Proposed Changes to NSW’s Security of Payment Legislation

Tuesday, November 12th, 2013
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Over the course of the 2011-2012 financial year, there were 1,113 insolvencies in the NSW building and construction industry including a number of high profile cases such as Kell & Rigby, St Hillier’s and Southern Cross Constructions.

In response to the spate of insolvencies, the NSW State Government established an inquiry into the issue, which was led by Bruce Collins QC.  The inquiry (known as “the Collins Inquiry”) considered a number of possible measures to be implemented in an effort to stem the tide of insolvencies in the NSW construction industry.

The final report arising out of the Collins Inquiry was delivered in November 2012 and proposed 44 recommendations which were mainly aimed at improving cash flow within the industry and ensuring payments down the chain on a construction project.

Proposed amendments to the Act

In April 2013, the NSW Government responded to the recommendations of the Collins Inquiry. Following that response, the NSW Government introduced into Parliament the Building and Construction Industry Security of Payment Amendment Bill 2013 (the Bill) on 24 October 2013.

The Bill seeks to amends the Building and Construction Industry Security of Payment Act 1999 (the Act) by incorporating some of the recommendations arising out of the Collins Inquiry.  If passed, the Bill will significantly change the security of payment regime in New South Wales and will have significant ramifications for industry participants.

The key changes to the Act which are proposed are as follows:

  • A statutory time frame for progress payments: The Bill proposes implementing a time frame in which progress payments are to be made, namely no later than 15 business days after a payment claim was served in the case of payments by a principal to a head contractor and no later than 30 business days after a payment claim was served in the case of payments to subcontractors. Any provision of a construction contract that allows for payment later than the time frames mentioned above will be deemed void for the purposes of the Act. These amendments do not apply in the case of certain residential construction contracts.
  •  Declarations by head contractors: A head contractor is required to submit a “supporting statement” with each payment claim that includes a declaration that all subcontractors have been paid all amounts due and payable to them in relation to the construction work concerned. Failure to provide a supporting statement can attract a maximum penalty of $22,000. Similarly, it is also an offence for a head contractor to serve a payment claim with a supporting statement knowing that the supporting statement is false or misleading in a material particular. This offence can attract a maximum penalty of $22,000, three months imprisonment, or both.
  • Payment claims need not be endorsed under the Act: The Bill proposes dispensing with the requirement that payment claims must state it is a claim made under the Act in order for the Act to apply, except in the case of certain residential construction contracts.

It remains to be seen whether the proposed amendments to the Act will have the desired effect and reduce the number of insolvencies in the construction industry.  However, if the Act is amended, it is important for industry participants to be mindful of the following:

  • every payment claim will have to be considered to be a payment claim under the Act whether or not it carries that endorsement. This means a full payment schedule will be required for all payment claims or the amount in the payment claim will automatically fall due in its entirety;
  • any contract provisions outside of the statutory time frames for progress payments will be considered void and ineffective; and
  • claimants should be aware of the potential penalties if a claim for payment is made under the Act in the absence of providing a supporting statement (or falsely declaring) that its subcontractors have been fully paid.

Possible further reform

The recommendation that a statutory construction trust be created for projects valued at $1 million or more was one of the more controversial recommendations of the Collins Inquiry. Under that proposal, any payment made on a construction project in respect of (or on account of) work carried out (or materials supplied) would be subject to a trust for the purpose of paying subcontractors and suppliers down the contractual chain.  This recommendation has not been implemented by the Bill, however, the NSW government is trialling the use of a construction trust system in selected government projects.  The outcome of that trial will determine whether it will be more widely implemented.

By: Rob Buchanan and Daniel Vicano

[1] Independent Inquiry into Insolvency in the NSW Construction Industry, Bruce Collins QC, November 2012

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