SECURITY OF PAYMENT LEGISLATION

NEW SOUTH WALES



The security of payment legislation in NSW consists of two acts:

Building and Construction Industry Security of Payment Act 1999

(NSW) (NSW Act)



When does the legislation apply | What rights does the legislation confer on contractors | What must a principal do when faced with a claim | Contractor's rights if not paid - how to enforce its rights | Adjudication | Payment withholding requests | Recent amendments to the legislation


When does the legislation apply?



  The NSW Act applies to any contract or other arrangement (that is not necessarily a legally enforceable agreement) to carry out construction work and/or related goods and services within New South Wales (construction contract). There is no requirement for the contract or arrangement to be in writing. It can be written or oral, or a combination of both.

'Construction work' is defined very broadly and exclusions are essentially limited to mining operations. It includes construction, alteration, repair, maintenance and demolition of most structures that can be fixed to land. Accordingly, the NSW Act will apply to most typical construction contracts and consultancy agreements.

The NSW Act does not apply to a construction contract:

  • that forms part of a loan agreement, a contract of guarantee or a contract of indemnity;
  • for residential building work if the owner lives or intends to live in the building;
  • where it is agreed that the consideration payable is not calculated by referring to the value of the work carried out or the goods and services supplied (for example, an agreement for lease);
  • under which a party undertakes to carry out construction work, or supply related goods and services, as an employee; and
  • to the extent the construction work or related services are carried out outside NSW.

The NSW Act applies even if the construction contract specifies that it is governed by the law of another jurisdiction.

Contracts cannot include a '
pay when paid' provision, which is where a contractor makes its liability to pay a subcontractor dependent on payment to the contractor by a principal.

It is not possible to exclude the operation of the NSW Act in any construction contract to which it applies.


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What rights does the legislation confer on contractors?



When can contractors make a claim?



A claim for a progress payment (payment claim) can only be made on or from the date specified in the contract (reference date). If there is no reference date, then on the last day of each month. Importantly, only one payment claim may be served for each reference date.

Unless the construction contract provides otherwise, a payment claim cannot be made 12 months after the construction work is finished or related goods and services to which the claim relates were last supplied.


How does a contractor make a payment claim?



A claimant makes a payment claim by serving the payment claim on the person who is liable to make the payment under the construction contract (respondent).

A
payment claim must:

  • identify the construction work or related goods and services; and
  • specify the amount of the progress payment the claimant claims to be due (claimed amount).

If the claimant is a head contractor, being a person who carries out construction work for a principal and for whom construction work is carried out as part of or in addition to the work the head contractor performs for the principal, then the claimant must also include with the payment claim a supporting statement in the form required by the regulations to the NSW Act. The supporting statement requires the head contractor to state that it has paid its subcontractors amounts then due.

Payment claims made in respect of construction contracts entered into before 21 April 2014 must also state that the payment claim was made under the NSW Act. This removal of the requirement to state that the payment claim was made pursuant to the NSW Act was introduced in April 2014.


What type of payments are excluded?



No type of payments are expressly excluded from being claimed. However, the payment claim must only include payment for construction work under the contract. Unless the contract expressly makes provision for the payment of damages for breach, they are not claimable in a payment claim.

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What must a principal do when faced with a claim?



Respondent to serve payment schedule



If a respondent is served with a payment claim, it must respond by serving the claimant with a payment schedule setting out the amount that the respondent proposes to pay.


When to serve a payment schedule



The respondent must serve the payment schedule within 10 business days of receiving the payment claim or any shorter time that is stated in the contract.


What must be included in the payment schedule?



To comply with the NSW Act, the payment schedule must:

  • identify the relevant payment claim;
  • indicate the amount (if any) the respondent proposes to pay (scheduled amount); and
  • if the scheduled amount is less than the claimed amount, explain why and any reasons for withholding.


What amount must be paid?



If the respondent does not provide a payment schedule within the time limit, it must pay the full amount of the payment claim.

If the respondent does provide a payment schedule, it must pay the scheduled amount.



When is payment due?



A progress payment by a principal to a head contractor becomes due and payable:

  • 15 business days after service of the payment claim; or
  • on such earlier date as provided by the construction contract.

A progress payment to a subcontractor becomes due and payable:

  • 30 business days after service of the payment claim; or
  • on such earlier date as provided for in the construction contract.

A principal is a person for whom construction work is carried out who themselves are not engaged under a construction contract.

A subcontractor is someone who is engaged to perform construction work who is not a head contractor.

A progress payment to subcontractors in connection with a residential construction subject to the Home Building Act, where the owner intends to live in the house, is due and payable:


  • on a date determined in accordance with the construction contract; or
  • if the contract makes no express provision, 10 business days after the service of the payment claim.


Right to interest on unpaid amount



Interest is payable on the unpaid amount of any progress payment at whichever rate is the greater of:

  • the rate specified under the contract.


Defences to the consequences of failing to provide a payment schedule



The case study below demonstrates that a respondent can raise misleading and deceptive conduct as a possible defence to the consequences of failing to provide a payment schedule within the relevant timeframe as a result of that misleading and deceptive conduct.

CASE STUDY



Bitannia Pty Ltd & Anor v Parkline Constructions Pty Ltd

[2006] NSWCA 238



Facts


  • Parkline Constructions served a payment claim on Bitannia.
  • Bitannia did not provide a payment schedule within the time limit specified in the NSW Act which resulted in them being liable for the full payment claim.
  • The delay was attributed to the fact that Parkline Constructions had sent the claim to the general manager of Bitannia's associated company, rather than the architect responsible for payment claims.
  • A message attached to the payment claim stipulated that it related to 'retention release and variations as previously forwarded to [the architect]', indicating that the architect was also in possession of the relevant claim at that point in time.

Result


The New South Wales Court of Appeal held that:
  • the NSW Act does not require a payment claim to be served in good faith; and
  • the NSW Act allows a party to raise a defence to the consequences of failing to provide a payment schedule under section 52 of the Trade Practices Act 1974 (Cth) asserting that the misleading and deceptive conduct of the claimant contractor prevented submission of the payment schedule within the prescribed time limit.

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Contractor's rights if not paid - how to enforce its rights



Obtaining a summary judgment



The claimant may enforce its right to a progress payment by applying to the court for summary judgment in the amount of:

  • the payment claim, where the respondent fails to serve a payment schedule in accordance with the NSW Act; or
  • any unpaid scheduled amount which remains unpaid on the due date for payment.


Right to lien



A claimant may exercise a lien over any unfixed plant or materials which the claimant has supplied for use in the construction work for the respondent, where a progress payment becomes due and payable but remains unpaid.


Right to suspend work



A claimant may suspend construction work being carried out or related goods and services being supplied (with at least 2 business days' notice). The respondent becomes liable for any loss or expenses incurred by the claimant in connection with the work under the contract during the period of suspension.

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Adjudication



How and when to make an adjudication application



A claimant can apply for adjudication of the payment claim within:

  • 10 business days after the claimant receives the respondent's payment schedule, if the scheduled amount is less than the claimed amount; or
  • 20 business days after the due date for payment, if the respondent has failed to pay the whole or any part of the scheduled amount.

If the respondent has failed to provide a payment schedule in accordance with the NSW Act, the claimant is also entitled to apply for an adjudication as long as it follows the following steps:

  • within 20 business days after the due date for payment, serve a notice on the respondent of its intention to submit an adjudication application;
  • the notice must allow the respondent 5 business days to provide a payment schedule; and
  • then, after that 5-day period, and within 10 business days, the claimant may apply for adjudication.

In addition to the requirements for service within the specified times described above, the adjudication application must:

  • be in writing;
  • be made to a nominating authority authorised under the NSW Act to nominate an adjudicator;
  • identify the payment claim to which it relates;
  • identify the payment schedule to which it relates, if any;
  • be accompanied by the authorised nominating authority's application fee, if any; and
  • be copied to the respondent.

A claimant may include submissions with the adjudication application; however, this is not a necessary requirement of the NSW Act.

The adjudication application must as soon as practicable be referred by the authorised nominating authority to an adjudicator. The adjudicator must then notify the parties of acceptance of the adjudication application.



How to respond to an adjudication application



The respondent must lodge its adjudication response by the later of:

  • 5 business days after receiving the adjudication application; or
  • 2 business days after receiving notice that the adjudicator has accepted the adjudication application.

The adjudication response:

  • may only be lodged if the respondent issued a payment schedule within the time allowed in the NSW Act;
  • must be in writing;
  • must identify the adjudication application to which it relates; and
  • may contain submissions relevant to the response, as long as any reasons for withholding payment were previously raised in its payment schedule.


When will the adjudicator make his or her determination?



The adjudicator must determine the adjudication application within 10 business days after accepting the adjudication application. The parties may agree to extend this timeframe.

The adjudicator is required to determine:

  • the amount of the progress payment to be paid (adjudicated amount);
  • the date on which the amount becomes payable; and
  • the rate of interest on the amount.

In making a determination, an adjudicator can only consider the following matters:

  • the provisions of the NSW Act;
  • the provisions of the relevant construction contract;
  • the adjudication application;
  • the payment claim, together with all submissions and relevant documentation in support of the claim;
  • the adjudication response;
  • any payment schedule, together with all submissions and supporting documentation; and
  • the results of any inspection carried out by the adjudicator.

The adjudicator's determination must be in writing and must include reasons. However, if both parties agree, the claimant and the respondent may request the adjudicator not to include reasons in the determination.


When is payment due?



The respondent must pay that adjudicated amount within 5 business days of the respondent receiving the determination, or a later date as determined by the adjudicator.


Consequences of failing to pay the adjudicated amount



If the respondent fails to pay the whole or any part of the adjudicated amount, the claimant may request an adjudication certificate from the ANA and then file the adjudication certificate as a judgment debt in a court. The claimant may also suspend the carrying out of construction work after 2 business days' notice to the respondent.


Challenges to the adjudicator's determination



Despite the NSW Act providing that a respondent cannot challenge the adjudicator's determination, there have been occasions where respondents have successfully done so.

The law relating to a party's entitlement to challenge has evolved over recent times. Until 2010, the central authority was
Brodyn Pty Ltd v Davenport & Anor [2004] NSWCA 394 (Brodyn). In that case, the New South Wales Court of Appeal found that an adjudication determination could be set aside, if:

  • the adjudicator did not make a bona fide attempt to exercise the relevant power;
  • there was a substantial denial of natural justice; or
  • one or more of the basic and essential requirements was not present for the adjudicator to correctly exercise their powers, including:
  • the existence of a construction contract;
  • the service of a payment claim and adjudication application; and
  • the determination by the adjudicator of the amount of the progress payment, the date on which it became due and the rate of interest payable.

In 2010, the NSW Court of Appeal held in Chase Oyster Bar v Hamo Industries [2010] NSWCA 190 (Chase) that the test in Brodyn was too narrow. The court in Chase said that the proper test for determining if an adjudication determination could be set aside was whether the determination was affected by a jurisdictional error. However, the court did not provide a clear test for determining what constituted a jurisdictional error by an adjudicator.

The more recent decisions of
Bauen Constructions Pty Limited v Westwood Interiors Pty Limited [2010] NSWSC 1359 and St Hilliers Contracting Pty Limited v Dualcorp Civil Pty Limited [2010] NSWSC 1468 shed more light on the issue. Some principles that may be taken from these cases as to what might constitute a jurisdictional error by an adjudicator include where the adjudicator has:

  • made a mistake about whether or not they have jurisdiction to determine the adjudication application or the limits of that jurisdiction (for example, because they determined that an adjudication application has been served in time when it has not);
  • failed to comply with the statutory obligations upon which their jurisdiction is based (for example, by ignoring something the Act requires to be considered as a condition of jurisdiction or, conversely, considering something required to be ignored);
  • made a mistake because they have not in any way engaged with either or both of the parties' submissions such that they have reached an arbitrary, capricious, unreasonable or irrational justification for their determination; or
  • caused the denial of natural justice or procedural fairness (for example, because they consider fresh submissions from one party in its adjudication response without entitling the other party to respond).

In the above situations, a party may have an entitlement to challenge the adjudication determination, which may have the result of it being quashed if successful.

There is clearly now further scope since
Brodyn to challenge adjudications, as courts are no longer prepared to afford adjudicators absolute discretion to determine their own jurisdiction. The new approach appears to pose a risk of reduced confidence in successful, expedient enforcement and increased potential cost, time and complexity associated with adjudication under the NSW Act.

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Payment withholding requests



What is a payment withholding request?



Changes to the NSW Act in 2012 allowed subcontractors to secure payment up the payment chain. To explain the changes below, we have assumed a basic contractual chain of principal, contractor and subcontractor, though the changes would equally apply in the scenario of head contractor, subcontractor and sub-subcontractor.

As a result of the changes, a claimant/subcontractor is entitled to serve a payment withholding request (PWR) on a principal at the same time it serves an adjudication application on the respondent/contractor.

Upon receiving a PWR, the principal must withhold from any amount payable or that becomes payable to the respondent/contractor which includes an amount in respect of the work done/services provided by a claimant/subcontractor, an amount commensurate to that claimed by the claimant/subcontractor. If the principal fails to comply with this request, it will become jointly and severally liable with the respondent/contractor for the amount owed to the claimant/subcontractor.



Who's who in the contractual chain and what is a 'Principal Contractor'?



The amendments are designed to work anywhere up and down the contractual chain, and therefore the obligations on a contractor would vary depending upon where that contractor sits in relation to the party entitled to issue the PWR. The basic contractual chain is illustrated in the below diagram:



The term Principal Contractor in the amendment does not have the typical meaning that is understood in the industry in relation to WH&S obligations on site (Chapter 16 - WH&S principal contractor obligations). It defines the entity or individual liable to the respondent for work carried out or materials supplied by the respondent as part of, or incidental to, the work or materials that the respondent engaged the claimant to carry out or supply.


What are the requirements of a PWR?



The PWR must:

  • be served by a claimant/subcontractor who has made an adjudication application for a payment claim. Presumably, this will be at the time the relevant adjudication application is served;
  • be in the form approved by the Director General of the DSTA; and
  • include a written statement by the claimant in the form of a statutory declaration that it genuinely believes that the amount of money claimed is owned to the respondent by the claimant.


What to do if you are served with a PWR



Upon receipt of a PWR, the Principal Contractor must retain out of money that is or becomes payable:

  • the money owed by it downstream to its immediate subcontractor (which is the respondent in the adjudication), the amount of money to which the payment claim relates; or
  • if the amount of money owed by the Principal Contractor is less than the amount to which the claim relates, retain that amount.

If a part payment has been made in respect of the payment claim, the Principal Contractor is only required to retain money to the value of the balance of the payment claim.

However, if a person in receipt of a PWR is not (or is no longer) the Principal Contractor, that person must within 10 business days after receiving the request notify the claimant of this. Failure to provide that information is a maximum penalty of 5 penalty units (which is $550 based on 1 penalty unit = $110).

A person may no longer be a Principal Contractor as a result of money owed to the respondent having been paid before the PWR was served, assuming that evidence of payment can be established.

There is no obligation under the NSW Act on the Principal Contractor to pay the amount retained to the claimant/subcontractor. If the subcontractor wants to receive payment if it is successful in the adjudication and is unable to recover the adjudicated amount from the respondent/contractor, it must issue a notice of claim under the NSW Debts Act as described below.



Notification requirements



A contractor is required to provide the necessary details of the Principal Contractor to the subcontractor. Failure to provide this information results in a maximum penalty of 10 units (or $1100) being imposed upon the contractor.

A subcontractor does not need to notify a contractor that it has issued a PWR on a Principal Contractor. A contractor should therefore be mindful of the risk that a significant PWR could have upon its forecast cash flow in a project and perhaps consider imposing an obligation on the subcontractor to notify it of any PWRs in the relevant subcontract.


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Recent amendments to the legislation



As set out above, in April 2014, changes to the legislation were introduced to:

  • provide for maximum due dates for payment;
  • remove the requirement in a payment claim to state that it is a payment claim made pursuant to the NSW Act; and
  • impose the requirement to provide a supporting statement on head contractors making payment claims.

The April 2014 amendments also included provisions for the making of regulations to the NSW Act to provide for head contractors to hold retention money provided by subcontractors on trust. As at July 2014, these regulations have not come into force.

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Contractors Debts Act 1997

(NSW) (NSW Debts Act)



When does the legislation apply | What rights does the legislation confer on contractors | How does an unpaid person effect the assignment | What must a principal do when faced with a claim | What are the contractor's rights if not paid - how does a contractor enforce its rights


When does the legislation apply?



The NSW Debts Act applies when a person (unpaid person) is owed money by another person (defaulting contractor) for work carried out for or materials supplied by the unpaid person to satisfy the obligations of the defaulting contractor to some other person (principal). The Act expressly provides that the term 'carrying out of work' incorporates construction work under a construction contract, within the meaning of the NSW Act. It is not possible to contract out of the NSW Debts Act.

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What rights does the legislation confer on contractors?



Right of assignment of debt from principal



The NSW Debts Act gives an unpaid subcontractor the right to require the assignment to it of the principal's obligation to pay money it owes under the head contract to the defaulting contractor.

The right to the
assignment only arises where:

  • an unpaid person is owed money for work carried out for or materials supplied to the defaulting contractor;
  • there is money that is payable or will become payable to the defaulting contractor by the principal for work or materials that the defaulting contractor was engaged to carry out or supply under a contract; and
  • the work carried out or materials supplied by the unpaid person are, or are part of or incidental to, the work or materials that the principal engaged the defaulting contractor to carry out or supply.

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How does an unpaid person effect the assignment?



Judgment and debt certificates



To exercise the right of assignment, the unpaid person must firstly obtain a judgment against the defaulting contractor. This traditionally meant having a court or arbitrator give a judgment in favour of the unpaid person. Once a judgment has been received, the unpaid person must obtain a debt certificate for the amount owed. The unpaid person can apply to a court for a debt certificate.

The fact that the unpaid person must have obtained a judgment debt against the defaulting contractor means that the NSW Debts Act is rarely used. By the time the unpaid person obtains the judgment debt, it is unlikely that the principal will still owe the defaulting contractor any money which is the subject of the assignment.

However, the NSW Debts Act has been amended to allow a court to issue a debt certificate based on an adjudication certificate issued under the NSW Act.



Notice of claim



To make the assignment of the obligation to pay the debt under a debt certificate effective, an unpaid person must serve a notice of claim in an approved form on the principal.

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What must a principal do when faced with a claim?



Receiving a notice of claim



When a principal is served a notice of claim, it must pay the money owed to the defaulting contractor to the unpaid person.

Failure to pay the debt entitles the unpaid person to start proceedings in court for recovery against the principal. However, the principal does have a right to defend any proceedings.



Does the principal owe any money to the defaulting contractor?



If there is no money payable to the defaulting contractor by the principal, the unpaid person has no right to assign its debt to the principal and the principal will have no obligation to pay the unpaid person.

CASE STUDY



George Feros Memorial v Hammat Constructions

[2000] NSWSC 808



Facts


  • Hanna & Edmed (contractor) and George Feros Memorial (principal) entered into a standard building works contract JCC-D 1994 which included a term that made any security provided by the contractor available to the principal whenever the principal was entitled to the payment by the contractor or whenever the principal would be entitled to reimbursement of any moneys paid to others under the contract, as if the security were money due to the contractor by the principal.
  • Hanna & Edmed entered into subcontract with Hammat Constructions to construct a car park and road works as part of the works in the head contract.
  • Hammat obtained judgment against the contractor (who had since gone into receivership) for money owing under the subcontract. Hammat then served a notice of claim and debt certificate issued under the NSW Debts Act on the principal.
  • The principal handed over to the receivers the remaining bank guarantee held by it under the head contract.
  • In debt recovery proceedings against the principal, the court found that this amount was due to the contractor and paid to Hammat in satisfaction of the judgment debt.

Result


  • When the case went to the Supreme Court, it was held that all moneys payable under the contract to the contractor had been paid and accordingly there was nothing owing for work or materials.
  • An obligation to return security was not a payment for work or materials and in any event would not have been money due for work carried out, as the contractor had been paid in full.
  • The NSW Debts Act does not impose an obligation on a principal to activate security or consider it as money payable to the contractor, unless required by the contract.
  • The security in the form of a bank guarantee was not money; it was a contract between the bank and principal under which money might become available.


Other reasons for non-payment



Before making payment to the unpaid person, the principal should consider the following:

  • If a binding assignment has already been made more than seven days before, the debt which ranks in priority must be paid first.
  • If after 7 days from the date of service of the notice of claim there are other notices of claim that have been served in the same period, the principal must make pro rata payments.
  • In making payments to the unpaid person, the principal must comply with the contract between the principal and the defaulting contractor and pay the unpaid person as payments become payable under that contract.
  • A principal may be entitled to resist payment of the debt of an amount that exceeds 120 days wages or involves something moveable which would be practicable for the unpaid person to exercise a lien over.
  • Proceedings for a debt cannot be taken more than 12 months after the debt becomes payable. A debt that is payable because of an assignment under the NSW Debts Act, becomes payable by the principal when it would have become payable to the defaulting contractor as if there had been no assignment.


Discharge notice



On assignment of a debt, a principal must make payments to an unpaid person until the principal receives a notice that fully discharges the debt, or the payments are no longer payable under the contract between the principal and the defaulting contractor, whichever occurs first.

An unpaid person must provide a discharge notice acknowledging payment of a debt, or part of a debt, if requested by the principal.


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What are the contractor's rights if not paid – how does a contractor enforce its rights



If the principal does not pay a debt the subject of a notice of claim the unpaid person must sue the principal for the assigned debt. The principal may then defend the claim using any defence which it would have had against recovery of the debt by the defaulting contractor.

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Updated 15 July 2014