by Aaron Suine
The Building and Construction Industry Security of Payment Amendment Act 2010 (NSW) (Act) came into force on 28 February 2011. With other jurisdictions winding back their security of payment legislation, the Act may, in putting further protections in place for subcontractors and others at the ‘bottom of the contractual chain', have unintended consequences.
Payment withholding requests
The Act gives a person the right to issue a ‘payment withholding request’ (together with a statutory declaration from that person declaring that it ‘genuinely believes that the amount of money claimed is owed’ by the party it is in contract with) to a ‘principal contractor’ after it has issued an adjudication application.
To be a ‘principal contractor’ (using the scenario where a head contractor has not paid an amount claimed by a subcontractor, and that subcontractor has issued a payment withholding request to the project's developer or owner):
(a) the work performed or materials supplied by the subcontractor, for which the head contractor has not paid the subcontractor, must be part of or incidental to the work performed or materials supplied by the head contractor to the project's developer or owner; and
(b) the project's developer or owner needs to have not paid the head contractor all monies owing or which may become owing for work which is part of or incidental to the work performed by the subcontractor.
It is important to note that the work performed by the subcontractor may not necessarily have to be directly linked to the work performed by the head contractor to the principal; it need only be incidental to that work. It is unclear how this will be applied or work in practice, but it would appear to include circumstances where there is a right to recover under the subcontract which does not exist under the head contract.
Notification of principal contractor status
The person in receipt of a payment withholding request must, within 10 business days after receiving the payment withholding request, notify the subcontractor if it is no longer the ‘principal contractor’ for the claim.
A ‘principal contractor’ must retain, out of the money owed or which may become owing to the head contractor, the amount specified in the payment withholding request.
If the principal contractor does not retain such money, it will become jointly and severally liable to the subcontractor in respect of those monies. In these circumstances, any payments made by the principal contractor to the subcontractor can be recovered by the principal contractor from the head contractor as a debt due, however, this may not sufficiently protect the principal contractor if the head contractor is or becomes insolvent.
No obligation to pay
For as long as the principal contractor is required to withhold such monies, its obligation to pay the head contractor under the relevant contract is suspended to the extent that obligation relates to the monies withheld.
The obligation to withhold money lapses on the earlier of:
- the date the adjudication application for the payment claim is withdrawn (the principal contractor may rely in good faith on a statutory declaration from a head contractor declaring this);
- the date the head contractor pays the subcontractor the amount claimed to be due under the relevant payment claim (note this refers to the whole amount claimed; accordingly, if the head contractor makes a part payment (including where the adjudicator determines a lesser amount than that claimed by the subcontractor), the principal contractor’s obligation to withhold will only be removed with respect to amount paid by the head contractor – the principal contractor will need to continue to withhold the balance of the claimed amount);
- the date the subcontractor serves a notice of claim on the principal contractor under section 6 of the Contractor’s Debts Act 1997 (NSW) in respect of the payment claim; and
- 20 business days after the relevant adjudication determination is served on the principal contractor by the adjudication claimant (note the principal contractor’s obligation to withhold does not cease, and is not reduced, on the date of the adjudicator’s determination, even if a lesser amount is determined to be due to the subcontractor).
This will obviously have important cash flow implications for the head contractor and the progress of the project.
Some tips for dealing with the new regime
While aspects of the Act will hopefully be clarified in time, it is important that project developers, owners and head contractors have a process in place that enables immediate identification of a payment withholding request; prompt distribution of that request to appropriate personnel within the organisation; and, if necessary, timely response to and, if appropriate, compliance with, that request.
Further, head contractors, if the project’s developer or owner is in receipt of a payment withholding request from a subcontractor, should promptly discharge their payment obligations at the earliest possible time and inform the project’s developer or owner of that payment immediately.