Security of payment laws to come into force in NSW

In brief

New amending security of payment legislation will soon come into force in NSW that will provide greater protection and certainty for subcontractors in the contracting chain. Partner Leighton O'Brien and Lawyers Will Coote and Jerome Entwisle look at what will change and the implications.

Background

On 21 April 2014, the Building and Construction Industry Security of Payment Amendment Act 2013 (NSW) (the Amendment Act) will come into force.

The Amendment Act was drafted in the wake of the Independent Inquiry into Construction Industry Insolvency¹ and the NSW Government's responses to the Inquiry's recommendations. The Amendment Act is designed to 'provide, greater protection for subcontractors and promote cash flow and transparency in the contracting chain.'² It does so by implementing four key amendments to the Building and Construction Industry Security of Payment Act 1999 (NSW) (the Act). They are:

• introducing statutory time periods in which payment claims become due and payable;
• introducing an enforcement mechanism to ensure compliance with the time periods;
• removing the necessity for payment claims to be specifically endorsed as claims made under the Act; and
• allowing for regulations that would require retention money to be held in trust for subcontractors.

Amendments to the current security of payment regime

Due date for payment

The Amendment Act introduces a strict timetable for the payment of head contractors and subcontractors. It stipulates that a payment owed by a principal to a head contractor is due 15 business days after a payment claim is made in relation to the payment. A payment owed by a head contractor to a subcontractor is due 30 business days after a payment claim is made in relation to the payment.³

These changes cover all construction contracts except for exempt residential construction contracts, which are those contracts that deal with the carrying out of residential building work within the meaning of the Home Building Act 1989 (NSW).

Information to be provided by head contractor to principal

The Amendment Act obliges a head contractor to serve the payment claim on a principal alongside a supporting statement which relates to the particular claim. The requirements of the supporting statement will be outlined in regulations that are subject to further industry consultation. It has, however, been foreshadowed that the regulations may consider the need to consolidate supporting statement requirements with existing legal obligations relating to payroll tax, workers' compensation and employee remuneration.⁴

Enforcement

The Amendment Act also introduces a new regime designed to enforce compliance with the above new requirements. Authorised officers will be appointed by the Director General of the Department of Finance and Services who will be empowered to compel, by written notice, head contractors to produce relevant evidence of their compliance with the Act.

If a head contractor fails to comply with a notice issued by an authorised officer or provides false documents in relation to a notice they will be liable for a maximum penalty of $22,000 and/or three months' imprisonment.

Endorsement of claim under the Act

The Amendment Act has removed the requirement that a payment claim be specifically endorsed as a claim being made under the Act.

Trust account requirements for retention money

The Amendment Act also proposes to protect a subcontractor's interest in money held a by head contractor as security for performance (retention money) by providing that the NSW Government may promulgate regulations requiring retention money to be held in trust for the subcontractor. It is envisaged in the Amending Act that the nominated trust account could be an account established and operated by the Small Business Commissioner.

Head contractors that fail to comply with these trust account requirements could be liable for a fine of up to $22,000.

Implications

Transition

The Amendment Act will not affect contracts that are already on foot but only those contracts entered into after 21 April 2014.

Timing

Where previously there were no strict timeframes for compliance with a payment claim, principals and head contractors must now be aware of the 15- and 30-day periods within which payment claims must be addressed (these changes are similar to the provisions that currently exist in the Queensland security of payment regime⁵). As a result, contractual payment mechanisms will have to be accelerated in order to fit the requirements of the Amendment Act. This is particularly the case where project finance is involved. Provisions in contracts which create conditions precedent to the payment are potentially less effective as a result of the amendments.

Submission of payment claims

Because payment claims no longer have to be endorsed as being made under the Act, parties must now assume that any claim for payment is one that can be pursued under the Act and must respond with payment schedules accordingly.