Reading Between the Lines: Part 2 – Statutory Obligations

Parties to construction contracts are often unaware of a number of obligations that may exist, and can be implied, into a contract, even where the parties have not turned their minds to them during contractual negotiations. Such obligations can be just as important as the express terms of a contract, and can have significant impacts on the rights and responsibilities of the parties.

Following on from the first article in this series, we consider a number of statutory obligations that may dictate certain aspects of the relationship between project participants, including:

1. statutory trust accounts;
2. security and retention amounts; and
3. statutory warranties.

Statutory Trust Accounts

The main purpose of the Building Industry Fairness (Security of Payment) Act 2017 (Qld) (BIF Act) is to assist participants in the building and construction industry in being paid for the work they do. This is achieved through the requirements of, inter alia, a statutory trust account framework which applies to particular construction contracts, and includes the following trust mechanisms:

1. Project Trust Accounts; and
2. Retention Trust Accounts.

Where a trust account is required, certain processes and obligations will apply.

Project Trust Accounts

Money payable to Head Contractors and Subcontractors for work carried out under eligible contracts must be held in trust by the Head Contractor for the primary benefit of a Subcontractor.

A Head Contractor is responsible for:

1. opening a Project Trust Account for each construction contract;
2. making certain the account is operated in accordance with the BIF Act (this includes ensuring that Subcontractors are paid only from the trust account); and
3. keeping proper trust account records.

The Principal’s primary obligation is ensuring all contract payments it makes are deposited into the trust account.

Retention Trust Accounts

A retention trust account is an account where eligible cash retention amounts withheld from Contractors are held until due to be paid at a specified time.

Cash retention amounts must be held in trust where the overarching building contract (i.e., the head contract) is an eligible contract. Such retention amounts include those withheld from:

1. Contractor payments by a private Principal;
2. Subcontractor payments by a Head Contractor; and
3. Subcontractor payments by the Subcontractor that engaged them.

The party who will withhold the retention amounts is responsible for:

1. opening a retention trust account with an approved financial institution;
2. making certain the trust account is operated in accordance with the BIF Act (this includes ensuring that all retention amounts are paid into the trust account and that retentions are released/paid from the trust account; and
3. keeping proper trust account records.

The BIF Act establishes stringent obligations for trust accounts, and requires meticulous adherence to procedures and records. Failure to comply with these statutory obligations can result in significant financial penalties.

You can read more in more detail about the requirements of statutory trusts here.

Security and Retention Amounts

Section 67J of the Queensland Building and Construction Commission Act 1991 (QBCC Act) sets out the obligations on a contracting party who intends to call on a security or retention amount (i.e., set-off) under a building contract to obtain an amount owed under the contract.

Specifically, the party seeking to call on the security or retention amount must first notify the other contracted party in writing of the proposed use and of the amount owed. Critically, this notice must be given within 28 days after the party seeking recourse becomes aware (or ought reasonably to have become aware), of its right to the amount owed.

Section 67J will not apply in circumstances where:

1. work that has been taken out of the hands of the party providing the security or retention, or where the contracted has been terminated; or
2. the security or retention amount is to be used to make a payment into court to satisfy a notice of claim of charge under the BIF Act.

Parties are reminded of the importance of timely and transparent communication when seeking to call on security or retention amounts.

Statutory Warranties

Part 4A of the QBCC Act regulates building contracts other than domestic building contracts (including commercial head contracts and subcontracts for residential projects) and sets out a number of obligations for such contracts, and for Contractors. Part 4A requires, inter alia:

1. building contracts for more than $10,000 are to be in writing before work commences;
2. a limit on the value of retention amounts and securities for building and subcontracts (subject to the parties contracting out of this requirement in accordance with section 67K of the QBCC Act), namely:
   1. 5% of the contract price at any time before practical completion; and
   2. 5% of the contract price at any time after practical completion
3. cash retentions to be limited to 10% from each progress claim;
4. building contractors not to enter into a building contract that includes a prohibited condition; and
5. any retention amounts or security withheld under a building contract must be released to the party entitled to it after 12 months from practical completion

Contracting parties should be aware that non-compliance with Part 4A of the QBCC Act may constitute an offence and can result in significant consequences, particularly for builders, including inter alia:

1. warnings, fines, and prosecutions;
2. suspension or cancellation of a building licence;
3. accrual of demerit points against a building licence; and
4. disciplinary action.

Schedule 1B of the QBCC Act sets out a number of statutory warranties that are implied into domestic building contracts. Crucially, these warranties cannot be contracted out of, and to the extent a contractual provision purports to do so (i.e., restrict or take away the rights of a person for a breach of such warranties), it will be considered void.

Schedule 1B requires that building contractors warrant, inter alia, that:

1. the work will be carried out in accordance with the plans and specifications that form part of the contract;
2. where the work consists of construction of a detached dwelling, or the renovation, alteration, extension, improvement or repair of a home, the detached dwelling or home will be suitable for occupation when the work is finished;
3. the work will be carried out with reasonable diligence; and
4. any provisional sums or prime cost items have been calculated with reasonable care and skill.

Parties are reminded that monetary penalties can apply for non-compliance with Schedule 1B of the QBCC Act.

Understanding Your Obligations

Critically, parties entering into a construction contract should be aware of any applicable statutory obligations and have an adequate understanding of how these obligations can significantly impact the contractual relationship.

The non-negotiable nature of statutory trust accounts and a number of statutory warranties (many of which cannot be contracted out of), highlights the importance of compliance. To navigate this complex legal landscape, parties to a construction contract should take proactive steps to obtain a thorough understanding of all applicable statutory obligations. Engaging legal representation early in the project life cycle is a prudent measure, ensuring that the parties are well-informed and equipped to comply with the intricate requirements of relevant legislation. In doing so, they will not only mitigate legal risks but may also foster a collaborative and legally sound environment for the successful execution of a construction project.

Lamont Project & Construction Lawyers

We have the industry knowledge and experience to assist both Principals and Contractors in all major construction projects. If you would like to discuss any of the matters raised in the above article or the forthcoming series as it relates to your specific circumstances, please contact Lamont Project & Construction Lawyers.

The content of this article is for information purposes only; it does not discuss every important topic or matter of law, and it is not to be relied upon as legal advice. Specialist advice should be sought regarding your specific circumstances.

Contact: Peter Lamont or Kristopher London

Email: [email protected] or [email protected]

Phone: (07) 3248 8500

Address: Suite 1, Level 1, 349 Coronation Drive, Milton Qld 4064

Postal Address: PO Box 1133, Milton Qld 4064