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By Lachlan Commins, Patterson Houen & Commins, Lawyers, Sydney.

Building & Construction Security of PaymentsLegislation exists in each Australian state and territory which aims to keep the cashflow flowing along the length of the great Australian building and construction industry chain and helps ensure that any person who carries out construction work or supplies related goods and services under a construction contract gets paid. In NSW, the legislation is the Building and Construction Industry Security of Payments Act 1999 (“the Act”).

At the top of the chain exists the client (often referred to as the ’principal’). This is the person or entity for whom, or for which, the particular construction project is being built; think government, developer, consortium or a private owner. At the bottom of the chain may exist a small family operated sub-contracting unit, who has been contracted to – say – supply and install the venetian blinds to every bedroom in a multi-million dollar residential tower being built in the CBD. Between these two extremes exists a plethora of other entities such as (as the case may be) head contractors, builders, architects, engineers, project managers, suppliers, sub-contractors, sub-sub-contractors and so on.

Money flows along the length of this chain from the top – that is from the client. It is the client who wanted the project to be built and it is the client who ultimately will have to pay for it. On large-scale projects the client (principal) will contract with a head contractor (otherwise referred to as the ‘builder’) to undertake and manage the construction project. Usually the head-contractor will then enter into all the further sub-contracts with the plethora of professionals, administrators, suppliers and tradespeople that are needed to complete the works for the client. In turn, of course, all of these further entities may then enter into their own sub-contracts with the necessary professionals, administrators, suppliers and tradespeople required to complete their segment of the works for the head contractor. At every level along the chain each party will also have employees and other bills which need to keep being paid.

So what if (as is not uncommonly the case) a dispute arises between two parties somewhere along this chain? Say there is a dispute at the top of the chain between the client and the head contractor regarding the extent of the scope of the works, or the finished quality of a particular component of the project. As a result, the client is refusing to pay the head contractor until the dispute has been satisfactorily resolved. What does this mean for the parties along the chain underneath the head contractor? Do they have to wait until the dispute is resolved between the principal and the head contract before they themselves receive payment?

To combat such an impasse – which could occur at any level along the construction chain and which could have disastrous consequences for the contracting parties downstream – the Act establishes a comprehensive regime enshrining the statutory right of contracting parties in the construction chain to receive – and to be able to recover – progress payments. As the name suggest, such payments are made at regular and defined intervals (commonly referred to as ‘milestones’) throughout the duration of the works under contract and are usually valued with reference to the works completed (or goods and services supplied) to date.

The Regime

The Act enshrines the statutory right of contracting parties to receive progress payments at regular and defined intervals (s 8), regardless of whether or not the contract in question allows for them or is otherwise silent on the issue. Accordingly, any provision of a contract which purports to exclude, modify or restrict the operation of the Act is void (s 34), as is any provision which purports to establish a “pay when paid” payment regime (s 12).[i]

Upon becoming entitled to receive a progress payment, the contracting party (the claimant) may then serve on the other party responsible for payment (the respondent) a payment claim with respect to the progress payment (s 13). The payment claim must state the amount of the progress payment claimed to be due (the claimed amount) and the work or the goods and services undertaken or supplied to which the progress payment relates.

Once a payment claim is served on the respondent, the particular progress payment to which the payment claim relates becomes due and payable on the date occurring after (s 11):

  1. 15 business days for a progress payment to be made by a principal to a head contractor; or
  2. 30 business days for a progress payment to be made to subcontractor; or
  3. 10 business days for a progress payment to be made under a construction contract in connection with an exempt residential construction contract.[ii]

Upon being served with a payment claim, the respondent has several options available to it. Firstly, they may pay the claimed amount in full within the relevant time period as set out above. If so, happy days.

On the other hand, if the respondent does not wish to pay the claimed amount in full, they may respond to the payment claim with a payment schedule which must indicate the amount that the paying party proposes to make (the scheduled amount) in response to the payment claim (s 14). If the scheduled amount is less than the claimed amount, the payment schedule must state the reasons why. Critically, the respondent must issue the payment schedule within 10 business days from being served with the relevant payment claim otherwise they will become liable to pay the full claimed amount upon the progress payment becoming due and payable.

Scenario 1

  • The respondent provides a payments schedule within 10 business days; and
  • The scheduled amount is less than the claimed amount; and
  • The respondent pays the scheduled amount before the due and payable date (as outlined above); then
  • The claimant may proceed to have the matter adjudicated (s 17) in accordance with the procedure outlined in the Act (see Division 2 of Part 3).

Scenario 2

  • The respondent provides a payments schedule within 10 business days; and
  • The scheduled amount is equal to or less than the claimed amount; and
  • The respondent does not pay the scheduled amount in full or at all (the unpaid amount) before the due and payable date (as outlined above); then
  • Interest accrues on the unpaid amount from and including the due and payable date at the rate of the prevailing Reserve Bank cash rate plus 6 per cent (s 11(2)); and
  • The claimant may:
    1. recover the unpaid amount (including interest) as a debt owing to the claimant by the respondent in any court of competent jurisdiction (s 16(2)(a)(i)); or
    2. proceed to have the matter adjudicated in accordance with the procedure outlined in the Act (see Division 2 of Part 3) (s 16(2)(a)(ii)); and
    3. serve notice on the respondent of the claimant’s intention to suspend carrying out works or supplying goods or services under the contract (s 16(2)(b)); and
    4. exercise a lien in respect of the unpaid amount over any unfixed plant or materials supplied by the claimant (s 11(3)).

Scenario 3

  • The respondent does not provide a payments schedule within 10 business days; and
  • The respondent does not pay the claimed amount in full or at all (the unpaid amount) before the due and payable date (as outlined above); then
  • Interest accrues on the unpaid amount from and including the due and payable date at the rate of the prevailing Reserve Bank cash rate plus 6 per cent (s 11(2)); and
  • The claimant may:
    1. recover the unpaid amount (including interest) as a debt owing to the claimant by the respondent in any court of competent jurisdiction (s 15(2)(a)(i)); or
    2. proceed to have the matter adjudicated in accordance with the procedure outlined in the Act (see Division 2 of Part 3) (s 15(2)(a)(i)); and
    3. serve notice on the respondent of the claimant’s intention to suspend carrying out works or supplying goods or services under the contract (s 15(2)(b)); and
    4. exercise a lien in respect of the unpaid amount over any unfixed plant or materials supplied by the claimant (s 11(3)).

Importantly, in the debt recovery proceedings referred to above in scenarios 2 and 3, the respondent is barred from raising in their defence any substantive issues arising from the construction contract, nor are they allowed to bring any cross-claim against the claimant (s 15(4) & s 16(4)). That is, the respondent will be restricted to raising matters of a procedural nature (such as technical errors in complying with the required notice provisions).

Additionally, if the claimant carries through with and puts into effect their intention to suspend works or supply under the contract (as referred to in scenarios 2 and 3 above), they will not be liable for any loss or damage suffered by the respondent as a result of the suspension (s 27(3)). Further, the claimant is entitled to be indemnified by the respondent with respect to any reduction in the scope of works under the contract that has been brought about by the respondent owing to the suspension (s 27(2A) & 13(3)(a)).

Other Weapons

Other notable weapons in the Act’s arsenal include:

The obligation of a head contractor to submit a supporting statement

Along with sub-contractors and suppliers, the head contractor also has the statutory right to receive progress payments from the principal and to this extent must follow the same procedure when serving a payment claim on their principal so as to avail themselves of their rights under the Act.

However, as an added protection for sub-contractors and suppliers, the head contractor must submit with each payment claim a supporting statement (ss 13(7)-(9)) in the manner prescribed by the regulations which contains a declaration to the effect that all sub-contractors and suppliers on the project have been paid all amounts that have become due and payable. It is an offence under the Act for the head contractor to fail to submit a supporting statement, or to submit a supporting statement which it knows to be false or misleading.

The obligation of a head contractor to hold retention money on trust

Retention money is an amount (usually 5%-10% of the contract sum) retained by a head contractor from the monies otherwise due under the contract to the sub-contractor. The purpose of withholding retention money is to ensure that the sub-contractor satisfactorily performs all works under the contract and rectifies any defects in the works as requested by the head contractor. Accordingly, retention money is usually withheld by the head contractor until such time as it known that all manifest and latent defects in the contract works have been satisfactorily rectified by the sub-contractor (a period which may amount to months after practical completion).

The Act and accompanying regulations establishes a regime (s 12A) whereby the head contractor is obliged to invest all retention monies in an approved ADI interest earning trust account for the benefit of the sub-contractor. Accordingly, such retention monies cannot be used by the head contractor for their own benefit. The Act and regulations makes it an offence for a head contractor to fail to comply with the regime.

The obligation of a principal contractor to withhold monies when properly requested

If a claimant has made an adjudication application (in accordance with Division 2 of Part 3 the Act) in relation to an unpaid or disputed payment claim which they have served on the respondent (the disputed amount), the claimant may then “go above” the respondent and require the principal contractor (that is the party responsible for paying the respondent) to conditionally withhold from the money they otherwise would pay to the respondent an amount equal to the disputed amount (s 26A).

Check the fine print of each Act

The purpose of this article has been to give a broad overview of how the legislation works to maintain cashflow and to resolve disputes in the construction industry. The particular Act and its accompanying regulations as enacted in each state and territory will be unique to varying extents.

Further, each Act will be replete with the finer details concerning the correct procedures and forms which must be followed and adhered to by parties wishing to avail themselves of their rights and obligations under the Act.

[i] The latter situation arises when the liability of the paying party (the first party) to pay the other party (the second party) for works undertaken or goods or services supplied by the second party is made contingent on the first party being paid by a third party. For instance, where a builder refuses to pay his or her sub-contractors for works completed until such time as the builder himself or herself is paid by the principal on the same project.
[ii] Construction contracts for residential works between an owner-occupier (or prospective owner-occupier) and the builder are exempt from application of the Act (“exempt residential construction contract”; s 7(b)). However, construction contracts between the builder and other sub-contractors and suppliers in “connection with” an exempt residential construction contract are not exempt from the application of the Act.

About the Author:  Lachlan holds a First Class Honours degree in Building Construction Management from the University of Technology Sydney

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