Recently, hearts have been set racing by the Government's intention to make changes to the Security of Payment Act 1999 (NSW).Yesterday the Building and Construction Industry Security of Payment Amendment Bill 2013 received Royal Assent and passed into law as the Building and Construction Industry Security of Payment Amendment Act 2013.  However, in the week prior to assent the Government extended the scope of the changes to be made to SOPA by the Bill.

When the Bill was reviewed by the second house of parliament (the Legislative Council) a schedule of amendments was made to the Bill.  The proposed schedule of amendments related to a key recommendation from the report of the Collins Inquiry into Insolvency in the Construction Industry; the creation of Subcontractors' "retention money trust accounts".

These amendments fundamentally alter the way in which Head Contractors handle retention money held on subcontracts.

Retention Money as Trust Money

One of the first amendments that Head Contractors invariably seek to make to the terms of subcontracts are terms which reject the creation of any fiduciary or trust obligations in respect of retention money held by the Head Contractor.

Practically speaking, by not creating a fiduciary or trust obligation over the money it means that if the Head Contractor goes bust, Subcontractors must apply to the liquidator to get the retention.  The Subcontractor will then have no priority over other creditors of the Head Contractor, even if retention money was held in a separate account; the retention money becomes part of the assets of the Head Contractor.

Trust money, on the other hand, remains the property of the beneficiary of the trust, in this case, the Subcontractor.  A Head Contractor (or any liquidator of the Head Contractor) can only access the retention money by proving that the money no longer belongs to the relevant Subcontractor and now belongs to the Head Contractor.

Creation of a new "offence" for not observing retention money procedures

Specifically, the Act makes provision for the regulations to provide as follows:

  • that any retention money to be paid to a Subcontractor by the Head Contractor is to be paid into "a trust account (a retention money trust account)";
  • that any retention money is paid into a trust account established with a financial institution by the Head Contractor or a trust account established and operated by "the Small Business Commissioner";
  • specific procedures regarding:
    • payments into and out of such retention money trust accounts;
    • keeping of records regarding retention money trust accounts; and
    • resolution of disputes regarding retention money trust accounts.

The regulations may provide that failure to comply with procedures regarding retention money trust accounts constitutes an offence punishable by fines up to AUD22,000.

If regulations are implemented as provided by the Act, this will mean that Head Contractors can no longer hold retention money on subcontracts and will have to pay that money to an independent third party.  Failure to do so will be an offence.

Further protection of Subcontractors

In NSW, SOPA already makes provision for subcontractors' rights to be protected by way of liens over unfixed plant and materials.  Equally, the Contractors Debts Act makes provision for "debt certificates" to be issued by the Court which require a Principal to make direct payment to the relevant Subcontractor.  However, a Court will not issue a debt certificate unless the Subcontractor in question has successfully obtained a separate Court judgment or statutory adjudication decision against the Head Contractor.

These new retention money procedures will provide further protection to Subcontractors' entitlements. However, they will of course add to the Head Contractor's financial obligations and make it more difficult to recover money from Subcontractors in the event of disputes.

The Act will apply to any contracts entered into after the new Act commences.  The new Act will commence on a day to be appointed by Royal Proclamation and any regulations will follow after.

Head Contractors and Subcontractors alike must be watchful for the commencement of these new rules.