16 Mar 2011
Subcontractors gain direct rights against principal contractors under NSW Security of Payment Act
by Frank Bannon, Mark Gillard
Changes to NSW's security of payment laws mean you should review construction contracts now.
The Building and Construction Industry Security of Payment Amendment Act 2010 (NSW) ("Amendment") commenced on 28 February 2011.
The Amendment provides a subcontractor with direct rights against a principal contractor to secure payments due to it from the contractor. A subcontractor can require a principal contractor to withhold money from a contractor, pending determination of its adjudication application against that contractor.
Further, the Amendment overcomes a timing issue which can reduce the effectiveness of the Contractors Debts Act 1997 (NSW) (CDA). This issue is of particular relevance in the case of insolvency of the contractor.
Under the CDA, the benefit of the obligation of a principal contractor to pay money to a contractor can be assigned to a subcontractor in order to satisfy a judgment obtained by a subcontractor against the contractor. However, the CDA will not assist a subcontractor if the principal contractor has paid the contractor all money due to it prior to the subcontractor being able to obtain a judgment against the contractor and to serve a debt certificate on the principal contractor.
The Amendment enables a subcontractor to earmark money which may become payable by the principal contractor to a contractor, by serving a payment withholding request on the principal contractor. However, a judgment or debt certificate is not required for a payment withholding request. All that is required is the making of an adjudication application.
When a principal contractor is served with a payment withholding request, it must withhold from any moneys owed to the contractor an amount equal to the amount specified in the request, pending the adjudication determination. A principal contractor which does not comply with a request becomes jointly and severally liable with the contractor for the debt owed to the subcontractor. It appears that the Amendment may be used in the context of any three consecutive contracting parties in a chain – for example, head contractor, subcontractor, sub-subcontractor. Although the term "principal contractor" might suggest that it applies only to contractors, the definition would seem to extendto owners/principals.
Construction industry participants should review their contracts and consider the implications of the amendment in relation to matters such as:
- risks to cash flow of contractors as a result of spurious payment withholding requests from one or more subcontractors, which could affect a successful project outcome;
ability of a principal contractor to recover payments made directly to subcontractors under the contract or via project security; and
whether the Amendment might enable a subcontractor to jump the queue in the case of the contractor going into liquidation.
You might be interested in…