Australia: Subcontractor’s charges under the Subcontractor’s Charges Act 1974

HG Construction Alert: 25 November 2014

In the building industry there are two pieces of legislation that allow for subcontractors to make claims for monies owed for works completed.

The Building and Construction Industry Payments Act 2004 (BCIPA) commenced 10 years ago and is often cited as the quickest way to ensure payment for a subcontractor. Essentially, BCIPA creates a statutory based system of rapid adjudication for the quick resolution of payment disputes on an interim basis and moneys are paid on account pending final determination.

However, an alternate remedy (which has been around for some 40 years) is often overlooked. The Subcontractor's Charges Act 1974 (the Act) allows a subcontractor to secure payment by skipping the builder above them in the supply chain, and securing payment from the principal/developer who would have normally paid the builder. The Act is particularly beneficial in circumstances where a builder may be in financial difficulty and/or insolvent, but still owes a subcontractor money. By using the Act, the subcontractor can bypass the insolvent builder to secure the payment of money that is payable or to become payable by the developer in the chain of supply above. The effect of making a claim under the Act is that a sum of money is taken out of circulation and marked specifically for the subcontractor and this money is charged for the benefit of the subcontractor.

A subcontractor must choose one or other of either BCIPA or the Act, but not both. One reason for this is so that a subcontractor cannot vexatiously destroy the cashflow of a builder at a critical time. This would happen if the flow of monies from the principal/developer to the builder was frozen, yet at the same time the builder was required to comply with BCIPA and make the fast track payments pending the adjudication process under BCIPA. In other words, it would stop the flow of money to the builder (from the principal/developer above) but force the flow of money out of the builder (to the subcontractor below).

Under the Act, a subcontractor must lodge a Form 1 (Notice of Claim of Charge) upon the principal/developer. The Form 1 must be completed properly; it must be certified by a prescribed person (i.e. a registered architect, registered professional engineer, a person licensed by QBCC, or a quantity surveyor who is a member of the Australian Institute of Quantity Surveyors). It must be supported by a statutory declaration (by an authorised officer of the subcontractor company) declaring the debt is owing and served within a specific time that is either three months of the completion of the works, or within three months of the expiration of the maintenance period provided for in the contract where the claim is for retention money only.

A subcontractor's claim must only be for relevant work as defined under the Act, being labour, skilled or unskilled, done or commenced upon land where the contract or subcontract is being performed. Note that there are certain exclusions including the delivery of goods, supply of plant materials or equipment under a hire agreement (not intended to be incorporated in the work), domestic building work and work done in relation to testing or taking of measurements.

A subcontractor must also serve a Form 2 (Notice to Contractor of Claim of Charge being given) upon the builder. Within 14 days of serving that Form 2, the builder must respond with a Form 4 Contractor's Notice either accepting liability to pay the amount claimed, disputing the claim, or accepting liability to pay an amount but otherwise disputing the claim.

The subcontractor must, within one month of serving its claim, commence court proceedings to recover the amount sought. A failure to commence court proceedings will mean that the claim will be extinguished. Once extinguished the subcontractor cannot make a further claim in respect of the same work. Thus there is a clear obligation upon a subcontractor to engage themselves in litigation to eventually recover the money that is being sought.

If any of the above steps are not properly undertaken, for instance, if the formal notice of claim is not correctly prepared, is not for relevant work, or the statutory declaration is not correctly attached then the subcontractor's claim may be invalid.

The Act is ideally suited to those situations where there are concerns over the solvency of a builder and a subcontractor is owed money. However where a builder is already in voluntary administration, the one month time period with which a subcontractor has to commence court proceedings will not apply. The one month time period will only commence once the voluntary administration has ended and the builder has entered into liquidation. The subcontractor has to wait for the insolvency administration to run its course before commencing the court proceedings to secure the money that it is owed.

If multiple charges are lodged under the Act, then each subcontractor will share equally in proportion with those other subcontractors to the amounts of their claims, in effect receiving a pro rata share of the money payable by the principal/developer. No priority is given for charges that are lodged earlier than any other charges under the Act. There is an obligation upon the principal/developer to retain the charged monies on behalf of the subcontractor. A failure to do so will make the principal/developer personally liable for that amount of money.

Overall, the process can be long and difficult. By correctly following the process a subcontractor can at least have a chance of recovering some money from an insolvent builder, whereas by not following the process it is likely that a subcontractor will receive nothing at all.

© HopgoodGanim Lawyers

Award-winning law firm HopgoodGanim offers commercially-focused advice, coupled with reliable and responsive service, to clients throughout Australia and across international borders.

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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Ben Ricketts
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