Introduction

The Building and Construction Industry Security of Payment Amendment Act 2010 NSW, introduced on 28 February 2011 ('Act') enables subcontractors to freeze money in the hands of a principal that is due to be payable to the head contractor.

The old regime

The Building and Construction Industry Security of Payment Act 1999 NSW ('SOP Act') was designed to facilitate a process for which subcontractors could receive timely payment for their work.

The SOP Act introduced quick adjudication of disputes over progress payments, however actual payment to subcontractors was not guaranteed as a subcontractors' entitlement to payment could be defeated by the insolvency of the head contractor.

In the traditional relationship between a principal and subcontractor, a subcontractor does not have a contractual relationship with the principal. The courts gave little assistance in this situation due to the fact that subcontractors have freely entered into contractual relationships with head contractors alone and therefore should not be allowed to claim payment directly from a principal.

The amendments

A principal (usually a proprietor) is defined in 26A and refers to a person who owes money to a respondent of a payment claim (generally a head contractor) for work done or materials supplied that the respondent engaged the claimant (usually the subcontractor) to carry out or supply. A subcontractor who has carried out work for a head contractor, submitted a payment claim under the SOP Act for that work and has not been paid the claimed amount, is entitled to lodge an adjudication application under the SOP Act.

If a subcontractor has made an adjudication application for a payment claim, it can serve a payment withholding request on the principal, which requires the principal to retain a sufficient amount of money to satisfy the claim that the principal would otherwise generally have to pay the head contractor.

Upon receipt of a payment withholding request, the principal must retain the smallest of the following amounts:

  • The amount claimed in the payment is the subject of the adjudication application, less any part payment made
  • The amount owed, or which subsequently becomes payable, by the principal to the respondent when or after the payment withholding request is served on the principal 
  • The amount that is or becomes payable by the principal to the respondent for the work or incidental to the work or materials that the respondent engaged the claimant to carry out or supply.

The requirement to retain the money remains in force until one of the following requirements is fulfilled:

  • 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 a claim on the principal for the purposes of s6 of the Contractors Debts Act 1997, in respect of the payment claim
  • A period of 20 business days elapses after a copy of the adjudicator's determination of the adjudication application is served on the principal.

A debt certificate will be required before money must be paid to the claimant. This will be served on the principal and the principal must then pay the sub-contractor directly.

Obligations on the parties

Parties that are subject to the amendments should be aware of their obligations under the amendments as these can result in liability for debt or monetary penalties under the Act. For example:

  • If the principal fails to keep this money aside they can be held jointly and severally liable with the respondent in respect of the debt owed by the respondent to the subcontractor
  • The respondent may be required to provide information about the principal to the claimant such as its identity and contact details. There are monetary penalties should the respondent fail to comply
  • A claimant must make sure that they serve a copy of an adjudication application determination on the principal within five business days or face monetary penalties under the Act.

Conclusion

It is important for subcontractor's to be aware of these additional rights, and to exercise them where appropriate as quickly as possible to ensure that money that it considers is due and payable to it is not lost due to a head contractor becoming insolvent.

A principal who has been served a payment withholding request should make sure all payments to the respondent are stopped until they are able to ascertain how much of those payments are for work done by the claimant. Both principals and subcontractors must ensure that they comply with their obligations under the Act to avoid penalties.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.