Australia: Building and Construction Industry Security of Payment Amendment Act 2013 (NSW) – the law of unintended consequences?

Last Updated: 17 December 2013
Article by Keith Redenbach and Mike Lichtwark


The NSW parliament has recently passed the Building and Construction Industry Security of Payment Amendment Act 2013 (NSW)("Amendment Act") which can be viewed here. The Amendment Act amends the Building and Construction Industry Security of Payment Act 1999 (NSW) ("Principal Act").

Following on from the recommendations of the Collins Inquiry of January 2013, the key changes to be introduced by the Amendment Act are:

  1. Changes to the format of payment claims (crucially removing the need to formally "endorse" a payment claim), and the time for payment (see section (a) below);
  2. Introducing a requirement for supporting statements to be provided with payment claims (see section (b) below); and
  3. Establishing trust accounts for retention funds (see section (c) below).
  1. Payment claim format and payment timing

A crucial change is the removal of the current requirement in section 13 of the Principal Act that a payment claim must state it is made under the Principal Act (often referred to as the "endorsement"). The rationale for this was described by the Minister for Finance and Services' (the Hon. Mr Andrew Constance) second reading speech of 24 October 2013 as follows:

"The [Collins] inquiry found that this requirement was one of the factors that had led to an under-utilisation of the [Principal] Act by subcontractors and should be abolished. Many subcontractors are reluctant to include such a statement in their payment claims to head contractors as it may be viewed as a signal of a possible dispute. The statement was made a requirement under the [Principal] Act to ensure that respondents to claims were made aware of their obligations should a dispute arise. However, the [Principal] Act is now in its fourteenth year of operation and is generally well understood by industry."

This change means that parties will need to be much more vigilant in reviewing any claims for payment, and it will be safest to assume that all claims will be subject to the Principal Act and its other provisions. Essentially this change means that parties no longer need to make a conscious election as to whether they wish to pursue their rights under the Principal Act. Almost all claims will be payment claims under the Principal Act subject to limited exceptions. This has the potential to produce many unresponded to payment claims, carrying with them no defence to that claim - see section 15 of the Principal Act. Summary judgment threats may now proliferate.

The Amendment Act will also amend the Principal Act to remove the ability for the parties to contract longer time periods for the payment of progress claims. Under the changes:

  • a progress payment to a head contractor from a principal becomes due and payable no later than 15 days after the payment claim is made; and
  • a progress payment to a subcontractor under a construction contract becomes due and payable no later than 30 days after the payment claim is made.

This standardises the cashflow down the contractual chain and the parties will not be able to contract out of the minimum timeframes. However, some parties will find that the practicalities of meeting these timeframes are difficult and there are potentially significant consequences for missing them. It should be noted that these changes do not remove the existing requirement for a payment schedule to be provided within 10 days to contest a payment claim.

The changes will only have prospective application, that is, contracts signed before these new changes come into force will continue under the old law. There is a potential for a law of unintended to consequences where a head contract is entered into prior to, and a subcontract is entered into after, the Amendment Act coming into force. In that scenario the head contract would not be subject to the statutory minimum timeframes but the subcontract would, and the timeframes may not dovetail together properly. Accordingly, parties entering head contracts now should consider the downstream consequences of the Amendment Act changes even if the head contract itself will not be subject to the change of law.

  1. Supporting statements introduced

The Amendment Act also amends the Principal Act to make it an offence for a head contractor to serve a payment claim on a principal without a "supporting statement". The form of the supporting statement is to be prescribed in Regulations, and it will include a declaration that all subcontractors have been paid. The offence will carry a fine of up to $22,000 for serving a payment claim without a supporting statement.

Where a supporting statement is in fact included, but the head contractor knew that the statement was false or misleading, either a fine or a period of imprisonment of up to 3 months can be imposed (or both).

Powers are given to the Director General of the Department of Finance and Services to investigate compliance with the supporting statement provisions.

  1. Establishing trust accounts for retention money

An amendment was made to the Amendment Act in the Upper House of the NSW Parliament which will insert a provision in the Principal Act allowing the government to promulgate Regulations requiring retention money to be held by the head contractor in a trust for subcontractors. These Regulations may provide for the trust account to be with a financial institution or an account established and operated by the Small Business Commissioner.

The Department of Finance and Services has released a consultation paper on the proposed Subcontractor Retention Trust model which can be accessed here. Submissions can be made on the consultation paper up until 22 January 2014.

Whilst the form of the retention trust is not specified, what is clear is that there is a myriad of potential issues with this aspect of the Amendment Act.

Next steps

The Amendment Act does not provide a commencement date for these changes to take effect. Commencement is to be "on a day or days appointed by proclamation". It has been speculated that this may not occur until after March 2014, but this is not clear.

The Amendment Act also leaves some significant detail to Regulations to be promulgated and we will continue to monitor progress in relation to this.

Any parties wishing to submit on the proposed Subcontractor Retention Trust model have until 22 January 2014 to do so.

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.

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Keith Redenbach
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