Key Points: Changes to NSW's security of payment laws mean you
should review construction contracts now.
The Building and Construction Industry Security of Payment
Amendment Act 2010 (NSW) ("Amendment")
commenced on 28 February 2011.
The Amendment provides a subcontractor with direct rights
against a principal contractor to secure payments due to it from
the contractor. A subcontractor can require a principal contractor
to withhold money from a contractor, pending determination of its
adjudication application against that contractor.
Further, the Amendment overcomes a timing issue which can reduce
the effectiveness of the Contractors Debts Act 1997 (NSW)
(CDA). This issue is of particular relevance in
the case of insolvency of the contractor.
Under the CDA, the benefit of the obligation of a principal
contractor to pay money to a contractor can be assigned to a
subcontractor in order to satisfy a judgment obtained by a
subcontractor against the contractor. However, the CDA will not
assist a subcontractor if the principal contractor has paid the
contractor all money due to it prior to the subcontractor being
able to obtain a judgment against the contractor and to serve a
debt certificate on the principal contractor.
The Amendment enables a subcontractor to earmark money which may
become payable by the principal contractor to a contractor, by
serving a payment withholding request on the principal contractor.
However, a judgment or debt certificate is not required for a
payment withholding request. All that is required is the making of
an adjudication application.
When a principal contractor is served with a payment withholding
request, it must withhold from any moneys owed to the contractor an
amount equal to the amount specified in the request, pending the
adjudication determination. A principal contractor which does not
comply with a request becomes jointly and severally liable with the
contractor for the debt owed to the subcontractor. It appears that
the Amendment may be used in the context of any three consecutive
contracting parties in a chain – for example, head
contractor, subcontractor, sub-subcontractor. Although the term
"principal contractor" might suggest that it applies only
to contractors, the definition would seem to extendto
Construction industry participants should review their contracts
and consider the implications of the amendment in relation to
matters such as:
risks to cash flow of contractors as a result of spurious
payment withholding requests from one or more subcontractors, which
could affect a successful project outcome;
ability of a principal contractor to recover payments made
directly to subcontractors under the contract or via project
whether the Amendment might enable a subcontractor to jump the
queue in the case of the contractor going into liquidation.
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