On 20 November 2013, the New South Wales Government’s first attempt at addressing the issues to arise out of the Collins Inquiry1 became reality when amendments to the Building and Construction Industry Security of Payment Act 1999 (NSW) (the Act) were assented to.
The key amendments to the Act include:
- the removal of the requirement that payment claims need to be endorsed as being made under the Act;
- the introduction of a statutory timeframe for progress payments;
- the introduction of a requirement that payment claims be accompanied by a “supporting statement”; and
- the establishment of a regime in respect of trust account requirements for retention moneys held by head contractors.
The changes will not apply retrospectively. The date for commencement of the amendments has not yet been proclaimed.
The amendments are intended to provide greater protection for subcontractors and promote cash flow and transparency in the contracting chain2. The amendments will potentially have significant implications on industry participants moving forward and will require both principals and contractors to have in place adequate administrative procedures to ensure compliance with the Act.
We consider the key amendments in further detail below.
Payment claims need not be endorsed as being made under the Act
Payment claims (other than in respect of “exempt residential construction contracts” – i.e. where the work is carried out for the intended occupant of the dwelling) will no longer need to be endorsed as being a claim made under the Act in order for the Act to apply.
The amendments mean that respondents must now assume that every payment claim in respect of “construction work” or “related goods and services” is a payment claim made under the Act, whether or not it carries the relevant endorsement. The effect of this amendment is that, if a respondent does not agree with the amount claimed in a payment claim, a payment schedule (which complies with the Act) will be required to be served by the respondent (whether or not the claim carries the endorsement) – or the amount in the payment claim will automatically be considered to be a debt due to the claimant from the respondent.
A statutory timeframe for progress payments
There will be a statutory timeframe for making progress payments, so that, unless the relevant contract provides for earlier payment:
- in a head contract, payment must be made by a principal to a head contractor no later than 15 business days after the relevant payment claim is made; and
- in a subcontract, payment must be made by a main contractor to a subcontractor no later than 30 business days after the relevant payment claim is made.
Any provision of a construction contract that provides for payment later than the relevant statutory timeframe will be void.
In the light of these timeframes for payment, it is unclear what the attitude of the courts in New South Wales will be to pre-conditions in construction contracts attached to a contractor’s entitlement to receive payment or to submit payment claims.3
Another issue which may arise as a result of the amendments to the Act is the potential ambiguity arising out of the definitions of “principal”, “head contractor” and “subcontractor”. The definitions introduced by the amendments contemplate the traditional contractual arrangement between principal, head contractor, and subcontractor.
The ambiguity may arise in contractual arrangements which differ from the traditional structure (for example, in a ‘construction management’ contract arrangement), in which case, the definitions may not neatly fit within the roles to be performed by the parties in that arrangement. This has the potential to create uncertainty as to how the statutory payment provisions may apply to the relevant parties (such as the “construction manager” or a “trade contractor”) in that contractual arrangement.
Head Contractor supporting statement
Head contractors will be expressly required to submit a “supporting statement” with each payment claim that includes a declaration that all subcontractors have been paid all amounts due and payable to them in relation to the construction work concerned. The form of supporting statement will be prescribed in the regulations.
A failure to provide a supporting statement is an offence and attracts a maximum penalty of $22,000.
It is also an offence for a head contractor to serve a payment claim with a supporting statement knowing that the supporting statement is false or misleading in a material particular. This offence attracts a maximum penalty of $22,000 or 3 months imprisonment (or both).
Authorised officers of the Department of Finance and Services are provided with broad powers to investigate compliance with the supporting statement requirements under the Act.
It is unclear, however, if the commission of either of the offences referred to above will invalidate the relevant payment claim (and, therefore, excuse a principal from making the relevant payment).
Trust account requirements for retention moneys
The changes anticipate the introduction of new trust account requirements in respect of retention moneys held by head contractors, which will apply once the regulations make provision for them.
The regulations will more specifically deal with these new requirements, but it appears to be intended that:
- retention moneys retained by head contractors from subcontractors are to be paid into a trust account (‘retention money trust account’) which is to be established and operated in accordance with the regulations;
- retention money trust accounts are to be either established with a financial institution by the head contractor or established and operated by the ‘Small Business Commissioner’; and
- the regulations may include requirements in respect of the procedures to be followed in connection with the authorisation of payments out of a retention money trust account, the keeping of records and inspection of records in connection with a retention money trust account and the resolution of disputes in connection with the retention money trust account.
The regulations may also impose offences in relation to these new trust account requirements (attracting a maximum penalty of $22,000). This is also likely to be of concern to the banks as well as to the person who has ostensible control of the trust account.
Watch this space
Although the changes reflect a clear indication of the New South Wales Government’s intention to change the current statutory framework, it remains to be seen whether these amendments to the Act will have the desired effect and reduce the number of insolvencies in the construction industry.
Nonetheless, these changes only represent the first step in addressing the issues to come out of the Collins Inquiry and further changes are to be expected.