Proposals are afoot to stop construction subcontractors being left in the lurch when developers and main contractors go bust, but the proposal has not been fully embraced by the country's largest legal firm.
Post-global financial crisis, the fall of developers and construction companies into receivership or liquidation cost subcontractors, as unsecured creditors, tens of millions of dollars in payments, forcing many to the wall and into receivership themselves.
The subcontractors' plight was highlighted following the collapse in February last year of large construction company Mainzeal, in which about $18 million of subcontractors' retention money was lost.
Government, Building and Construction Minister Dr Nick Smith has proposed a law change requiring that the developer or main contractor has a fiduciary duty to subcontractors to hold the retention money in trust.
''It's unfair that electricians, plumbers, painters, plasterers, tilers and other subcontractors can miss out on being paid when contractors or developers use retentions money inappropriately.
''We are going to change the law and require retentions to be held in trust to help ensure contractors and their subcontractors get paid for the work they do,'' Dr Smith said.
Dr Smith said the Government had not opted for a model requiring retention funds to be put into a separate bank account or lawyer's trust fund, as some had advocated, because the compliance cost was too high.
However, Chapman Trip partner John McKay said some in the construction sector had sought for the retention funds to be put into a separate bank account or a lawyer's trust fund, saying Dr Smith's description of the high compliance costs ''may have had been overstated'' and were not quantified.
''In the absence of this segregation, it's difficult to see how the retention monies can be identified among the other funds held in a contractor's bank account, and how those funds are to be adequately protected if the [main] contractor becomes insolvent,'' Mr McKay said.
''We don't want to get into a situation where we generate another type of [legal] dispute.''
Dr Smith said putting a trust obligation into the law made plain the retention money was not to be used ''inappropriately'' and should take priority over other creditors in the event of liquidation.
A NSW government consultation paper on the issue looked at three options, Mr McKay said.
The first, a ''deemed trust model'', while the least intrusive, was also the least effective, leading to inevitable issues with mingled funds and difficulties in trying to trace the trust money.
The second, a ''statutory construction trust'' held in a special account, the terms of which prevented the money being used as general working capital, would also fence it off from the liquidator's grasp but would work only if the rules were followed.
''There are real risks that the contractors who are most likely to fail will be more prone to patchy compliance,'' Mr McKay said.
The third option was a ''statutory trustee'' administered by the Office of the Small Business Commissioner. This was the preferred NSW government option.
Mr McKay said NSW considered this simpler and more cost effective than option two, which would require the creation of thousands of separate trust accounts.
''But even under option three, the administrative burden is vast, involving many thousands of transactions every month,'' he said.
While Mr McKay did not have a definitive preference for Dr Smith to consider, he highlighted that the Minister's proposal at least created an ''unstoppable momentum'' for change and the sector would be prompted to move ahead from ''should we'' change to ''how do we change''.
Dr Smith said the changes would provide certainty and stability in the construction industry, without excessive compliance costs.
''It ensures that in building contracts, the risks are carried by the developer and the principal contractor rather than by subcontractors, who are less well-informed of the viability of a particular development,'' Dr Smith said.
