WA Regulation of Performance Security in Contracts

Date: 3 October 2023

Australia Real Estate and Construction Alert

By: Sandra Steele, Alex Rickarby, Natalie Poretti

All participants in the construction industry should be aware of legislative provisions that apply to performance security in more recent construction contracts for projects in Western Australia.

The changes create new statutory rights and obligations relating to performance security and also regulate the use, access to, and return of performance security, regardless of the agreed terms of construction contracts.

Overview

Performance security is given by a contractor under a construction contract to secure performance of the contractor’s obligations. It is held for the benefit of project owners (under a head contract) and head contractors (under a subcontract). The holding party’s right to access and to have recourse to the performance security is governed by the terms of the relevant contract.

Generally a court will uphold a party’s right to have recourse to performance security in accordance with the terms of the contract unless there are exceptional circumstances, such as fraud by the party having recourse.¹

The provisions under the Building and Construction Industry (Security of Payment) Act 2022 (WA) (WA SOP Act) limit the parties’ freedom of contract with respect to terms relating to performance security.

Specifically, this regulation of performance security addresses the following:

For construction contracts entered into after 1 August 2022, the return of security may be enforced by claimants under the payment claim and adjudication regime;
For construction contracts entered into after 1 February 2023:
- There are mandatory notice requirements before a party may have recourse to performance security; and
- A mandatory trust scheme will apply for retention money held by a party to certain construction contracts, unless excluded (outlined below).
For construction contracts entered into after 1 February 2024, a claimant may make a claim to substitute a performance bond (bank guarantee) in place of retention money.

Enforcing Return of Performance Security

The progress payment and adjudication regime under the WA SOP Act commenced for all construction contracts entered into from 1 August 2022.²

The provisions make it clear that a claimant may seek the release of performance security in a payment claim and subsequent adjudication (or review adjudication).³ This applies to both retention money and performance bonds (such as bank guarantees).

If the claim for release of performance security proceeds to adjudication an adjudicator is authorised by the WA SOP Act to require the release of any performance security:

That is no longer required because the obligations secured have been performed; and
If the performance security is due for release in accordance with the relevant construction contract.⁴

These requirements do not restrict the statutory right to seek release of security in a payment claim, but will limit an adjudicator’s power to determine release of the security. Of course, any entitlement to return of security will depend on the terms of the relevant construction contract.

Security Notice Requirements

The terms of the construction contract govern entitlement, timing, and procedure for recourse to a performance security by the holder of the security. Often a contract does not require notice to be given before the holding party has recourse to the performance security.

Effective for construction contracts entered into from 1 February 2023,⁵ a party to a construction contract is not entitled to have recourse to performance security under the contract unless:

The holding party has given the other party notice of its intention to have recourse to the performance security; and
At least five business days have passed since the holding party gave that notice or, if the contract provides a longer period, the period specified in the contract has passed.⁶

The notice of intention to have recourse must comply with the requirements of the WA SOP Act in order to be valid.⁷

A mandatory legislative requirement to give notice before having recourse to security is not novel. The Queensland jurisdiction has long required the party intending to have recourse to security to notify the other party “within 28 days after the contracting party becomes aware, or ought reasonably to have become aware, of the contracting party’s right to obtain the amount owed.”⁸

The Queensland obligation to give notice attaches to a particular contractual entitlement and failure to give notice will prevent the party from having recourse to security in respect of that entitlement. This contrasts with the WA SOP Act, which regulates the process for having recourse to security, and is similar to traditional notice requirements in contracts.

Under the WA SOP Act the notice requirements are taken to be a term of every construction contract and will override any inconsistent terms of the contract.⁹ Failure to comply with this notice requirement will constitute a breach of the relevant contract and may entitle the other party to claim damages for any loss resulting from the breach.

Where a performance security is secured over property owned by a third party, the WA SOP Act creates a statutory cause of action for damages suffered by that third party against the party having recourse to security without the required notice.¹⁰

Retention Money Trust Scheme

The WA SOP Act has established a retention money trust scheme¹¹ applicable to certain construction contracts. Parties who hold retention moneys will no longer have access to those funds for other purposes.

The retention trust scheme will apply to retention money held as performance security under:

Construction contracts entered into from 1 February 2023¹² where the value of the contract (including variations) is over AU$1 million (including GST); and
Construction contracts entered into from 1 February 2024¹³ where the value of the contract (including variations) is over AU$20,000 (including GST).

The retention money trust scheme will not apply to:¹⁴

Construction contracts where a party to the contract is a government party;
Contracts with a value less than the amounts stated above; and
Contracts and subcontracts for home building work unless in relation to a residential development for multiple dwellings or where the principal is a corporation.

The retention money trust scheme requires that retention money is held on trust¹⁵ for the benefit of each party to the construction contract in accordance with the contract terms. The retention money must be deposited into a trust account complying with certain requirements¹⁶ and is not available for payment to third-party creditors.¹⁷If retention money is not paid into a trust account as required, the trust applies to property of the party retaining the money up to the value of the retention money.¹⁸

The provisions also limit the circumstances in which retention money can be withdrawn from the retention money trust account. These limited circumstances include:

For the purpose of release of or recourse to the retention money “in accordance with the relevant construction contract;”¹⁹
As agreed between the parties to the relevant construction contract;²⁰
In accordance with a determination of an adjudicator or review adjudicator, arbitrator, court, tribunal, or expert appointed to determine a matter in relation to the construction contract;²¹and
Payment to the party who established the account of interest earned on the money prior to the date the retention money is required to be released under the relevant contract.²²

The party holding the retention money is also not entitled to set off against retention money due to be released any liability of the other party under another contract.²³

From 1 February 2024, failure to establish a retention money trust account or to allow a beneficiary access to trust account records as required by the WA SOP Act, will constitute an offence with a maximum penalty of AU$50,000.²⁴

Claim to Substitute a Performance Bond in Place of Retention Money

For construction contracts entered into from 1 February 2024,²⁵a party providing retention money as security may claim the release of retention money in substitution for a performance bond (or performance bonds).²⁶

There will be additional requirements for a valid payment claim seeking substitution of retention money, including to include a draft of the performance bond and certain other information specified by the WA SOP Act.²⁷The proposed substitute performance bond and the institution issuing the bond must also meet certain criteria, including that the proposed performance bond is unconditional, does not expire, and is wholly irrevocable.

If the claim for substitution of performance security proceeds to adjudication, an adjudicator will be authorised by the WA SOP Act to require the respondent to substitute the performance security that is proposed in a payment claim.

Conclusion

Regulation of performance security will increasingly affect construction contracts for projects in Western Australia. Participants in the construction industry should review contracts and procedures to ensure compliance with the new WA SOP Act performance security requirements.

¹Wood Hall Ltd v Pipeline Authority (1979) 141 CLR 443; Redline Contracting MCC Mining (Western Australia) [2011] FCA 1337.

²Section 2(2)(a)(iii) of the Commencement Proclamation.

³Section 58(1) and (2) of the WA SOP Act.

⁴Section 58(3) and (4) of the WA SOP Act.

⁵Sections 2 and 9 of the WA SOP Act; 2(2)(b)(i) of the Building and Construction Industry (Security of Payment) Act 2021 Commencement Proclamation 2022 (WA) (Commencement Proclamation).

⁶Section 57(1) of the WA SOP Act.

⁷Section 57(2) of the WA SOP Act.

⁸Section 67J of the Queensland Building and Construction Commission Act 1991 (Qld).

⁹Section 57(3) of the WA SOP Act.

¹⁰Section 61 of the WA SOP Act.

¹¹Part 4 of the WA SOP Act.

¹²Sections 2 and 9 of the WA SOP Act; section 2(b) of the Commencement Proclamation.

¹³Sections 2 and 9 of the WA SOP Act; section 2(c) of the Commencement Proclamation.

¹⁴Section 70 of the WA SOP Act.

¹⁵Section 71(1) of the WA SOP Act.

¹⁶Sections 74 and 75 of the WA SOP Act.

¹⁷Section 71(3) of the WA SOP Act.

¹⁸Section 71(2) of the WA SOP Act.

¹⁹Section 76(2)(a) of the WA SOP Act.

²⁰Section 76(2)(b) of the WA SOP Act.

²¹Section 76(2)(c).

²²Sections 76(2)(h) and 78(1) of the WA SOP Act; clause 13(1) of the Building and Construction Industry (Security of Payment) Regulation 2022 (WA).

²³Section 72(2) of the WA SOP Act.

²⁴Section 87 of the WA SOP Act.

²⁵Sections 2 and 9 of the WA SOP Act; section 2(c) of the Commencement Proclamation.

²⁶Section 59 to 61 of the WA SOP Act.

²⁷Section 51(2) and (4) of the WA SOP Act.

Sandra Steele

Sydney

Alex Rickarby

Perth

Natalie Poretti

Sydney

This publication/newsletter is for informational purposes and does not contain or convey legal advice. The information herein should not be used or relied upon in regard to any particular facts or circumstances without first consulting a lawyer. Any views expressed herein are those of the author(s) and not necessarily those of the law firm's clients.

Find more items tagged as: Real Estate, Real Estate Development and Construction