| Focus: | Subcontractors' Charges Act 1974 |
| Services: | Property & Projects |
| Industry Focus: | Energy, Resources & Infrastructure, Property |
BCIPA is often trumpeted as security for payment legislation. But is it the most effective way to ensure security for payment?
In the rush to make a claim under the BCIPA, an older (and at times more effective) process also offering security for payment (dating back to 1974) is often forgotten; ie lodging a charge under the Subcontractors' Charges Act 1974 (SCA).
This article provides a reminder of the process in the SCA and outlines ten tips for dealing with a subcontractor's charge.
Overview of Subcontractors' Charges Act
The SCA was introduced to provide subcontractors with a way to secure outstanding amounts owed under a contract.
The SCA is short but technical. Under the SCA a "subcontractor" can place a charge on money payable by an "employer" to a "contractor". The charge secures payment of a subcontractor's claim. The charge is over any money payable by an employer to a contractor. The charge gives the subcontractor priority of payment from that money ahead of secured, as well as unsecured creditors, because the money does not reach the contractor. The charge stops the employer paying money to a contractor and that money becomes the security for the subcontractor's payment.
One typical illustration of the operation of the SCA is where the employer is a Principal:
Additionally, the practical effect of the SCA is that an "employer" could also be a "contractor". Accordingly, a sub-subcontractor can claim a charge on money payable by a contractor to a subcontractor and from a Principal to a head contractor.
A "subcontractor" which claims a charge must still prove its entitlement to claim. This is usually done through court proceedings. The SCA requires the subcontractor to commence proceedings within one month of giving notice of claim of charge. If proceedings are not commenced within that time period, the charge will be extinguished.
A notice of claim of charge must be served on the employer (eg principal or superior contractor) within three months after the subcontractor completed the works. A longer period is available if the claim of charge is on retention money only; ie within three months after the defects liability period has ended.
A prudent claimant will be alert to these time limitations.
Subcontractors' Charges Act v the BCIPA
Both Acts provide a means for securing payment:
BCIPA: through speedy payment of a claim, "on account", a subcontractor can hold the money pending a final determination.
SCA: employer holds the money back from the contractor pending proof of the claim.
Therefore, the key difference is that the SCA secures (an amount from) monies payable by the Principal to a contractor immediately. As a result:
- From the contractor's perspective, a subcontractor can use the SCA as commercial leverage, claiming an amount (with little verification) which can substantively affect the contractor's cash flow. Frequently, this leads to a forensic review of the claim of charge to ascertain whether it conforms to the SCA and, if not, a challenge to the validity of the claim.
- From the subcontractor's perspective, the BCIPA will be of limited use when the contractor is or is likely to become insolvent before payment is made. Put simply, a claimant cannot get "blood from stone". If the contractor becomes insolvent, a favourable adjudication decision is of no use.
Additionally, the SCA process will take longer than the BCIPA process to recover the amount claimed (even after the amendments to the BCIPA which are scheduled to take effect in September 2014). However, the monies charged will be available irrespective of the solvency of the contractor (provided there are monies or retention monies payable or to become payable from the employer to the contractor).
If the contractor defends the subcontractor's court proceedings and a trial ensues, the SCA will be more costly than the BCIPA process. However, the SCA process will still be more attractive in the case of an insolvent or soon to be insolvent contractor, if there is money which is charged. Additionally, in that case, a negotiated resolution of court proceedings is more common because the cost of a trial benefits neither the insolvent contractor nor the subcontractor.
10 tips
Whether a contractor is faced with a charge or a subcontractor claiming a charge, the following ten points should be considered:
- Limits of a claim of charge
The clamant may only claim a charge in respect of work done under the subcontract. Accordingly, a charge will be invalid if it claims in respect of the supply of goods only, for damages for breach of contract or for quantum meruit. - Is there money payable?
Practically, a charge will be of benefit, only if there is money to be charged. Any money payable (including retention money) by an employer to a contractor can be charged. That could include money payable not only by a principal but also money payable by a superior contractor in the contractual chain. - Time limits are strict
The time limits in the SCA are critical and applied strictly. A subcontractor's failure to comply with them (eg. to lodge a notice, or to issue proceedings) will be fatal to the charge. - Leapfrog up the contractual chain
Under the SCA, a sub-subcontractor can "leapfrog" up the contractual chain (eg. a claim of charges can be given to a contractor and a claim of charge can be given to a principal). The principal or contractor must be prepared to address multiple charges. - No second charge
If a claim of charge is struck out as invalid, the subcontractor cannot lodge a second charge. - Joining or piggybacking
If a claimant fails to commence proceedings in time, the charge will be extinguished. However, a subcontractor may be lucky as the Act allows subcontractors to join or "piggyback" on proceedings initiated by another claimant of a charge. - Money payable or retention
A subcontractor that fails to give notice of charge on money payable within time may be able to later claim a charge on retention money only. The time limit for lodging that claim of charge is longer, ie three months following the end of the defects liability period. - "They got me on a
technicality"
The technical nature of this Act has resulted in the Courts declaring charges which contain minor omissions to be invalid. A minor technicality may be the difference between a successful and an unsuccessful claim of charge. - What happens if the claimant is
unlicensed?
If the claimant is unlicensed, a claim of charge will be void. The licence status of a subcontractor should, therefore, be checked. - Retaining the amount charged
A principal or superior contractor that does not retain money payable or retention money will be liable to the subcontractor for payment personally. Therefore, as soon as a claim of charge is received, steps should be taken to ensure the money is not paid.
Conclusion
The SCA is an alternative approach to the BCIPA process for securing payment.
It can sometimes be misused by subcontractors to secure commercial leverage by making a claim of charge (with little substantive verification) and preventing money from being paid by an employer to a contractor. This adversely affects a contractor's cash flow.
The process under the SCA is highly technical. Minor non-compliance can lead to the claim of charge being invalid.
However, provided there are monies or retention monies payable or to become payable from an employer to a contractor, the monies charged will be available irrespective of the solvency of the contractor (cf. BCIPA process).
If the construction industry tightens further, it can be expected that the use of the SCA will become more common.
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.
