top of page
  • Valentina O'Regan

Changes to Security of Payment in NSW from 21 October 2019

Updated: Feb 7

The Building and Construction Industry Security of Payment Amendment Act 2018 (the Amendment Act), makes significant reforms to the Building and Construction Industry Security of Payment Act 1999 (the Act).


The Amendment Act takes effect from 21 October 2019 and will apply to any contracts entered on and after this date.


The reforms were formulated as a result of the Collins Inquiry and the publication of the Murray Report. The Amendment Act will include changes that will impact all parties in the construction industry.


The reforms deal with concerns about underpayment and non-payment to claimants for goods and services provided. Its primary aims are to provide greater protection to claimants, by creating and increasing offences for individual and corporate Principals and increasing transparency in the payment process. The amendments also deal with recent issues the subject of litigation in NSW, particularly with the involvement of the High Court of Australia’s interpretation of the Act.


The Amendment Act introduces the following significant reforms:
  • Payment claims will (once again) need to expressly state that they are made under the Act

  • Replacement of a broader definition of the ‘owner-occupier exemption’ for residential building works

  • Removal of reference dates for progress payments

  • Payment claims to be served monthly

  • Head Contract payments to subcontractors reduced from 30 business days to 20 business days

  • Increased penalties

  • Judicial review of adjudications allowed

  • Exclusion of claimants in liquidation

  • Investigation and enforcement powers

  • Personal liability for Directors


You can find a copy of the Amendment Act here: https://www.legislation.nsw.gov.au/#/view/act/2018/78


You can find a copy of the Amendment Regulation here: https://www.legislation.nsw.gov.au/regulations/2019-341.pdf


We provide more information on each of the reforms below.


Payment Claims and the ‘Magic Words’

To have the protections offered under the Act, payment claims must be endorsed with the ‘magic words’:


This is a payment claim made pursuant to the Building and Construction Security of Payment Act 1999 (NSW)’.


This is a back flip to the pre-April 2014 days.


The decision to re-insert this requirement followed overwhelming stakeholder feedback that removing the requirement created significant problems and uncertainty for both respondents and claimants. Endorsing a payment claim that it is made under the Act shows a clear intention to engage the formal process under the Act. The reform is also consistent with Recommendation 23 of the Murray Review. Recommendation 23 identified that there could be a potential risk of inadvertently having been taken to have made a claim under the Act when in fact it was only intended to be a payment claim under the contract thereby potentially having served more than one payment claim.


Contractors, subcontractors, suppliers or consultants can now elect to enliven the operation of the Act and the same commercial considerations would apply.


Interestingly, the equivalent legislation in Queensland (Building Industry Fairness (Security of Payment) Act 2017) no longer requires that payment claims be endorsed as being made under that legislation, which was the position under the now repealed Building and Construction Industry Payments Act 2004. In Queensland, every payment claim is considered to be made under that legislation where it contains the appropriate information and has a valid reference date. Principals in Queensland must respond to every payment claim. This took effect as at 17 December 2018.


Residential Building Works

The Amendment Act has also introduced the concept of an owner occupier construction contract, defined in the same terms as the former section 7(2)(b) and broadened the exempt residential construction contract to contracts ‘connected with an owner occupier construction contract' and not just contracts for residential building work.


The application of the old section 7(2)(b) was subject to debate in courts, in terms of to whom and what it applied to, and how it was to be applied. This was particularly problematic in multi-unit developments. For example, in Oppedisano v Micos Aluminum Systems [2012] NSWSC 53, the owner of the development resided in one unit (of four single occupancy units) and the family resided in the other units. The owner argued that the exemption applied. The Court noted that section 7(2)(b) was not entirely clear but held that because there are multiple units on the site, the exemption could not exclude the contract (or part of it) from application of the Act.


The Amendment Act attempts to deal with this issue. A residential builder will not be able to make a payment claim or adjudication application against an owner in respect of a contract for residential building work that is carried out in land that the owner resides or proposes to reside in. It will also exclude claimant’s rights to make payment withholding requests against a principal contractor for owner occupier construction contracts. This issue, as well as the broadening of the exemption to include a construction contract that ‘is connected with’ an owner occupier construction contract is likely going to be the next line of debate in this space.


Efficiency in Progress Payments

‘Reference Date’ No Longer Required

The Amendment Act reinforces the existing entitlement of the contractor under section 8 of the Act to progress payments but removes the concept of a reference date.


Under section 13(1A), claimants may serve a payment claim on and from the last day of the named month in which the construction work was first carried out (or the related goods and services were first supplied) under the contract and on and from the last day of each subsequent named month, if no earlier date is specified in the contract.


This allows contractors, subcontractors, suppliers or consultants a more certain schedule to make claims, increasing transparency and promoting efficiency. For construction contracts that have been terminated, the Act allows payment claims to be served on and from the date of termination.

This change has been made following the High Court decision in Breakfast Point Pty Ltd (In Liquidation) v Lewence Construction Pty Ltd [2016] HCA 52 (Breakfast Point). In this case, the High Court held that the Act (as it was previously drafted) operated in such a way that if a contract does not provide for reference dates after termination, recourse under the Act is not available under section 8(2)(b). That is, a claimant cannot default to the Act’s monthly reference date once a contract is terminated. The contract in Breakfast Point did not have an express term stating that the right to payment claims survived termination. As a result, the claimant was not entitled to be paid under the Act for works it performed following termination.


Payment Terms

Under section 11(1B)(a), the period allowing for progress payments to become due and payable has also been shortened for head contractors to sub-contractors from 30 business days to 20 business days, if an earlier date is not specified pursuant to section 11(1B)(b).


Payment terms for the principal to the head contractor remain the same – being 15 business days. We note there was talk of the time frame being reduced to 10 business days but this was not adopted. We presume that this is because of the practical difficulties of requiring the service of a payment schedule within 10 business days of a payment claim and requiring payment of a payment claim within the same timeframe.


The reduction to 20 business days will require careful management of cash flow and contract processes by head contractors in respect of sub-contractor claims i.e. if a head contactor receives a subcontractor claim less than 5 business days before its claim to the principal is due, then the head contractor will receive payment before the subcontractor claim is due. However, we can envisage tight timeframes.


For example, if the head contractor claim is due on the last day of the month like Thursday 31 October 2019, the principal has 15 business days to make the payment, which falls on Thursday 21 November 2019. The head contractor must pay the sub-contractor within 20 business days so if they receive a claim on Friday 25 October 2019 (4 business days prior to the head contractor claim), this will be due for payment on Friday 22 November 2019, which may only be the same day that cash is received from the principal.


Cash flow issues will also arise if principals take longer than 15 business days to pay the head contractor or if the sub-contractor contracts require the serving of payment claims 5 business days or more prior to the head contractor payment claims to the principal. In these cases, head contractors may be faced with having to fund the project for a period of time (and until the principal pays) to ensure subcontractors are paid and to avoid any disputes downstream.


To avoid the later issue, we recommend that head contractors carefully review the payment claim terms with its subcontractors.


Transparency and Rights

The Amendment Act also further provides for claimant’s rights and powers to access information and assert their rights, promoting transparency and discouraging tactical tardiness.


Under section 12A, the Act permits subcontractors entitled to retention money to inspect the records in connection with the operation of a retention money trust account.


Under sections 13(5) and 13(6), a subcontractors’ powers to service payment claims are adjusted, where they were previously being only able to service one payment claim in respect of each reference date. Pursuant to the clauses in the Amendment Act, a claimant may service one payment claim a month, but is not prevented from serving a single claim in respect of more than one payment, including in a payment claim the amount that has been a subject of a previous claim, or serving a payment claim in a particular named month for work done in a previous month.


Penalties

One of the most notable aspects of the Amendment Act is the prominent increase in the maximum penalties regarding non-compliance offences in the Act. The considerable increase in the maximum punishments that can be metered out to offenders reflects the increased emphasis on speed and efficiency in the payment and contracting process.


Adjudication

The Amendment Act also addresses issues that have arisen regarding the adjudication of disputes.


The newly inserted section 17A provides flexibility to claimants to withdraw an adjudication application, at any time, before an adjudicator is appointed to determine the application or if an adjudicator has been appointed but has not determined the application. Section 17A(1) operates subject to the qualification in section 17A(2) that if any other party objects to the withdrawal and, in the opinion of the adjudicator, it is in the interests of justice to uphold the objection. This option facilitates the early settlement of disputes between parties.


The Amendment Act further reinforces the continued obligation of the principal contractor to retain money owed to the respondent under section 26B. Whereas under section 26B(3)(a) the obligation to retain money would cease upon the withdrawal of the adjudication application for the payment claim, the new provision specifies that if the adjudication application is withdrawn or is failed to be determined in accordance with section 21, this obligation will only cease if a new adjudication application is not filed in pursuant to section 26.


Authority to Nominate Adjudicators

The Amendment Act, addressing section 28(2)(b), allows the Minister the option to grant conditional authority under section 28(2)(b). This power is qualified in section 28A, which accords the Minister the power to enact and modify a Code of Practice for an authorised nominating authority.


A contravention of the Code of Practice, defined as an offence under section 28(4), may lead to the withdrawal of authority by the Minister.


Judicial Review

The procedure to find jurisdictional error in an adjudicator’s determination is contained in the newly enacted section 32A, which allows the Supreme Court to make a finding that a jurisdictional error exists in an adjudicator’s determination and to make an order setting aside the whole or any part of the determination.


This addresses the High Court decision of Probuild Constructions (Aust) Pty Ltd v Shade Systems Pty Ltd [2018] HCA 4 (Probuild), which held that judicial review was not available for a non-jurisdiction error of law (e.g. an error in law or an application of contract terms). In that case, the High Court found that while the adjudicator erred in the application of a liquidated damages clause in a construction contract, the error could not be subject of judicial review. This was an unsatisfactory outcome. It is not surprising that the NSW Government decided to revise this decision, although, with respect to their Honours’ decision in Probuild, it was the only outcome that could be reached given the drafting of the Act prior to these amendments.


Claimant in Liquidation

Section 32B(1) of the Act excludes corporations in liquidations from serving a payment claim on a person or take action to enforce a payment claim or adjudication determination under Part 4


Section 32B(2) specifies that if it has made an adjudication application that is not finally determined immediately before the day on which it commenced to be in liquidation, the application is taken to have been withdrawn on that day. This effectively addresses the loophole that arose where a respondent would not be able to countersue a company in liquidation that had obtained payment under the old Act.


Investigation and Enforcement Powers

The Amendment Act, under Part 3A, enacts several new offences and specifies the powers available to enforce compliance within the Act, enforceable by ‘authorised officers’.


Section 32C specifies the definition of an authorised officer, being:

  • A person employed in the Department of Finance, Services and Innovation who is appointed under [Part 3A]; or

  • An investigator appointed under section 18 of the Fair-Trading Act 1987.


Section 32D notably establishes the purposes for which functions under Part 3A may be exercised:

  • For the purpose of investigating, monitoring and enforcing compliance with the requirements imposed by or under this Act;

  • For obtaining the information or records connected with the administration of this Act;

  • For the purpose of administering or executing this Act


Offences

The Amendment Act also introduces new offences in the aim of encouraging compliance with the requirements of the Act as follows:


  • Section 32O: Failure to comply with requirement under Part 3

  • Section 32P: False or misleading information

  • Section 32Q: Obstruction of authorised officer


Executive and Accessorial Liability

The inclusion of sections 34C and s34D in the Act means that for certain offences, executives and directors will attract personal liability, including offences with respect to retention money trust accounts. Section 34A also establishes a specific limitation period of 2 years after the date on which the offence is alleged to have been committed.


What This Means for You

The changes as a result of the Amendment Act are extensive and significant. All parties participating in construction projects in NSW should begin to consider whether their contracts and project administration practices will comply with the amendments. If the proposed amendments affect you, consider contacting us to discuss further.


What You Should Do:

  1. Audit construction contract payment terms, especially subcontractor’s payment terms, and compliance programs to ensure that directors and managers are not exposed to personal liability for non-compliance;

  2. Identify key issues that arise with cash flow (including risk of principal’s not paying on time) and contracts that may be impacted by the changes, including any contracts under current negotiation, which will be executed post 21 October 2019;

  3. Consult staff involved in the administration of contracts and payments;

  4. Amend standard form contracts for redrafting to address payment claims; and

  5. Train staff on the new amendments and incorporate the regime into your training.


If you would like further advice about the Act, please contact our expert construction lawyers at admin@valorumlaw.com.au or voregan@valorumlaw.com.au.

20 views0 comments

Recent Posts

See All

Statutory Demands: An Introduction

Overview A statutory demand is a document that can be lodged and relied on as part of the process to apply for the winding up of a company. Statutory demands are made under section 459E of the Corpora

Comentarios


bottom of page