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07 Nov 2013

SOP Act amendments may increase burden of payment schedule preparation

by Frank Bannon, Mark Gillard

SOP Act amendments may increase burden of payment schedule preparation

Following the recommendations of the Collins Inquiry into Insolvency in the NSW Construction Industry (PDF 1.6MB), the NSW Government has proposed a number of amendments to the Building and Construction Industry Security of Payment Act 1999 (NSW) (SOP Act).

The introduction of the Building and Construction Industry Security of Payment Amendment Bill 2013 (NSW) is the first step in the implementation of the Government's response to those recommendations.

The changes are primarily directed at promoting timely payment of subcontractors, but also could make the preparation of payment schedules more onerous for principals and head contractors.

Summary of amendments to the SOP Act

The key changes to the SOP Act are:

  • the removal of the requirement to endorse a payment claim as being made under the SOP Act;
  • the introduction of a requirement that a payment claim be accompanied by a supporting statement to the effect that all subcontractors have already been paid amounts due to them; and
  • the introduction of mandatory deadlines for making progress payments.

Removal of requirement for endorsement of SOP Act payment claims

A contractor must presently include an endorsement on its payment claim stating that it is made under the SOP Act before being able to avail itself of the rights and remedies provided by the SOP Act.

Following the Amendment Bill, this type of endorsement will not be necessary. This means that any claim for payment, whether or not in the form prescribed by the contract, could potentially be the subject of an adjudication application under the SOP Act.

At a practical level, a SOP Act endorsement on a payment claim served to alert a principal or head contractor that it must serve a payment schedule within 10 business days or be liable for the full amount claimed, and that the payment schedule must set out all reasons for non-payment of any amount. The absence of an endorsement will mean that principals and head contractors need to be attentive and respond to all claims for payment in an appropriately comprehensive manner or be at risk of being liable in a subsequent adjudication for amounts claimed in excess of contractual entitlements.

However, the Amendment Bill retains the present restriction that only one payment claim may be served per reference date and adds a requirement to provide a supporting statement (see below). The supporting statement is likely to become the alert that the payment claim may be pursued in an adjudication under the SOP Act.

Supporting statement to accompany payment claims

The Amendment Bill also requires that a payment claim be accompanied by a supporting statement which includes a declaration to the effect that all subcontractors have been paid all amounts that have become due and payable. The exact form of the supporting statement will be prescribed by the regulations following further industry consultation.

Many construction contracts already impose a similar contractual obligation. However, two further aspects of the Amendment Bill mean that head contractors would be well advised to consider whether their present administrative processes are adequate to ensure both that supporting statements are provided and that they are correct.

First, the Amendment Bill will make it an offence (not just a breach of contract) for:

  • a head contractor to serve a payment claim on the principal unless the claim is accompanied by a supporting statement, or
  • a head contractor to serve a payment claim on the principal accompanied by a supporting statement knowing that the supporting statement is false or misleading in a material particular.

The maximum penalty for these offences is a fine of $22,000 and, in the case of knowingly serving a false supporting statement, a term of 3 months' imprisonment.

Second, the Amendment Bill provides for the appointment of authorised officers who may require a head contractor or associated persons to provide information or documents relating to compliance with the obligation to provide a supporting statement. This aspect of the Amendment Bill means that head contractors will need to be in a position to produce evidence of payment of their subcontractors on request by authorised officers.

Introduction of deadlines for progress payments

Another important change will be the introduction of mandatory payment deadlines for making progress payments. The period for making a progress payment will vary depending on the level of the relationship between the parties in the contractual chain. Unless the contract provides for earlier payment, progress payments must be made:

  • 15 business days after a payment claim is submitted by a head contractor to a principal; and
  • 30 business days after a payment claim is submitted by a subcontractor to a head contractor.

The Amendment Bill provides definitions of principal, head contractor and subcontractor so that parties may identify the timeframe applicable to their contract.

These deadlines will apply in spite of any contractual provisions to the contrary. Importantly, under the current legislation, it is possible for the parties to agree to a different timeframe for payment in their contract. However, the Amendment Bill provides that a construction contract will have no effect to the extent it allows payment of a progress payment at a later date.

Importance of ongoing industry consultation

In the second reading speech for the Amendment Bill on 24 October 2013, the Minister for Finance and Services, the Hon. Andrew Constance, emphasised the importance of ongoing industry consultation and noted that an industry advisory group has been established to "ensure continued effective industry engagement". This group, comprising key industry peak organisations, will assist in communicating the changes and reforms to industry and also develop an education campaign focusing on the financial and business management skills of small business.

The Amendment Bill, which will not apply to construction contracts entered into prior to its commencement, was passed by the Legislative Assembly, and introduced to the Legislative Council, on 30 October 2013.

UPDATE: Since this article was published, the Amendment Bill has now been passed by Parliament, though with an additional amendment providing for the making of regulations to introduce a requirement for trust accounts for retention money held by head contractors. The Amendment is currently projected to commence in April 2014, although the trust account requirement will only commence once regulations are made.

 

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.