WRITTEN BY Anna Phillips
The NSW government has recently proposed changes to the Building and Construction Industry Security of Payment Act 1999 (NSW) (Security of Payment Act), to be introduced through the Building and Construction Legislation Amendment Bill 2022 and the Building and Construction Legislation Amendment Regulation 2022 (together, the Amendment Bill).
The Security of Payment Act, and the corresponding statutes in each State and Territory (including the Building and Construction Industry (Security of Payment) Act 2009 in the ACT), govern payment disputes under most construction contracts. In circumstances where an individual or a company has carried out construction work or provided related goods and services under a construction contract, the Security of Payment Act allows them to claim payment through a relatively quick and streamlined process, without the need to go through a court. In practical terms, the Security of Payment process acts as a “pay now, argue later” system that is intended to prevent larger developers from withholding payments owed to subcontractors who cannot necessarily afford the time and cost of enforcing payment through the traditional court system.
By way of brief overview, the process set out under the Security of Payment Act commences where one party, the “claimant” (often a subcontractor) issues a payment claim to another party, the “respondent” (often a developer or builder). The respondent then has 10 business days to respond with a payment schedule in which they set out what, if any, amount of the payment claim they agree to pay, as well as providing reasons for the non-payment of any amount. If some or all of the claim remains unpaid, the claimant can then apply to have the matter determined by an adjudicator.
If the claimant chooses to proceed with adjudication, they must file an adjudication application in which they set out the basis and evidence for their claim.
Once the adjudication application is served on the respondent, the respondent then has five business days in which to provide a response. This response can only be submitted if the respondent has previously provided a payment schedule, and most critically, the response must be limited to the reasons set out in the payment schedule. That is, the respondent cannot rely on a reason for non-payment if that reason was not in the payment schedule. This is why it is of the utmost importance for a respondent to provide a payment schedule in circumstances where the payment claim is disputed, as well as to set out in full any reasons on which the respondent intends to rely in its response.
The application and response are then considered by an adjudicator appointed under the Security of Payment Act, and a determination is made approximately ten business days from when the response is submitted.
While there are some minor differences in the process between each State and Territory, the fundamental steps are the same, and the deadlines must be strictly adhered to.
The Amendment Bill would result in four main changes to the Security of Payment Act in New South Wales.
Increased Investigative Powers
The proposed amendments would expand the scope of an adjudicator’s power to obtain additional information in respect of the matters to which a payment claim relates, including obtaining expert reports.
The existing Security of Payment Act allows an adjudicator to request further written submissions by the parties or to “carry out an inspection of any matter to which the claim relates”. The proposed amendments would allow an adjudicator to arrange for testing of any such matter (for example, determining whether works for which payment is claimed were actually completed), or to engage an expert to investigate and provide a report on relevant matters.
This latter power to engage an expert may be intended to mitigate some of the pressure placed on an adjudicator to make relatively quick determinations about often complex technical issues. Adjudicators, much like the parties, are placed under tight deadlines for considering and determining an adjudication application. Where the material before the adjudicator may be extensive or particularly complex, the requirement for a quick turnaround can result in errors. Such errors, while not necessarily the result of any wrong action on the part of the adjudicator, often have limited avenues for appeal. Ideally, the ability to obtain expert reports from third parties will reduce the burden placed on the adjudicator.
Likewise, the engagement of an expert may benefit the parties to an adjudication. In the normal course of an adjudication, the claimant makes its application and the respondent provides a response (where it is permitted to do so). The claimant does not have any further right to respond to the points raised by the respondent. If a respondent relies on expert reports as part of its response, the claimant is not able to provide any additional expert reports even where doing so would provide a more balanced view of the matter for the adjudicator.
Under the proposed amendments, the adjudicator would be able to seek any additional expert reports if they, the adjudicator, consider that those reports would, in fact, provide a more balanced view.
It is not clear from the Amendment Bill who would bear the cost of any additional testing or expert reports sought by the adjudicator. Most likely, this issue would be determined by the adjudicator in the same way that the existing adjudication fees are dealt with, though that is speculation at this time.
The Amendment Bill also proposes a new review process under the existing Security of Payment Act which would allow either party to apply to have an adjudicator’s determination reviewed. The review would be conducted by a separate adjudicator, though it would be on same material and facts on which the original determination was made.
As above, there is a very limited basis on which adjudication determinations can currently be reviewed by a court of law. Parties can appeal if they consider that there has been a jurisdictional error (that is, where the adjudicator did not have the authority to make a determination in the first place), but appealing erroneous findings of fact is almost impossible.
To address this, the Amendment Bill proposes a new process that would give parties to an adjudication an opportunity to have the adjudication determination reviewed and, if appropriate, to have a new determination issued.
The parties to an adjudication would only be able to apply for review of a determination in circumstances where:
Relevantly, where a respondent applies for review, they would be required to pay the disputed monies into a trust account established with an authorised deposit-taking institution. That money would then be considered as held by the respondent on trust for the benefit of the claimant until the review application is determined.
The Security of Payment Act requires that, where a subcontractor enters into a construction contract, and the project is valued at more than $20 million, the head contractor must hold the subcontractor’s retention monies in a trust account. This requirement exists to prevent head contractors from using funds otherwise payable to subcontractors, for the purpose of meeting capital requirements or otherwise keeping the head contractor solvent.
The Amendment Bill proposes to lower that threshold from $20 million to $10 million, which would increase the number of projects required to offer protection by way of retention monies held in a trust account. Ideally, this would see a corresponding decrease in the number of subcontractors who, upon the insolvency of a head contactor, are put in the position of having to recover monies owed from a liquidator.
In circumstances where a construction contract relates to residential building works on a residential property for an owner-occupier, payment claims can be served directly on the owner-occupiers (in place of a head contractor company on commercial sites). Unlike builders, developers, and other entities working in the construction industry, it is often the case that individuals such as owner-occupiers are not familiar with the construction industry or the Security of Payment Act.
To assist with this, the Amendment Bill proposes an additional requirement on the claimant to provide an owner-occupier with a “Homeowners Notice” along with the payment claim. The Homeowners Notice would need to set out the reason for the payment claim, and provide information about the Security of Payment Act process and the consequences of not responding to the payment claim.
This would give owner-occupiers an opportunity to exercise their rights and comply with their obligations under the Security of Payment Act, and to protect themselves from the potentially serious consequences of not doing so. Likewise, the requirement to provide a Homeowners Notice would benefit builders and other subcontractors by allowing them to make use of the Security of Payment process without delays due to the inexperience and lack of knowledge on the part of owner-occupiers.
If passed, the Amendment Bill will result in important changes to the Security of Payment Act. While those changes are currently only being proposed in New South Wales, if the amendments prove to be effective and beneficial for the various parties involved in the adjudication process, it is possible that the ACT will consider similar amendments to its own Security of Payment legislation.
Anyone with questions about the impact of the proposed amendments, or about their rights and obligations under Security of Payment legislation generally (including in the ACT), can contact our Litigation and Dispute Resolution team for further advice on 02 6274 0999.