Building and Construction Industry Security for Payments

05 MAR 2018

 

Update on the Building and Construction Industry Security for Payments Act NSW ("SOP ACT")

The SOP Act is a small but contentious piece of legislation which is ever changing and producing judgments from the Courts on an almost weekly basis. 

We have observed over the past few months a number of developments as to how Courts and Adjudicators deal with contracts and Payment Claims under the SOP Act.  As larger and more complicated projects continue to be built, it is easy to overlook some of the smaller details which might have drastic consequences when dealing with the SOP Act. 

Changes to Assessment of Practical Completion 

The decision of the NSW Court of Appeal in Abergeldie Contractors Pty Limited v Fairfield City Council [2017] NSWCA 113 means that Adjudicators and Courts, when assessing the date that practical completion is achieved, look to the date that a superintendent or contract administrator issues its certificate of practical completion and not the date the certificate states practical completion was achieved. As a result, the decision  has the effect of removing (in some contracts) the ability to retrospectively certify practical completion.  

This may present problems for (already) busy contract administrators and superintendents because, in reality, the circumstances in which practical completion is claimed may be the subject of significant doubt and negotiation as to when it is to occur even after the date it is claimed. There will be times when a certificate of practical completion may be withheld for good reasons but the superintendent will want for practical, commercial or legal reasons to accept an earlier date. This may be achieved by agreement but if there is no agreement then practical completion becomes a potential minefield which may have unintended consequences.

No longer allowed "deemed" service of Payment Claims

A further decision of the Court of Appeal, released late last year, in All Seasons Air Pty Limited v Regal Consulting Services Pty Limited [2017] NSWCA 289 passed without much fanfare, however has significant impact in relation the validity of “Payment Claims” under the SOP Act. 

Many contracts contain a provision that progress/payment claims can be made by a contractor by a particular date, referred to under the SOP Act as the “reference date” and that if a claim is made by the contractor before the “reference date” the claim will be deemed to have been served on the reference date and not the date on which it was actually received.

While upholding the validity of “deeming provisions” of this nature under the contract, the Court of Appeal’s decision casts significant doubt on their application for the purposes of the SOP Act, with the consequence of invalidating service of payment claims under the Act which seek to rely on these “deeming provisions”. 

Superintendents and contract administrators should be particularly mindful of this decision when dealing with claims, particularly where the claim is contentious.

Subcontractors are not being paid

In 2014 the SOP Act was changed to require head contractors to serve a supporting statement setting out that they have paid all subcontractors or otherwise disclose which ones they are in dispute with.  These changes were enacted by Parliament in order to “to reduce the financial stress that delayed payment places on builders, particularly subcontractors.”

The fact that supporting statements are now required, unfortunately, does not seem to have deterred a number of contractors from submitting false or incorrect supporting statements.  Unfortunately for principals under a contract, Adjudicators do not look to verify the material contained in the supporting statement, they only look at whether one has been served or not. 

Council’s are in a particularly sensitive position when it comes to subcontractors, often small local businesses, not being paid. Those subcontractors often look at Council to pay. In our experience, most contracts currently in place do not contain adequate provisions allowing a superintendent or contract administrator to withhold payment from a head contractor where there is good reason to believe that a subcontractor has not in fact been paid. 

This can lead to situations (and we have seen this first hand a number of times) where a principal, such as Council, is forced under the SOP Act to make a payment to the head contractor, but the payment does not make its way to the subcontractor. With the  increase in subcontractors taking advantage of PPSR registrations to maintain “security” until they are paid, we have seen circumstances where a principal has paid the head contractor for works but materials and goods on site still have valid PPSR encumbrances in favour of the subcontractor that have not been discharged by payment being made.

Currently the SOP Act provides that complaints can be made to the Department of Fair Trading for investigation as to whether a supporting statement has been validly completed, but that is of little comfort to principals who have already had to shell out money, and are left in one (1) of the following two (2) circumstances:

  1. sue the head contractor; or
  2. pay the subcontractor (effectively doubling up on payment),

in order to have the encumbrances removed. Hardly an ideal outcome, but one which seems to unfortunately be the present reality.

How do you overcome the problem?

We recommend that all current contracts be assessed and reviewed and changes made to allow superintendents and contract administrators to withhold payment from the head contractor. 

If you would like more advice about contracts that you have currently in place, please contact Justin Thornton on (02) 4626 5077 or jthornton@marsdens.net.au, or if you potentially have a dispute in relation to a current contract, please contact Aaran Johnson on (02) 4626 5077 or ajohnson@marsdens.net.au.

The contents of this publication are for reference purposes only. This publication does not constitute legal advice and should not be relied upon as legal advice. Specific legal advice should always be sought separately before taking any action based on this publication.

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