The Fantastic Fourth: another NSW Security of Payment amendment
On 21 November 2018, the NSW Houses of Parliament passed the Building and Construction Industry Security of Payment Amendment Act 2018 (Amendment Act). This will amend some provisions of the Building and Construction Industry Security of Payment Act 1999 (Security of Payment Act).
Some of these changes are reversions to old systems, while others introduce completely new regimes. Readers will be forgiven for being irritated at yet another shock to the system, but it is vital to become familiar with all of these so that when they come into effect, businesses are ready for them. Directors and managers should take particular note as they will soon be open to criminal proceedings.
We wrote a pocket summary of these changes in December (see here).
Here we expand on the details, and we can now give some indication of when these changes will be activated.
Before going into the detail, readers should take note that as of 5 March 2019, none of these changes have come into effect.
When the changes will come in
This is the most important detail and so far, we don’t know. We will only know for sure after the fact, when the government makes the official announcement in the NSW Government Gazette.
However, a paper released by Fair Trading NSW in December 2018 has given some hints about when to expect these changes. It looks like there will be three main phases of changes throughout 2019 for principals and contractors to weather:
- Phase 1 changes were proposed to come in during February 2019. This has not yet happened, so we can expect that any day now the changes will come;
- Phase 2 changes were proposed for June 2019;
- Phase 3 changes were schedule for December 2019.
When they do come into effect, they will not affect contracts already entered into. The old Security of Payment Act will still apply to these contracts.
Phase 1: February 2019
Investigation and enforcement powers for the Department
The most wide-reaching changes concern new powers of officers of the Department of Finance, Services and Innovation that can be used for the purposes of investigating, monitoring and enforcing compliance with the Security of Payment Act.
Authorised officers may now:
- Require a person to provide them with information or records that they can obtain;
- Require a person to answer questions on topics about which they are suspected of having knowledge, or to attend at a specified time and place to answer such questions;
- Enter premises (including commercial premises without a search warrant);
- When entering premises, make examinations, direct persons to produce records for examination, copy records, and seize anything suspected on reasonable grounds of being connected with an offence under the Security of Payment Act.
The Amendment Act also introduces offences for failing to comply with the above without reasonable excuse, or obstructing or delaying an authorised officer. The maximum penalty is $4,400 for a corporation and $2,200 for an individual.
There are even greater maximum penalties for providing information, answers or records that are false or misleading: $55,000 for a corporation and $11,000 for an individual.
Authorised officers will also be able to issue quick penalty notices for more minor infringements to the Security of Payment Act.
Liability of directors and managers
The Security of Payment Act already provides for offences of a corporation. See the next section for examples.
The Amendment Act now extends this liability to its directors, or for those involved in the management of the corporation (managers).
Where
- A corporation commits an offence against the Security of Payment Act, and
- A director or manager aids, abets, induces, conspires, is knowingly concerned in, or is a party to this offence,
then the director or manager will have committed an offence, which is subject to the same maximum penalty as applies to the corporation.
The Security of Payment Act also creates an “executive liability offence”. This is an offence involving specifically the supporting statement to a payment claim. These statements are required to be put forward by head contractors to certify that subcontractors have been paid.
Where:
- A corporation fails to attach a supporting statement to a payment claim, or the statement provided is false or misleading, and
- The director or manager knows this or is recklessly indifferent about it, and
- The director or manager has failed to take reasonable steps to prevent the offence.
the director or manager will have committed an executive liability offence. The maximum penalty is $22,000.
One example of failing to take reasonable steps under (3) is failing to ensure that a corporation’s employees, agents and contractors have supervision, and information and training about complying with the Security of Payment Act.
Higher penalties
Head contractors should take note that failure to include a supporting statement not only risks the payment claim to a principal being rendered invalid (which is the current law). Failure to include this is also now subject to tougher maximum penalties: $110,000 for corporations and $22,000 for individuals.
The same maximum penalties now apply where the supporting statement is provided by someone who knows that it contains false or misleading information. As mentioned, directors and managers may also be liable.
There are also offences relating to payment withholding requests. Currently a claimant in an adjudication application can issue a payment withholding request to the principal contractor, requiring them to hold back any money due to the respondent to cover a successful adjudication application. If a person receives this payment withholding request but is not, or is no longer, the principal contract, they must notify the claimant of this fact within 10 business days. The Amendment Act makes the penalties harsher: the maximum penalty for failing to do this is $5,500 for a corporation, and $1,100 for an individual.
There are similar increases in penalties where a claimant withdraws an adjudication application but fails to tell a principal who has received a payment withholding request, and where a respondent fails to comply with the direction by an adjudicator to give the identity and contact details of a principal contractor.
Adjudications reviewable for error
The Amendment Act now puts into writing what the courts have already decided. This is that an adjudicator’s determination, or any part of it, that is affected by jurisdictional error may be set aside by the Supreme Court. A jurisdictional error is where an adjudicator wrongfully decides a case that it has no authority to decide under the Security of Payment Act, such as where a payment claim is not properly served on the respondent or it is served without a supporting statement.
However, non-jurisdictional error, such as where an adjudicator makes a mistake about what the law is, is not reviewable.
No ball for companies in liquidation
A new change is that if a corporation claiming progress payments enters liquidation at any stage up until the final determination by an adjudicator, it will be prevented from claiming.
The NSW government is now denying the right of a corporation which is in liquidation to serve a payment claim, and is not allowing them to enforce a payment claim such as through applying for adjudication under the Security of Payment Act. This overrides some of a recent NSW Court of Appeal judgement.
A corporation that goes into liquidation while a determination is being considered is taken to have withdrawn the application.
There are uncertainties that NSW courts may need to resolve. Firstly, it appears that notwithstanding these changes, claimants in liquidation may still use the alternative to adjudication, which is enforcing a statutory debt that arises from unpaid payment schedules. Secondly, the Amendment Act does not appear to affect companies in voluntary administration. However, we may know for sure when the courts address these questions.
Phase 2: June 2019
Reference dates are no more
The Amendment Act removes the reference date system that has been the bane of many a claim.
It appears that the entitlement to a progress claim is no longer triggered by a reference date, but is merely triggered by that party undertaking to carry out construction work.
Under the new changes, contractors may serve a payment claim “on and from the last day” of the month in which work was carried out. If the contract provides for an earlier date of any month, the contractor may serve the payment claim from that date.
Only one payment claim per month
Unless the contract says otherwise, a claimant can only serve one payment claim in any particular month for work carried out in that month (previously one claim per reference date).
Parties can still include in a payment claim amounts that were the subject of previous payment claims, or include claims for work completed in previous months.
Payment claims after termination
Where a contract has been terminated, a contractor may serve a payment claim on or after the date of termination. This is a change from the existing law.
Endorsement of payment claims
In a return to the previous law, payment claims to be valid must state that they are “made under the Building and Construction Industry Security of Payment Act 1999”.
Shorter deadline for subcontractor payments
Where a party receives a payment claim from a subcontractor, the payment is due 20 business days after the payment claim is made (previously: 30 business days). If the contract provides for a shorter deadline, this shorter deadline will apply.
Withdrawal of an adjudication application
A claimant may now withdraw its adjudication application at any time before the application is determined. It can do this by serving written notice on both the respondent and the adjudicating body (and on the adjudicator, if one has been appointed).
Extended time for adjudicator’s decision
Under the original Security of Payment Act, the adjudicator must decide the application within 10 business days after notifying both parties that it has accepted the application.
The Amendment Act changes this where the respondent is entitled to lodge a response (e.g. where it had issued a payment schedule). The deadline for deciding the application is 10 business days after the respondent has lodged the response. If no response is lodged, the 10 business days start ticking at the end of the period that the respondent could have issued a response.
The adjudicator must now serve the determination on the claimant and the respondent.
Phase 3: December 2019
Owner-occupier exceptions removed
The Amendment Act makes changes so that the Security of Payment Act will apply to residential construction contracts between a builder and an owner-occupier of the building (that is, someone who resides or proposes to reside in the building). Currently the Security of Payment Act does not apply to these contracts.
Codes of practice
The Minister for Innovation and Better Regulation may now prescribe a code of practice for adjudication bodies to follow. They will publish this on the NSW legislation website.
Bonus phase: May 2019
Lastly, Fair Trading NSW is also proposing changes to the Building and Construction Industry Security of Payment Regulation 2008 (Regulations).
These changes are scheduled to be drafted by May 2019, at which point stakeholders will be able to submit comments on these proposed changes.
- Retention moneys for projects valued at over $20 million must currently be held in a trust account. It is proposed to reduce this threshold to $10 million, and to reduce annual reporting obligations on this trust account.
- Fair Trading NSW proposes to amend the Regulations to require the keeping of trust account records by a head contractor, and to allow subcontractors to inspect these records if they have their retention held.
- Liability of directors and managers of companies is proposed, for offences under the Regulations. These mainly relate to head contractors and trust accounts.
Conclusion
Fair Trading NSW has recommended that these changes be staggered over the course of a year to allow people in the industry to prepare for them. It is vital that everyone involved in construction and building business familiarise themselves with them. Even tiny non-compliances may have big consequences for adjudications. They can also give rise to criminal liability and severe penalties.
Businesses also need to be aware that authorised government officers will soon be perfectly within their rights to demand access to their documents and premises, and to demand answers to questions in relation to Security of Payment Act issues.
If you or someone you know wants more information or needs help or advice, please contact us on +61 (0)2 9248 3450 or email [email protected].