NSW Security of Payment Legislation Developments

Articles Written by Catherine Parry

Subcontractors now have direct rights against Principal Contractors

Recent amendments to the NSW Building and Construction Security of Payment Act 1999 (NSW) (Act) mean that subcontractors now have the right to compel a principal contractor to withhold money claimed to be owed by a contractor.

These changes are designed to dramatically improve the prospects of recovery of unpaid payment claims via principal contractors compared with the pre-existing Contractors Debts Act 1997 (NSW) (CDA) regime, which requires a judgement debt against the contractor as a pre-condition to enforcement against a principal contractor. By the time a subcontractor has crawled through the CDA hoops, the contractor who owes the money may have already been paid out by the principal contractor, and have gone out of business, thereby leaving the subcontractor high and dry. Equally the changes are designed to improve the prospects of subcontractors recovering amounts determined to be paid through the adjudication process under the Act.

Now, under the new provisions of the Act, no judgement certificate against the contractor is required, merely the commencement of an adjudication application for the unpaid payment claim. Thus, the subcontractor does not have to go to the expense of going through the courts to obtain judgment, all it need do is pursue payment through the speedier and cheaper adjudication procedure under the Act.

The request of the principal contractor is in the form of a 'payment withholding request', and must include a statutory declaration by the subcontractor that it 'genuinely believes that the amount of money claimed is owed' by the respondent contractor. At that point the principal contractor is obliged to retain the claimed amount from funds that become payable to the contractor. The obligation of retention of funds remains on foot for the duration of the adjudication. Failure to retain funds contrary to the terms of the withholding request (ie paying the funds to the contractor) results in the principal contractor becoming jointly and severally liable with the contractor in respect of the debt owed to the subcontractor. If the principal contractor has already paid out the contractor, then no retention obligation arises.

Intriguingly the second reading speech reveals that the NSW Liberal Coalition opposed the Bill due to lack of opportunity to consult with relevant industry stakeholders. The Bill was introduced with no notice to the lower house by the then NSW Labour Government during the final sittings of Parliament in 2010. It became law on 28 February 2011. The ultimate fate of these amendments made in the final days of the previous NSW State Government remains to be seen, but in the meantime, these changes ramp up the armoury of out of pocket sub contractors as against principal contractors (with whom they have no contractual relationship) and contractors.

Discussion Paper on Reforms to NSW Security of Payment Legislation

The outgoing NSW State Government released a discussion paper inviting submissions around the reform of the Act and the CDA by 8 October 2010. The discussion paper (released by the NSW Services, Technology and Administration Department) states:

'The Government takes the position of subcontractor claimants seriously, and is committed to exploring measures which improve the position of this group in the industry. A range of proposals designed to specifically assist subcontractor claimants, particularly smaller, lower-tier subcontractors has been included in this Discussion Paper.' (Executive Summary).

The issues aimed at assisting subcontractor claimants include:

  • Joining the principal as a party to the payment claim brought by a subcontractor (this is different to the payment retention changes that recently became law);
  • Amending the CDA to make it easier for subcontractors to 'stake their claim' in any money owed by the principal to the contractor;
  • Whether subcontractor debt recovery proceedings should be shifted out of the court system to a less formal, low cost forum such as the CTTT;
  • Requiring contractors to hold payments due to subcontractors on trust, thereby quarantining the funds for the benefit of the subcontractor; and
  • Regulating the costs of submitting payment claims to adjudication under the Act.

Other reform issues up for consideration include:

  • payment claims include an endorsement that states: 'If the claim is not paid or otherwise dealt with in accordance with the procedures or periods prescribed by the Act, the claimant will be legally entitled to pursue the claim under the adjudication process, or in certain circumstances, judgment may be entered against the principal for the full amount of the claim.'
  • exclusion of prolongation claims, damages claims for breach of contract and Trade Practices legislation and latent conditions claims from the payment claim ambit. This proposed reform is aimed at preventing 'predatory claiming practices' of some claimants;
  • the time limit within which claims may be made under the Act be clarified to mean that all work to which the claim relates must be completed within 12 months prior to submission of the payment claim. Presently, the Court of Appeal has held that the Act requires only some work to which the payment claim relates be performed within 12 months prior to service; and
  • interest be paid on overpayments resulting from adjudication determinations.

We are informed that shortly before the March 2011 election the NSW Government put on hold consideration of submissions made on the above reform issues, and there is no current time line for progression of the Discussion Paper, pending an internal review.

The fate of these proposed reforms to the Act and CDA, and indeed perhaps the above recent changes to the Act remain unclear.

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