The Queensland Government has recently passed legislation imposing additional statutory obligations to ensure security of payment to contractors, following receipt of a favourable adjudication determination. From 1 October 2020, all levels of contractors within a contractual chain will have enhanced powers to recover the adjudicated amount by:
- issuing a “payment withholding request” to the next higher party; or
- requesting a charge over the property on which the construction work was carried out or to which the related goods and services were supplied.
How did these amendments come about?
The Building Industry Fairness (Security of Payment) and Other Legislation Amendment Bill 2020 (Qld) was introduced into the Queensland parliament in February 2020 and was passed on 15 July 2020. The Building Industry Fairness (Security of Payment) and Other Legislation Amendment Act 2020 (Qld) received assent on 23 July 2020, with most sections to commence on proclamation.
The amendments include the introduction of payment withholding requests, being a similar security of payment mechanism to that provided for under the old Subcontractors Charges Act 1974 (Qld), although now specifically available to a contractor where a favourable adjudication determination has been obtained.[i] The amendments also introduced the concept of a charge over the property on which the construction work was carried out or to which the related goods and services were supplied, where a favourable adjudication determination has been obtained.[ii] This concept echoes the Worker’s Liens Act 1893 (SA).
On 27 August 2020, certain provisions, including those relating to payment withholding requests and charges over property, were proclaimed to commence on 1 October 2020.[iii]
Payment withholding requests
The purpose of the new payment withholding request regime is to protect claimants who are successful in an adjudication from the risk of non-payment by the respondent who may be nearing insolvency or already insolvent. Notably, the regime extends to head contractors issuing a payment withholding request directly to the financier of the principal. However, a payment withholding request cannot be issued to a resident owner.[iv]
The below flowcharts illustrate the various contractual circumstances in which a payment withholding request might be issued.
The regime operates as follows (using the example of a contractor and subcontractor):
- Following the failure of a respondent (the contractor in this case) to pay the adjudicated amount to the claimant (the subcontractor in this case) within the required timeframe (usually 5 business days), the claimant may issue a payment withholding request to the next “higher party” in the contractual chain (being the head contractor in this case).[v] The respondent is required to disclose the higher party’s relevant details, including whether any amount is or will become payable to the respondent by the higher party under the head contract.[vi]
- The PWR must only claim outstanding moneys owed in accordance with the adjudicated amount (i.e., the adjudicated amount less any partial payment of the adjudicated amount made by the respondent to the claimant).[vii]
- Upon receipt of the payment withholding request, the higher party will be obliged to withhold, from payments to the respondent, either the adjudicated amount or the related amount payable to the respondent, whichever is less.[viii] The legislation provides the following examples:
- if the adjudicated amount is $55,000 but the amount payable to the respondent is only $40,000, the higher party’s obligation is to retain $40,000;
- if the adjudicated amount is $55,000 and the amount payable to the respondent is $120,000, the higher party’s obligation is to retain $55,000.
- Where the higher party fails to do so, the higher party becomes jointly and severally liable with the respondent to the claimant (to the extent of the non-withheld amount).[ix]
- The claimant maintains a charge over the withheld amount (as a declared statutory interest under the Personal Property Securities Act 2009 (Cth)). The claimant may enforce the charge at any time, as if the charge was created via a written agreement between the claimant and higher party.[x]
- The charge expires if one of the following occurs:[xi]
- the respondent pays the outstanding adjudicated amount to the claimant;
- the adjudication decision is set aside, and the respondent pays into court the unpaid portion of the amount pending a final decision; or
- the adjudication certificate is filed in court as a judgment for debt, but the court dismisses the enforcement proceedings.
- Failures by any of the parties to perform their obligations under the PWR regime can result in a financial penalty.[xii]
Charges over property
As noted above, a payment withholding request cannot be issued to a resident owner.[xiii] However, in circumstances where the respondent or a related entity of the respondent is the registered owner of the property on which the construction work was carried out or to which the related goods and services were supplied, a successful claimant may request that a charge be registered over the relevant property, providing security to the claimant for payment of the adjudicated amount.
The below flowchart illustrates an example of a successful claimant contractor registering a charge over the principal or principal’s related entity’s property, being the relevant property under the contract:
- Following the failure of a respondent to pay the adjudicated amount to the claimant within the required timeframe (usually 5 business days), the claimant may file the adjudication certificate as a judgment for debt.[xiv]
- If the respondent or a related entity for the respondent is the registered owner of the relevant property, the claimant may request a charge over the property by lodging the request with the registrar, along with a copy of the adjudication certificate and a statutory declaration confirming that the adjudicated amount has not been paid.[xv]
- The charge expires 24 months after the day it is registered but the claimant may apply to the court to extend the charge for an additional period of not more than 24 months.[xvi]
- The charge also expires if:[xvii]
- the adjudication decision for the adjudicated amount is set aside; or
- the respondent pays into court, as security, the unpaid portion of the adjudicated amount pending a final decision in the relevant proceedings; or
- after filing the adjudication certificate as a judgment for a debt, the court dismisses the proceedings for enforcement of the debt.
- The claimant must lodge a request to release the charge as soon as practicable after the charge expires or the adjudicated amount is paid to the claimant and on receipt of such request, the registrar must register the release of the charge.[xviii]
- After giving written notice to the claimant, the registered owner may apply to have the charge set aside and the court may set aside the charge if:[xix]
- the adjudicated amount has been paid; or
- the registered owner is not the respondent or a related entity for the respondent.
- If the charge is registered and after giving written notice to the registered owner of its intention to do so, the claimant may apply to court for an order that the property be sold.[xx]
- The court may order that the property be sold if it is satisfied that the adjudicated amount remains unpaid and it would be appropriate to make the order.[xxi] Such an order authorises the sale of the property free of all encumbrances, other than those the court preserves in its order, and has effect despite any encumbrances or any other Act.[xxii]
- On settlement, the claimant is required to apply the sale proceeds in the following order:[xxiii]
- paying the sale costs and the claimant’s costs in seeking the order for sale;
- paying amounts to satisfy any registered encumbrances, including its charge, in order of priority under the Land Title Act 1994 (Qld);
- paying the balance to the registered owner of the relevant property or to someone else at the owner’s discretion.