Security of payment – NSW

Security of payment

Application of the New South Wales (NSW) SOP Act and Regulations

The Building and Construction Industry Security of Payment Act 1999 (NSW) came into operation on 5 October 1999 (the NSW Act) and was updated in October 2019. It applies to almost all contracts for construction work in New South Wales entered into after that date. The NSW Act now also applies to construction work on owner-occupier residential construction projects.

This legislation and regulations have since been updated in 2020 and again in 2021. New regulations affecting various parts of the NSW Act took effect from 1 September 2020 (the Miscellaneous Changes). Schedule 2 of these regulations took effect from 1 March 2021 (the Homeowner Changes). The Homeowner Changes introduce important consequences for owners and contractors on all residential building in NSW where the owner occupies or plans to occupy the home at the end of the project ('homeowner projects'). These changes also impact the ABIC Simple Works H NSW contract.

The Miscellaneous Changes and the Homeowner Changes will only apply to those contracts entered into after their respective commencement dates. 

Understanding the definition of construction work and construction-related goods and services is the single most important element in determining whether the NSW Act applies to the contract. Both these terms are broadly defined under the NSW Act and apply to a number of categories.

From 1 March 2021, these concepts also extend to owner-occupier (‘homeowner’) construction contracts for residential building work where the client/owner resides or proposes to reside in the premises. Typically, this includes a homeowner who engages a contractor to build their home.

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Main purpose of the NSW Act

The NSW Act entitles contractors to make progress claims and establishes a procedure that requires:

• contractors to make progress claims to owners
• owners to provide payment schedules to contractors (if the progress claim is not accepted in full)
• referral of disputed or unpaid progress payments to an independent adjudicator
• payment of progress claims decided by the adjudicator.

The NSW Act also gives protections to contractors such as:

• a right to make regular payment claims
• maximum payment periods (15 days for owners to the head contractor; 20 business days for head contractors to subcontractors)
• a right to suspend work in the event of non-payment
• prohibiting (and making void) ‘pay when paid’ clauses.

The NSW Act does not apply to:

• a construction contract that forms part of a loan agreement, a guarantee or an insurance contract (sometimes called a ‘tripartite’ agreement or deed)
• a construction contract where payment is to be calculated otherwise than by reference to the value of the work carried out
• construction work carried out, or construction-related goods or services supplied, outside of NSW.

For the reasons outlined below, you should be prepared for a possible claim before it arises. Your client, as the owner under the building contract and the party who receives a SOP claim, also needs to understand what might be expected of them.

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Parties should seek legal advice

This note provides an overview of the NSW Act and is not a substitute for legal advice. If the owner receives a SOP claim, we recommend that you advise the owner to promptly consult their legal adviser because:

• the time limits for the owner to comply and respond to SOP claims are tight
• the procedures are complex and certain formalities must be observed to protect the owner's rights
• developing case law will progressively clarify some uncertainties in the legislation and uncover others.

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How is the NSW Act invoked?

The NSW Act is invoked by the contractor making a 'payment claim' on the owner—this is a clear right under the NSW Act, but the contractor must meet the requirements and timing set out in the NSW Act. The contractor can make a payment claim for:

• a payment linked to an event or date (‘milestone’ or ‘progress’ payment)
• a single or one-off payment
• the final payment

under a contract for construction work or the supply of construction goods or services.

The choice whether to submit a claim as a SOP claim under the NSW Act is at the discretion of the contractor. Refer Acumen note Security of Payment for further information. Critically, if the contractor does intend to claim a progress payment under the NSW Act, the claim must be sent to (’served’ on) the party that is liable to pay the claim, if it is due under the contract. The party who needs to receive the SOP progress claim is typically the client/owner under the construction contract. SOP claims may also be sent to a superintendent or the architect administering the contract and who has the authority to be the client’s agent to receive SOP payment claims.

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Valid payment claims and timing

To be valid under the NSW Act a payment claim must identify and include the following things:

• The specific construction work the contractor has done, services performed or the materials supplied, which is the basis of the claim under the contract.
• The amount of the payment that is being claimed.
• That the claim is made under the NSW Act.

It is no longer necessary for the contractor to state any specific words on the claim itself, other than to say that it is a claim made under the Building and Construction Industry Security of Payment Regulation 2020 (NSW).

If the head contractor is making an SOP payment claim on the owner, the claim must be accompanied by a ‘supporting statement’ that includes various declarations that must be made. The form of supporting statement is approved and published by NSW Fair Trading.

The contract can submit one SOP payment claim monthly for work done in that month (unless the construction contract allows otherwise). The SOP claim must be sent on and after:

• the specified date in a given month stated in the construction contract—and if no date is stated, then
• the last day of that month in which the construction work or related goods and services were performed.

A contractor cannot submit more than one SOP payment claim in a given month, but is allowed to submit an SOP payment claim that relates to work done (or related goods and services performed) in more than one previous month. If so, the claim must still identify the work done, the months and the amounts claimed for previous months.

Some construction or supply contracts specify time limits that the contract must submit a claim by (sometimes referred to as ‘time bars’). The NSW Act complements such time limits and a contractor has a maximum of 12 months after the work was done or goods and services supplied to submit an SOP payment claim. This means that a contractor cannot submit an SOP payment claim after the date that is the later of:

• the period of time specified in the contract
• 12 months after the construction work (or supply of goods and services) was last carried out.

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How does the owner respond to a payment claim?

After receiving a payment claim, the owner may reply to the claim by providing a payment schedule. As best practice, the owner should issue a payment schedule even if paying the full amount of the payment claim. The owner’s payment schedule must:

• identify the payment claim it is replying to
• indicate the amount (if any) that the owner agrees to pay (the scheduled amount)
• if the scheduled amount is less than the claimed amount, indicate why this is the case and
• give the reason or reasons for not paying the disputed amount.

The owner has the time set out in the contract, or 10 business days (whichever is sooner) to reply to the SOP payment claim. The 10 business days is calculated from the date the SOP payment claim is served.

So that the owner is able to take into account the architect's certification of the claim while issuing the payment schedule to the contractor within time, the architect, at the latest, should give the owner the progress certificate within eight business days after receipt of a claim. The owner is responsible under the NSW Act to give the payment schedule to the contractor.

If the owner does not give the payment schedule to the contractor within time, the NSW Act imposes significant penalties on the owner and the owner becomes liable to pay the contractor’s payment claim in full. This is discussed below under Consequences of failure to follow the procedure.

The owner cannot rely on a ‘pay-when-paid’ condition or provision in a contract. Such provisions are made invalid by the NSW Act. The NSW Act also makes invalid any contractual provisions which make the due date for a payment dependent on the operation of another contract or the payment by another party.

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Date for payment

If the owner accepts the full amount of the contractor’s SOP payment claim, then this is generally a simple matter of paying the claim in full before the due date for payment under the contract. As best practice, the owner should issue a payment schedule even if paying the full amount of the payment claim. 

If the owner agrees with the full amount of the payment claim, or fails to serve a valid payment schedule on the contractor within time for a disputed amount, the payment claim becomes payable:

• [for head contractor claims only other than exempt residential construction contracts] 15 business days after a payment claim is made, or an earlier date as set out in the contract
• [for subcontractor claims only other than exempt residential construction contracts] 20 business days after a payment claim is made, or an earlier date as set out in the contract.

The time for payment is determined differently for a SOP payment claim made on a homeowner project under an owner-occupier construction contract (homeowner contract). An SOP payment claim submitted under a homeowner contract becomes payable in accordance with the procedures and timeframe set out in the homeowner contract. Only if the homeowner contract is silent on the procedures for and the due date for payment, then the payment claim becomes payable within 10 business days after the payment claim is made.

The owner is liable to pay interest on late payments. The rate payable on the unpaid amount of the payment claim from the due date is the rate set out in the contract, or alternatively, if the amount is recovered by court proceedings, the rate specified by the court with jurisdiction (whichever rate is higher).

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Consequences of failure to follow the procedure

The NSW Act makes the owner liable to pay all of the unpaid balance of a payment claim, if the owner:

• does not provide a payment schedule and does not pay the whole amount on or before the due date for the progress payment (see Date for payment above); or
• does not provide a payment schedule within the required time (10 business days under the NSW Act or any lesser time under the contract) and does not pay the whole amount on or before the due date for the progress payment (see Date for payment above); or
• having given a payment schedule stating it intends to pay the scheduled amount, then does not pay the scheduled amount within the time set out under the contract or the Act, whichever is earlier.

The contractor can exercise a lien over any unfixed plant or materials owned by the owner and supplied for the construction work. A lien is a legal claim over things (plant, materials, documentation) which is, in effect, a right to hold those things as security to secure payment.

The contractor can bring a court action for all of the unpaid amount of a payment claim or suspend the work and apply for adjudication.

If the contractor brings a court action to recover the unpaid amount where the owner has not followed procedure, the amount claimed is recoverable as a debt due to the contractor. The court cannot reconsider whether the claim or the amount of the claim was justified, and take into account any set off or counterclaim or other defences otherwise available to the owner under the contract. In other words, the court cannot review whether the debt was due.

In the circumstances described above, where the owner fails to comply with their obligations, the contractor is also entitled to serve a notice of intention to suspend work. The notice to suspend work must be given in accordance with the NSW Act. The contractor can then suspend work two business days after serving the notice, if the payment claim is not paid or not paid in full. The contractor has up to three days after being paid by the owner to return to work without being liable for loss or damage caused by the suspension.

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Subcontractor claims

A subcontractor can make a claim under the NSW Act to the contractor.

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Frequency of claims and modifying the claim schedule

The architect should follow the requirements of the Act and contract in assessing and responding to each and every progress claim, irrespective of when they are received by the architect. The architect should be mindful that if progress claims are submitted at the wrong time by the contractor, this could lead to that progress claim being invalid for the purposes of the contract, the Act, or both.

The architect should not agree to accept progress claims at longer or shorter intervals than stipulated in the contract, or agree to irregular dates in any one month for submission of progress claims.

Because the Act does not remove rights under the contract, the architect could be obliged to carry out duplicated or more frequent assessments and certifications (both under the NSW Act and the contract). As some contractors consider that putting the architect under pressure is to their advantage, some contractors might seek to bring this situation about.

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Recent amendments to the NSW Act

The Building and Construction Industry Security of Payment Amendment Regulation 2020

Architects should be aware of relevant changes to the 2020 Regulations which include:

• introducing trust retention and record-keeping obligations for contracts above the threshold (only applicable if the head contract value is greater than $20 million)
• a clarification that supporting statements from the head contractor, which must include the required declarations, relate only to the subcontractors or suppliers directly engaged by the head contractor
• provisions regarding the qualifications the adjudicator must hold and eligibility requirements
• specifying the offences with respect to retention money trust accounts as executive liability offences, and
• specifying the offences under the Act and Regulation for which penalty notices may be issued and the amount of the penalty payable.

The above changes only apply to contracts entered into after 1 September 2020.

The following significant changes only apply to contracts entered into after 1 March 2021:

• The SOP payment claim entitlement, procedures and timelines in the Act now apply to owner occupier (homeowner) construction contracts.
• Progress payments under an owner occupier (homeowner) construction contract become due and payable on the date in accordance with the contract (and if the contract is silent on this, then 10 business days).

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Summary

The provisions of the NSW Act are complex and there are still questions over the procedures set down. Now that the NSW SOP procedures apply to homeowner construction contracts, there may follow an increase in residential builders invoking the NSW Act when making payment claims and an increase in payment claim issues and disputes. It is now more important that owners enter into well-drafted residential homeowner construction contracts that deal with payment claim entitlement, assessment and related procedures and timings which are clearly expressed in the contract, rather than the ‘defaults’ under the NSW Act which are stricter and may be less favourable to the owner.

Architects should remember that the obligations under the NSW Act are on the owner. The architect's role is to assist the owner in meeting those obligations, but not to advise about specific procedures where this could amount to providing legal advice.

Owners should obtain their own legal advice if faced with a claim under the NSW Act and architects should recommend that the owner gets urgent legal advice.

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Adjudication of disputes

Under SOP legislation, adjudication is the process for the resolution of a dispute relating to the payment of a claim. Such disputes include a failure to pay, and differences in the amounts claimed and the amount paid or to be paid.

The contractor can apply to have a payment claim adjudicated where the owner:

• does not provide the payment schedule within the required time (10 business days or earlier if stated in the contract) and then does not pay all of the payment claim on or before the due date
• provides a payment schedule but not for the full amount of the payment claim; or
• having given a payment schedule stating it intends to pay, then does not pay the amount on the payment schedule within the time set out under the contract.

In the first situation above, before making the adjudication application, the contractor has to give the owner a further notice within 20 business days after the due date for payment (the Further Notice). The Further Notice must advise the owner of the contractor's intention to apply for adjudication. The contractor must then give the owner a further opportunity to prepare a payment schedule by allowing the owner five business days after receiving the Further Notice to provide the contractor with a payment schedule.

A contractor may withdraw an adjudication application at any time before an adjudicator is appointed, or before the adjudication dispute is decided by the adjudicator.

The contractor's application must be made within the following times in writing to an authorised adjudicator chosen by the contractor:

• if there is a further notice, within 10 business days after the five-business-day period granted to the owner in the further notice
• if the payment schedule is for a lesser amount than the payment claim, within 10 business days after receiving the schedule
• if having provided a payment schedule, the owner does not pay all or part of the amount stated on it within time, within 20 business days after the due date for payment.

When the contractor applies for appointment of an adjudicator, the owner has no say in who the adjudicator will be.

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Response to adjudication

Once an adjudicator has been appointed, the owner has to give the adjudicator and the contractor an adjudication response in writing to the contractor's application (response) within the later of:

• five business days after receiving a copy of the application; or
• two business days after the adjudicator accepts the application.

The response must be in writing and refer to the application and include submissions about the reasons why all or part of the payment claim is not payable. However, the owner can only submit a response to the adjudication application if the owner has submitted a payment schedule to the contractor within the original time, or under the further notice provisions. The adjudication response cannot include any reasons for withholding payment unless they were included in the payment schedule provided.

If the owner did not submit a payment schedule within time, the contractor is entitled under the Act to payment of the payment claim in full.

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Adjudicator's decision

The adjudicator has to make a decision as soon as possible but cannot make a decision before the time required for the owner's response.

The adjudicator must make a determination:

• if the owner is entitled to lodge a response, within 10 business days of the earlier of the date the owner provides a response or the end of the timeframe to provide a response
• if the owner is not entitled to lodge a response, within 10 business days after the adjudicator accepted the application; or
• within such further time as the parties may agree.

The adjudicator can ask the parties for further written submissions, call a conference of the parties (without lawyers being present) and inspect the site before making the decision. In making its determination, the adjudicator can only consider:

• the provisions of the NSW Act
• the provisions of the construction contract
• the payment claim
• the payment schedule
• the response
• any submissions
• the results of any inspection of the site.

The adjudicator can decide the sum of a progress claim, when it should be paid and the rate of interest payable on the claim (the rate that is current as at the date of this note, is set out under the heading 'Date for payment'). The adjudicator's decision has to be in writing and include reasons (unless the parties agree otherwise).

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Consequences of the adjudicator's decision

Where an adjudicator has determined a value of construction work or related goods and services, where there is a further adjudication a subsequent adjudicator must arrive at the same valuation unless the contractor or the owner can establish that the value of the work has changed since the previous determination.

The adjudicator's decision determines the parties' interim payment entitlements and cannot be reviewed by a court unless the adjudicator has made certain reviewable errors of law.

The owner must pay the contractor the adjudicated amount within five business days after the owner receives the adjudicator's decision or by such other date that the adjudicator decides. The owner cannot give the contractor security for the adjudicated amount instead of payment.

If the owner does not pay the adjudicated amount, the contractor can apply to the authorised nominating authority for an adjudication certificate. The contractor can then apply to enforce the adjudication certificate in a court as a judgment debt. The owner cannot in any such court action apply to set aside the judgment debt.

The contractor can additionally serve notice of the contractor's intention to suspend the works if the owner does not pay the adjudicated amount on time. The contractor will need to give the owner at least two business days’ notice of their intention to do so.

The notice must be in writing, be given to the owner and state that the notice is made under the Act.

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Adjudication and settling disputes under the contract

Other than taking court action, of concern to architects administering the contract is how the adjudication affects the contract's dispute resolution procedures, if at all.

A contractor is likely to favour using the adjudication process under the NSW Act because it is conducted relatively quickly. Unfortunately, the costs of adjudication are not as low as they once were.

Because the adjudication only decides the parties’ interim payment entitlements, a different final result may be achieved through final dispute resolution. You should recommend that your client obtains legal advice in relation to disputes under the contract and under the NSW Act.

However, amounts to be paid to the contractor as determined by adjudication are, when paid, advances toward the contract price (as adjusted). In other words, the adjudication process is not intended to undermine the bargain the parties have struck when entering into the contract. Even so, it is conceivable that the cost of variations and other adjustments may be determined by the adjudication process even though the determination differs from the architect's assessment (which must still occur under the contractual obligations between the parties).

In order to finally determine the rights of the owner and contractor, it is possible for the owner to start the dispute-resolution procedures under the contract, which may lead to a court action. These processes are not affected by the NSW Act. If the contractor has applied for an adjudication in the meantime, the contractor may arrive at court having already been paid (but being ordered to pay some of that money back).

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Related courses - Available via Online CPD

• Update: Security of Payment - NSW