Security of Payment: New Arsenal for those seeking Payment

By Rebecca Hegarty

Are you a subcontractor, contractor or principal contractor in relation to building and construction work or related goods or services in NSW? If you are, then recent amendments to the Building and Construction Industry Security of Payment Act 1999 NSW (the “Act”) may affect you.

Amendments to the Act

Effective from 28 February 2011, a new Division 2A was inserted into the Act.

The amendment provides Claimants under the Act, who have made an adjudication application, with a mechanism to freeze money held by a Principal Contractor that is owed to a Respondent, as security for monies owed to them, and, if they move quickly, to demand payment from the Principal Contractor.

This amendment does not limit or affect any other action by a Claimant to enforce a payment claim or adjudication determination.

Prior to the amendment

Before the changes to the Act, if you obtained an adjudication certificate and filed it as a judgment at court you could apply for a debt certificate and serve a notice of claim on the principal contractor under the Contractors Debts Act 1997 (NSW).

This effectively assigned to a claimant, the principal’s obligation to pay money owed to the respondent for work or materials it had engaged the respondent to carry out or supply (i.e. if that work or materials are part of or incidental to the work carried out or materials supplied by the claimant).

However, under the old section of the Act, by the time you obtained a debt certificate and served the notice of claim the principal contractor may have had already paid monies owing to the respondent. Recognising this gap, amendments to the Act were introduced to require principals to retain those monies and not pay it to the respondent for a period of time so that a claimant had a chance of claiming them.

Definitions under the Act

Who is a Claimant? 

A person/company who serves a payment claim under the Act.

Who is a Respondent?

A person/company on whom a payment claim is served under the Act.

Who is a Principal Contractor?

A person/company owing money to the Respondent for work carried out or materials supplied by the Respondent to the person as part of or incidental to the work or materials that  
the Respondent engaged the Claimant to do. 

The definitions are flexible enough to extend down the length of the contract sequence so, for example, a head contractor may be a principal for the purposes of the Act if the sub contractor under him receives a payment claim from a subcontractor next in the sequence.

Clarification of how it works: Questions that might be raised

I am a subcontractor and Claimant, so what do I do?

  • If you have applied for adjudication following the procedure set out in the Act, then you can also require a Principal Contractor to retain sufficient money to cover your claim out of money that is or becomes payable by that Principal to the Respondent (Section 26A of the Act). This is done by serving a payment withholding request in an approved form on the Principal.
  • The payment withholding request must include a statutory declaration that you genuinely believe the amount claimed is owed to you by the Respondent.
  • When your adjudication application is decided, you must serve a copy of the Adjudicator’s Determination on the Principal Contractor within 5 business days after the Determination is served on you. 
  • Then you must still act quickly to obtain a default judgment based on the Determination, and a Contractors Debts Act 1997 certificate, so that you can serve a notice of claim on the Principal under Section 6 of the Contractors Debts Act so that it is served within 20 business days of you serving a copy of the adjudication determination on the Principal contactor.

What if I do not know who the Principal Contractor is?

You can request the Adjudicator, in connection with your adjudication application, to direct the Respondent to provide this information to you (Section 26E). There are penalties for the Respondent for not complying or for giving false or misleading information.

I am a Principal Contractor, so what am I obliged to do?

  • If you are not or are no longer a Principal Contractor, as defined, for the claim, notify the Claimant within 10 business days after receiving the request.

Otherwise;

  • You must retain, out of money owed to the Respondent, an amount to the value of the payment claim (or the amount owed to the Respondent if that amount is less than the amount of the payment claim) (Section 26B of the Act).
  • Retain this money until whichever of the following happens first:
    • The adjudication application for the payment claim is withdrawn;
    • The Respondent pays to the Claimant the amount claimed to be due under the payment claim; 
    • The Claimant serves a notice of claim on you for the purposes of Section 6 of the Contractors Debts Act 1997 regarding the payment claim; 
    • A period of 20 days elapses after a copy of the adjudicator’s determination is served on you. 
  • If a part payment of the amount claimed to be due under the payment claim is made, this removes the obligation on you to retain money but only to the extent of the payment.

What happens if I do not comply?

  • If you do not retain the money that you are obliged to retain as Principal in accordance with the Act, you become jointly and severally liable with the Respondent for payment of the amount to which the contravention relates (Section 26C of the Act).

Protections for a Principal Contractor

  • If the Respondent commences action against you to recover money owed that you have been obliged to retain, you can raise this as a defence to the Respondent’s action (while that obligation continues).
  • Any period for which you have been obliged to retain money as a Principal Contractor is not taken into account for the purpose of working out the period for which money is owed by you to the Respondent that has been unpaid.

Penalties

The Amendments to the Act introduces penalties for non compliance in certain obligations for the Claimant, Respondent and Principal Contractor under this Division.

How good is this extra ammunition? It’s all in the timing…

It is always a good thing to have additional options in seeking to recover money. The amendments to the Act give a timing advantage to a Claimant who previously had to wait until it had a judgment to obtain a debt certificate and make a claim against a Principal Contractor under the Contractors Debts Act 1997 (NSW).

However, if the Principal Contractor had already paid money due to the Respondent, then the Claimant would miss out on that money. The amendments to the Act allow a subcontractor who is making an adjudication application to get in earlier by serving a payment withholding request on a Principal Contractor to put a freeze on that money in the Principal contractor’s hands, and, if the Claimant acts very quickly, to obtain payment from the Principal Contractor (by completing judgment and Contractor’s Debt Act procedures within the 20 days allowed).

As always, it’s all in the timing....

If you need more information on the Building and Construction Industry Security of Payment Act and how it might affect you as a contractor, or sub-contractor, contact one of our experienced lawyers at Coleman Greig listed below. We can provide advice on recovering monies owed, and how to deal with claims as quickly and effectively as possible.

Rebecca Hegarty, Lawyer
Phone: 9895 9289
Email:
rhegarty@colemangreig.com.au

Mark Williams, Lawyer
Phone: 9895 9245
Email:
mwilliams@colemangreig.com.au