the contract is still in term and valid. If the contract expires, and the builder and tradesperson draw up a new contract, the tradesperson has a better ground to renegotiate the terms. The alteration to contractual terms may be achieved in two ways, namely, changing the body of the contract and both parties signing the contract, or drawing up a separate document as an amendment to the existing contract by drawing reference to the clause which is being amended and both parties signing the amendment deed.

PROTECTION BY WAY OF INSURANCE?

There are few policies available in the market which protects tradespeople in the event of the collapse of a building company with outstanding invoices due to them. However, it is worthwhile to talk to an insurance broker regarding the options available to tradespeople caught in this precarious situation.

CUSTOMER ATTITUDES

What are the attitudes of customers vis-à-vis contract price re-negotiations?

In the context of the present situation of the building industry, it is not hard to imagine the constant worry and stress that building companies’ customers are going through. One way to bring in some form of stability to a building company’s financial situation is if they can pass on reasonable increases in material costs to its customers. The only way for a builder to do that would be if they build in a clause into the contract to provide for revision of prices in the event of a substantial increase in material costs. The builder’s customers should also be made aware of the existence of such a clause so as not to shock them when such a provision, in fact, kicks in. It is very important to have a well-drafted and mutually negotiated clause regarding price revisions to avoid the risk of disputes arising between the builder and its customers in the future. Since most customers would be aware of the current issues faced by the building industry, it is possible that they may be less reluctant to share the burden of increasing material costs.

SECURITY OF PAYMENT ACT

The Building and Construction Industry Security of Payment Act 2002 (a Victorian Act, though there are State-by-State equivalents), although not directly relevant in the context of the collapse of building companies, is still relevant for a tradesperson to claim amounts owed to them. The advantage of claiming under the Security of Payment Act is that the Act provides for quicker recouping of debts. The Security of Payment Act is in place to ensure that an entity or person who provides construction work services or enables provision of materials under construction contracts gets paid. The operation of the Act is monitored by the Victorian Building Authority. The process to make a claim under the Security of Payment Act is quite clear. It involves the following steps:

1. Serving a Payment Claim

A person wishing to claim progress payments for work carried out under a construction contract must first submit a payment claim to the entity which owes the sum.

2. Sending a Payment Schedule

Once the entity owing money receives the payment claim, it may either pay the amount due in full or send the claimant a payment schedule if they object to the payment claim. If the respondent does not revert with a payment schedule within 10 business days, the entity would be liable to pay the full amount stated in the payment claim.

3. Adjudication or Court

Once it is evident that the claimant and respondent cannot agree on the amount owing, the claimant may either choose to apply for adjudication by filing an application with an Authorised Nominating Authority which would then nominate an adjudicator to adjudicate the matter, or file a complaint with the Magistrate’s Court or a writ in the County Court or the Supreme Court, based on the claim value. If the claimant chooses to go down the path of adjudication, the determination of the quantum of money owed by the respondent to the claimant would be determined by the adjudicator within 10 business days of the acceptance of the nomination made by the ANA. The advantage of the adjudication option available under the Act is that the amount awarded by an adjudicator can be enforced through a court.

4. Other Options

In circumstances where the respondent fails to pay, the claimant has the right to suspend work, and/or exercise a lien (a right to hold a claim over a matter until payment is made) over unfixed material.

Conclusion

As is evident from the above analysis, there is not enough protection offered to tradespeople in the current circumstances. It is important that measures be put in place to check that tradespeople are not exposed to the risk of non-payment for services rendered by them, especially in the light of the collapse of many prominent building companies. A legislative framework needs to be relooked at as a starting point. Tailor-made insurance policies available to overcome builder bankruptcy situations faced by tradespeople is another area that needs to be explored and given attention.