A wide range of construction industry stakeholders are affected by changes to the operation of NSW Security of Payment legislation including in the timing of cash flow to contractors. This article is consequently relevant to developers, principals, head contractors, subcontractors, consultants and suppliers of goods and services to the construction industry. It will take 5 minutes to read. This article first explains the major amendments to the Building and Construction Industry Security of Payment Act 1999 (NSW) to come into force in October. It then examines the associated impact the amendments will have on construction industry stakeholders.
The Building and Construction Industry Security of Payment Amendment Act 2018 (NSW) (the Amendment Act) was passed by the New South Wales Parliament on 21 November 2018 and received royal assent on 28 November 2018. It was originally proposed that the reforms have staggered commencement dates.1 On 19 July 2019, the Governor of New South Wales proclaimed 21 October 2019 as the day on which the Amendment Act and its associated Construction Industry Security of Payment Amendment Regulation 2019 (NSW) (the Amendment Regulations) are to commence.
The long title of the Amendment Act stipulates that it intends:
"to make further provision with respect to payments for construction work carried out, and related goods and services supplied, under construction contracts; and for other purposes."
The Amendment Act applies only to construction contracts that are entered on or after 21 October 2019.
The Amendment Act contains multiple changes, including some amendments that are derived from recommendations made in the Murray Review (a national review of security of payment laws in the building and construction industry; released on 21 May 2018).2 This article considers 6 significant changes to be made by the Amendment Act.(1) Removal of the "reference date" concept
The Amendment Act removes the "reference date" concept by omitting the relevant wording in section 8 of the original Act. The effect of this amendment is that the entitlement to progress payments will no longer be dependent upon the existence of a reference date which, in turn, simplifies the process of making a payment claim. This change to the payment structure is broadly in line with Murray Review recommendations 14-17. The entitlement to receive a progress payment is instead triggered under section 8 when a person, under a construction contract, undertakes to carry out construction work or to supply related goods and services. Consequently, the Amendment Act includes new subsections 13(1A)-(1C) that stipulate the claimant may serve a payment claim:
- on and from the last day of the "named month" in which the construction work was first carried out (or the related goods and services were first supplied) under the contract;
- where the construction contract makes provision for an earlier date for the serving of a payment claim in any particular named month; or
- on and from the date of termination of the construction contract, as a final claim.
(2) Reinstatement of the endorsement requirement
The Amendment Act omits the wording in section 13(2)(c) of the original Act and reinstates the requirement that all payment claims must include an endorsement that states that the payment claim is made under the Act. By restoring the endorsement requirement (removed in April 2014) the Amendment Act conflicts with the view expressed in the Collins Inquiry Report (NSW) 2012,3 but is in line with recommendation 23 of the Murray Review.
(3) Claimants in liquidation prohibited from making payment claims
The Amendment Act inserts section 32B, which prohibits a corporation in liquidation from serving a payment claim or taking action to enforce a payment claim (including by making an application for adjudication of the claim) or an adjudication determination. Further, if the corporation in liquidation has made an adjudication application that has not been determined prior to the company going into liquidation, the application is subsequently taken to have been withdrawn on the day of liquidation. This reform is in line with recommendation 10 of the Murray Review and overcomes the effect of the decision in Seymour Whyte Constructions Pty Ltd v Ostwald Bros Pty Ltd (In liquidation)  NSWCA 11. Note that corporations in receivership or in administration remain entitled to make payment claims.(4) Shortened payment terms and various reforms to the adjudication process
The Amendment Act reduces the maximum period within which a head contractor must make a progress payment to a subcontractor, from 30 business days to 20 business days after the payment claim is received, by amending section 11(1B)(a) of the original Act. This reform reflects recommendation 19 of the Murray Review and will have significant implications for head contractors' and subcontractors' cash flows.
The Amendment Act also inserts section 17A, which permits a claimant to withdraw its adjudication application at any time before an adjudicator is appointed or, if an adjudicator has been appointed, before the application is determined. Further, the Amendment Act omits the wording in section 21(3)(a) and instead extends the time frame for the adjudicator to make an adjudication decision to 10 business days after the respondent lodges an adjudication response, rather than 10 business days after the adjudicator notifies the claimant and the respondent as to his or her acceptance of the application.
Additionally, the Amendment Act inserts section 32A, which gives the Supreme Court the power, where appropriate, to set aside the whole or any part of the determination of an adjudicator’s determination that is affected by jurisdictional error.
These reforms partially adopt recommendations 42 (time frame for adjudicator decisions) 54-56 (withdrawal of adjudication application) and 57 (severance of jurisdictional errors) of the Murray Review.(5) Emphasis on investigation and enforcement
The Amendment Act inserts Part 3A (investigation and enforcement powers) to provide an investigation and enforcement framework to be administered by Fair Trading. Authorised officers are given new powers to investigate, monitor and enforce compliance with the Act, including powers of entry and to make examinations and inquiries. Additionally, the Amendment Act inserts section 28A, which provides the Minister with the power to create an enforceable code of practice for Authorised Nominating Authorities (ANA).(6) Increasing penalty units for certain offences
The Amendment Act and its Amendment Regulations increase penalty units for certain offences. One example is section 13(7), whereby the penalty for a corporation that fails to provide a supporting statement when serving a payment claim has increased from 200 penalty units (200 x $110 = $22,000) to 1,000 penalty units (1,000 x $110 = $110,000). A second example is section 26A(5), whereby the penalty for a corporation failing to give notice to the claimant within 10 business days after a payment withholding request has increased from 5 penalty units (5 x $110 = $550) to 50 penalty units (50 x $110 = $5,500).
The Impact on You
Given the changes will affect contracts entered on and after 21 October 2019, participants have limited time to consider the amendments and to prepare themselves from an administrative perspective.
For head contractors, it is important to amend subcontracts to cater for the shortened time to make payment to subcontractors (reduced from 30 business days to 20 business days after the payment claim is received). This shortened payment period should be reflected in head contractor funding arrangements and synchronised to upstream payment procedures to reduce gaps in claim timings and ensure payments can be made to subcontractors within the mandatory 20 business days. Particular care should be taken in respect of projects where subcontracts will be let progressively both before and after 21 October 2019, as different payment durations will apply to pre and post 21 October 2019 dated subcontracts.
For parties claiming payment, payment claims will need to include the required endorsement that they are made under the Act.
The Amendment Act provides greater protection to subcontractors and adopts some of the Murray Review recommendations. If you are interested in the topic, require legal advice on construction law or simply want to know more about how the changes will affect you, do not hesitate to contact us to discuss your issues.
Thank you to Robert Pichersky for his assistance in preparing the alert.
1 Finance Services & Innovation, Security of Payment Reforms - Implementation, December 2018.
2 John Murray AM, Review of Security of Payment Laws, December 2017.
3 Bruce Collins QC, Independent Inquiry into Construction Industry Insolvency in NSW, November 2012, pp. 74.