The NSW Security of Payments Act1 enables individuals and companies who do work in the construction industry to get paid quickly and to avoid insolvency.
The Act achieves this by:
- giving rights to contractors and subcontractors to be paid by those that owe them money within set timeframes; and
- if payment is not forthcoming, allowing them to quickly recover payment through an ‘adjudication’ process.
This article deals only with the NSW Act. All states and territories in Australia have similar security of payments regimes which differ.
An overview of the Act
The Act gives head contractors and subcontractors (including subconsultants and suppliers) (called ‘Claimants’) a right to receive a regular progress payment from the individual or company for whom they have undertaken to do construction work (called the ‘Respondent’).
The payment claim must, among other things, identify the construction work (or related goods and services) and indicate the amount of the progress payment claimed to be due. If the Claimant is the head contractor, the payment claim must be accompanied by a supporting statement which effectively confirms that all subcontractors have been paid.
Within 10 business days of the Claimant’s Payment Claim or an earlier period specified by the construction contract, the Respondent must respond with a Payment Schedule. The Payment Schedule must, among other things, indicate the amount that the Respondent proposes to pay to the Claimant (if any) and provide reasons why the amount is less than the claimed amount (if applicable). If the Respondent fails to provide a Payment Schedule within the required period, the Respondent may become liable for all the claimed amount.
The Act provides for a method (called ‘adjudication’) by which Claimants can dispute the amount proposed to be paid by the Respondent. An independent adjudicator is appointed to determine the amount payable by the Respondent to the Claimant.
The decision of an adjudicator is an interim decision and does nothing more than require the Respondent to pay the determined amount of money to the Claimant (i.e. the decision does not affect the rights or liabilities under the construction contract).
So, what changes has the government made to the Act?
Last year, the NSW Government approved amendments to the Act.
The amendments are now in force and will apply to construction contracts entered into on or after 21 October 2019. Construction contracts entered into prior to that date are not affected by the amendments.
Broadly speaking, the amendments affect the provisions dealing with payment claims and progress payments, the adjudication process and investigation and enforcement of offences under the Act. The key amendments are summarised below.
Payment claims and progress payments
- Monthly progress payment entitlement: Claimants can now make monthly payment claims irrespective of whether the construction contract states otherwise. Before this amendment, the Act required a “reference date” to have arisen (which was specified in the Contract or otherwise the last day of the month in which work was carried out). The “reference date” concept has been removed which will mean that principals cannot delay payment claims by specifying reference dates less frequently than once per month.
- Final payment claim entitlement: Claimants will now have an express entitlement under the Act to make a final payment claim where a contract has been terminated [section 13(1C)]. This will overcome the consequences of the decision of the High Court of Australia in Southern Han Breakfast Point Pty Ltd (In Liq.) v Lewence Construction Pty Ltd  HCA 52 where the High Court of Australia found that no “reference date” had accrued after termination of the Contract, notwithstanding the contractor had undertaken construction work for which it had not been paid.
- Payment timeframes to subcontractors and subconsultants are reduced: Subcontractors and subconsultants must now be paid 20 business days after they make a payment claim under the Act (down from 30 business days) [section 11(1B)(a)]. If the terms of the contract specify a shorter period of time, then that shorter period of time will still apply.
- Companies in liquidation prevented from enforcing payment claims or adjudication determinations: Companies in liquidation will now be prevented from serving or enforcing a payment claim or adjudication determination [section 32B]. This amendment addresses the consequences of the decision of Seymour Whyte Constructions Pty Ltd v Ostwald Bros Pty Ltd (in liquidation)  NSWCA 11 in which the New South Wales Court of Appeal found that a company in liquidation would still have an entitlement to a progress payment under the Act. That outcome was widely considered to be at odds with the Act’s objective of promoting cash flow down the contracting chain (including to subcontractors and suppliers) in favour of creditors of a company in liquidation more broadly (many of whom will not be in the contracting chain that the Act was designed to protect and will include, for example, employees of the company in liquidation who are already protected by the Australian Government’s Fair Entitlements Guarantee).
- Claimants must (again) endorse Payment Claim under the Act: Claimants must (once again) state that their payment claims are made under the Act with wording to the following effect: “This payment claim is made under the Building and Construction Industry Security of Payment Act 1999 (NSW).” A failure to endorse the claim in this way will mean the Act is not enlivened and claimants will not be able to demand payment in accordance with the Act or make adjudication applications under the Act.
- Claimants’ right to withdraw adjudication applications: Claimants now have an express right to withdraw an adjudication application from any point prior to the determination being made by serving written notice of the withdrawal on the respondent, the authorised nominating authority and (if appointed) the adjudicator [section 17A]. Any other party to the construction contract can object to the withdrawal and the adjudicator can uphold that objection if it is in the interests of justice to do so. The Act does not specify who will be liable for adjudicators’ fees in the event of withdrawal but this is not expected to be an issue because adjudicators have, as a matter of practice before this amendment, agreed to the withdrawal provided the parties pay their fees accrued to date.
- Adjudicator’s determinations are due later: Adjudicators must now make a determination 10 business days after receiving the Respondent’s adjudication response. This amendment extends the period in which adjudicators must make their determination as previously the 10 business days started to tick from the date of acceptance of the application (a much earlier date than the response). The parties may still agree to an extended period for the adjudicator to make his or her determination [section 21(3)].
- Jurisdictional error will not necessarily affect the whole adjudication determination: The Act now confers on the NSW Supreme Court express rights to set aside an adjudication determination for jurisdictional error or sever part of a determination affected by such error while confirming the balance of the determination [section 32A]. This ensures the adjudication process remains effective in promoting timely payment and discourages parties from challenging adjudication determinations in order to avoid payment altogether or to restart the whole process.
- Introduction of executive liability offences: Directors and people involved in managing companies are now exposed to personal liability where a corporation commits an offence under the Act [section 34D]. Accessorial liability will also apply to all offences under the Act capable of being committed by a corporation [section 34C].
- Increased powers for Fair Trading NSW: Fair Trading NSW has enhanced powers to investigate, monitor and enforce compliance with the requirements of the Act.
Given the re-introduction of endorsements, it is now again important for claimants to specify that any claim is made under the Act otherwise the claim will not be a valid payment claim so as to enliven the protections afforded by the Act.
Head contractors, subcontractors, consultants and suppliers should be aware that they can make a final payment claim under the Act following termination of a construction contract that was entered into after 21 October 2019 (even if their construction contract does not provide such a right).
We would also recommend that template agreements with subcontractors and subconsultants are updated to reflect the new maximum payment terms of 20 business days. With other legislation coming into force (such as the introduction of modern slavery legislation), it is also an opportune time to review the template agreements to ensure they are robust. For example, given a company in liquidation cannot serve or enforce payment claims and adjudication determinations, it will be desirable to ensure that agreements confer a right upon principals and head contractors to engage subcontractors (with whom they are not directly contracted further down the contracting chain) in the event the intermediate parties with whom they are contracting go into liquidation. A direct contracting right such as this will minimise any costs and time impact on project delivery where contracting parties enter liquidation.
The introduction of executive liability offences for offences under the Act should also be a reminder for directors to ensure their compliance framework is robust. The Act imposes fines and periods of imprisonment for offences under the Act, including for example, a mere failure by a head contractor to provide a supporting statement with its payment claim – something that may be genuinely forgotten but which can have far-reaching consequences for individuals involved and now executives.
A ‘tug of war’ – so why the amendments?
The Act, without doubt, provokes strong opinions across the legal and commercial property and construction industries and at State Parliament.
Consequently, the Act has constantly been the subject of amendment by NSW State governments since its inception including in the years: 2002, 2003, 2008, 2010, 2013, 2016, 2017 and 2018 (effective from 21 October 2019). You can check out the amendments here.
The large number of amendments is likely driven by a mixture of politics, lobbying by interested industry bodies representing builders and owners and a legislative reaction to judicial decisions which often identify shortcomings in the application of the Act. It is unlikely, however, that the latest round of amendments will end the cycle of government review.
The Act has, and continues to be, something of a ‘tug of war’ between builders and owners for many years which is ultimately unsurprising given the purpose of the Act is to enforce payment where it is entitled by the contractor but not forthcoming by the principal.
1. Building and Construction Industry Security of Payments Act 1999 (NSW).Back