The Building and Construction Industry Security of Payment Amendment Act 2010 (NSW) will come into force on 28 February 2011, inserting a new Part 3, Division 2A into the Building and Construction Industry Security of Payment Act 1999 (NSW) (SOPA). The amendments favour subcontractors, allowing them to require a head contractor to withhold money owed by them to the defaulting contractor in the event the subcontractor commences adjudication proceedings against the defaulting contractor.
The current regime
A principal purpose behind the enactment of the SOPA was the introduction of a process to facilitate subcontractors receiving timely payment for their work.
While the SOPA introduced such a process in the form of the adjudication system, actual payment to subcontractors was still not guaranteed as a subcontractor's entitlement could be defeated by the insolvency of the head contractor. Frustratingly for subcontractors (and for proprietors also), this could occur even when the proprietor had fully paid a payment claim by the head contractor, which incorporated the subcontractor's claim on the head contractor and the head contractor had not passed on the subcontractor's component.
In this situation subcontractors have no entitlement to claim payment from the proprietor. This is because in the traditional proprietor/head contractor/subcontractor contractual chain, a subcontractor does not have a contractual relationship with the proprietor.
The courts have given little or no assistance to subcontractors in this situation, being consistently of the view that subcontractors have freely entered into contractual arrangements with head contractors only and, in these circumstances, subcontractors should not be allowed to usurp this arrangement and claim payment directly from proprietors, merely because of the insolvency of head contractors.
While the amendments do not guarantee payment to subcontractors, they provide a mechanism whereby subcontractors can secure payment of their payment claims by giving notice of their claim to the 'principal contractor'.
The new section 26A provides that a claimant who has made an adjudication application for a payment claim may require a principal contractor to retain sufficient money to cover the claimant's claim from money that is otherwise payable by the principal contractor to the respondent, ie the entity that has received the payment claim and is the respondent to the adjudication application.
Section 26A defines 'principal contractor' as follows:
'A principal contractor for a claim is a person by whom money is or becomes payable 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 carry out or supply.'
In the vast majority of cases, the principal contractor will be the proprietor ie the person who wants the construction work performed and is paying for it. The claimant will be a subcontractor and the respondent will be the head contractor.
If the subcontractor has made an adjudication application for a payment claim, it can serve a payment withholding request on the principal contractor, which requires the principal contractor to retain sufficient money to cover the claim out of money that the principal contractor would otherwise be liable to pay to the respondent to the adjudication application.
If the principal contractor fails to retain moneys after service of a payment withholding request, it becomes jointly and severally liable with the respondent (head contractor) for the debt owed by the respondent to the subcontractor.
The obligation on the principal contractor to retain money only remains in force until:
- The adjudication application for the payment claim is withdrawn.
- The head contractor pays to the subcontractor the amount claimed by the payment claim.
- The subcontractor serves a notice of claim on the principal contractor under the Contractors Debt Act 1997.
- 20 business days elapses after a copy of the adjudicator's determination is served on the principal contractor.
Section 26D details the statutory protections for the principal contractor, namely:
- The obligation to retain money is a defence against recovery of the money in proceedings commenced against the principal contractor by the respondent.
- The period during which the principal contractor retains money is not included in the reckoning of any period for which the principal contractor owes money to the respondent (ie for the calculation of interest).
- The claimant is subject to a penalty if it does not notify the principal contractor within five business days of the withdrawal of the adjudication application.
- The principal contractor is entitled to rely in good faith on a statutory declaration from the respondent that the amount claimed in the adjudication application has been paid, or the adjudication application has been withdrawn.
The amendments to the SOPA also provide that in situations where the subcontractor is unaware of the identity of the principal contractor, the adjudicator may direct the head contractor to provide information regarding the identity and contact details of the principal contractor in relation to the claim.
The process detailed above would also be available to contractors to subcontractors, ie sub-subcontractors. In this event the claimant will be the sub-subcontractor, the respondent will be the subcontractor and the principal contractor will be the head contractor.
It seems that the process introduced by the amendment will be of little benefit to head contractors. This is because the entity most likely to be a principal contractor with respect to a head contractor is the proprietor's financier. However, in most common construction delivery methods the proprietor's financier would not come within the definition of principal contractor. This is because the money provided to the proprietor by its financier is not payment for work or materials supplied by the proprietor to the financier.
Principal contractors, most commonly proprietors, must respond to a payment withholding request in a timely manner, otherwise they risk becoming jointly and severally liable with the head contractor for the amount owed to the subcontractor.
It must however be noted that no additional protection exists for subcontractors if the principal contractor has, before receiving a payment withholding request, paid all moneys owed by it to the respondent.
Head contractors should have a greater incentive to avoid having a subcontractor file an adjudication application in respect of a payment claim, as the filing of an adjudication application could have a negative impact on the head contractor's cash flow. This is irrespective of whether the payment claim is bona fide or purely capricious.
Subcontractors can now, in certain circumstances, secure payment of payment claims in giving notice of the claim to the head contractor.
While the amendment could lead to a greater number of adjudication applications, in practice it is likely that subcontractors will only serve a payment withholding request on a proprietor if they have real concerns about the ability of the head contractor to pass on payments.
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