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Australia – First Wave Of Reforms To NSW’s Security Of Payment Legislation Hits The Industry.

20 November, 2013

 

Legal News & Analysis – Asia Pacific – Australia – Construction & Real Estate

 

The first tranche of amendments to the Building and Construction Industry Security of Payment Act 1999 (NSW) (the Act) arising out of the Inquiry chaired by Mr Collins QC has now been passed by the NSW Government, and is now just awaiting assent.


Significantly, payment claims will shortly no longer need to state that they are made under the Act and retentions will soon need to be segregated from a head contractor’s other funds in a trust account.


The changes are intended to ‘provide greater protection for subcontractors and promote cash flow and transparency in the contracting chain’. That may be so, and is certainly a laudable intention, but the industry will need to move quickly to ensure that contracts and administrative processes are adapted to cater for the changes or may be caught out by the ‘pay now, argue later’ provisions of the Act or, perhaps worse, be criminally sanctioned.


When Will The Changes Apply?


The changes will only apply to construction contracts entered into after the amending Act’s commencement date (to be proclaimed in due course). The Government recognises that the industry will need some time to adjust to the changes, but the clock is now ticking.


What Are The Changes?


Payment Claims No Longer Need To State That They Are Made Under The Act


This is an amendment that principals and head contractors should be particularly cognisant of.


The enduring requirements for a payment claim under the Act are relatively easily satisfied, and a payment claim may take any form (assuming those requirements are met). This means that principals and head contractors will generally need to treat a claim for payment by a contractor (including a simple invoice) as a payment claim under the Act and respond with a payment schedule within the timeframe required by the Act. A failure to do so may leave principals and head contractors with limited options in the face of a demand for payment.


This amendment will obviously increase the number of claims subject to the Act and therefore (potentially) the number of resultant adjudications.


Payment claims made under construction contracts connected to contracts for the carrying out of residential building work must still state that they are made under the Act.


New Trust Account Requirements For Retention Moneys


New trust provisions are included which will apply if and when the regulations make provision for them. It is also intended that the regulations will specify and confirm the precise features of the trust.


The trust account requirement will only apply to retention moneys retained by a head contractor from a subcontractor under a construction contract. The changes suggest that, when regulations are created, the trust account will operate along the following lines:


  • Head contractors will be required to pay retention moneys into a trust account established and operated in accordance with the regulations.
  • The trust account will either be established with a financial institution by the head contractor or by a trust account established and operated by the Small Business Commissioner.
  • The regulations may include provisions relating to things such as the procedure to follow for payment of moneys out of the trust account, and the resolution of disputes arising in relation to the operation of a trust account.
  • Failure to comply with these provisions will expose the head contractor to a maximum penalty of $22,000.

New Due Dates For Payments By Principals And By Head Contractors


Before the changes, payment was due on the date specified in the parties’ construction contract or (where the contract did not specify) within 10 business days of the date the payment claim was made. These timeframes will now only apply to contracts connected to contracts for the carrying out of residential building work.


For all other construction contracts, the due date for payment will be the earlier of the date specified in the contract or:


  • 15 business days after the payment claim was made for head contractors.
  • 30 business days after the payment claim was made for subcontractors.

A provision in a construction contract specifying a later due date will be of no effect.


Payment Claims Must Be Accompanied By A Supporting Statement Confirming Payments Of Due And Payable Amounts To Subcontractors


The form of the supporting statement will be prescribed by the regulations.

The Minister foreshadowed that the form may also consolidate existing obligations under other legislation, including declarations required in relation to payroll tax, workers compensation, and employee remuneration. This would make sense from the perspective of administrative efficiency.


It Is An Offence For A Head Contractor To Serve A Payment Claim Without A Supporting Statement Or With A ‘Misleading Or False’ Supporting Statement


Far from being a toothless tiger, the maximum penalty for failing to serve a supporting statement will be $22,000. If a party serves a false or misleading supporting statement, the maximum penalty will be $22,000 or 3 months’ imprisonment (or both).


Authorised officers will be appointed to investigate compliance with the supporting statement provisions.


Requiring the regular provision (as part of a payment claim) of true and accurate statements confirming payment to subcontractors should benefit the project. Principals should be alerted relatively early if the contractor is having financial difficulties or is otherwise failing to pay its subcontractors. Principals will also be less likely to be ambushed by payment withholding requests under the Act by unpaid subcontractors.


What The Changes Mean For You


The industry will need to adapt management and administrative processes to properly prepare for and implement the changes. In particular:


  • Given the removal of the need to state that a claim is made under the Act, the starting point for prudent principals and head contractors will be that the claim is made under the Act and needs a fulsome response in the form of a compliant payment schedule.
  • Head contractors will need to keep a close watch on the provisions relating to the payment of retentions into trust accounts, and when the time comes, ensure that they have processes in place to ensure compliance with those requirements.
  • Contractors will need to ensure they pay subcontractors all amounts due and payable to them before they make a payment claim up-the-chain, and send a true and accurate supporting statement with each claim.
  • Parties will need to comply with the Act’s payment due dates and ensure their contracts are consistent with them.

 

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For further information, please contact:

 

Elisabeth Maryanov, Herbert Smith Freehills

[email protected]

 

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