Changes to the security of payments act

The Nexus Law Group details changes to the Building and Construction Security of Payment Act 1999 (SOP Act or the NSW Act) and explains how it can be a powerful tool for construction industry stakeholders to achieve a swift interim determination of payment disputes.

Understanding and being able to use the SOP Act can assist businesses in recovering delinquent payments.

Familiarity with the key concepts of the SOP Act and recent amendments to the legislation is crucial when making and responding to payment claims under the legislation.

Managing cashflow is key

When introducing legislation that amended the SOP Act to the NSW Parliament in 2002, the (then) Minister for Public Works and Services, Hon. M Lemma identified that cashflow was the lifeblood of the construction industry and that the final determination of disputes were both costly and being held up in lengthy court proceedings.

Accordingly, the Act set up a system by which there is:

• A statutory right to make monthly payment claims

• A mechanism for a quick paper-based adjudication of payment claims in dispute

• A means to enforce an adjudicator’s determination in Court as a Debt Due and Payable

• A means to take enforcement steps receive payment.

Know your payment schedule deadlines

The current version of SOP Act contains strict deadlines which include the following:

1. A Payment Schedule (responding to a Payment Claim) must be issued within 10 business days from receipt of the Payment Claim

2. An Adjudication Application is due within 10 business days from receipt of the Payment Schedule

3. An Adjudication Response is due by the later of: a) five business days after receipt of the Adjudication Application, or b) two business days after receiving the Adjudicator’s notice of Acceptance of the Application.

Missing a deadline in the SOP Act can be detrimental to an application or response.

Who Can Utilise the SOP Act?

In construction, the SOP Act payment claim recovery processes can be used by:

1. Head Contractors

2. Sub-Contractors

3. Architects, designers, surveyors, quantity surveyors

4. Advisory services for building, engineering, landscaping

5. Suppliers of materials and components (that form part of any building, structure or work arising from construction work) or plant or materials sold or hired for use in connection with the carrying out of construction work.

Differences in contracts dated pre or post 21 October 2019

An amendment to the SOP Act, operating from 21 October 2019, has resulted in different versions of the Act applying depending upon the date the construction contract was entered into.

Some of the changes which were introduced are as follows:

First is the ability to make one more payment claim after contract termination.

Prior to the amendment of the Act in 2019, High Court authority effectively prohibited a payment claim from being made after a contract was terminated.

For construction contracts entered into from 21 October 2019, there is now the ability to make one more payment claim after termination of the contract.

The second change is to trust account requirements for retention monies.

Where construction contracts provide for cash retention monies to be held and a construction project has a value of at least $20 million, the Act requires retention monies to be held in a trust account.

Separate ledgers must be kept for the retention monies for each subcontractor, recording details of the amounts deposited, the date of each transaction and the balance after each transaction.

Under the 21 October 2019 amendment to the Act, the regulations may now enable subcontractors to inspect the records kept in connection with the retention money trust account.

Accordingly, the regulations require subcontractors to be provided with the trust account ledger at least once every six months.

Third is the return of the requirement that a payment claim identify it is made under the Act.

For contracts dated from 21 October 2019, all payment claims must now state on the payment claim that the claim is made under the Act. This has been seen as a welcome reform where there was considerable confusion in the industry in some cases as to exactly what communications were required on a payment claim.

It was a significant problem because only one payment claim is permitted per month (or other intervals as specified in a contract) and quite technical arguments could be mounted to assert invalidity of certain payment claims on the basis that multiple payment claims had been issued.

The fourth point that has been changed revolves around claimants in liquidation.

The amendment to the Act removes the ability of a corporation in liquidation to serve a payment claim or to take any action to enforce a payment claim.

Important amendments to look out for

While the Act is a powerful tool to obtain progress payments in the event of a dispute, it is also highly technical area.

Mistakes can be made in terms of not getting the payment claim, or payment schedule responding to a payment claim, correct. Doing this or missing key deadlines can be detrimental.

Some mistakes include:

1. Failure to comply with the strict deadlines in the act such as for Payment Claims;

2. Not endorsing Payment Claims with a statement that the Act applies to the claim;

3. Not adequately describing the works or quantifying the claim;

4. Making multiple payment claims for the one entitlement date for Payment Schedules;

5. Not clearly articulating the reasons for withholding money claimed;

6. Not clearly detailing the payment which is proposed in response to the payment claim.

Given the technicalities involved we recommend construction industry stakeholders consider obtaining legal advice for important payment claims and consider regular training of contract administration staff to ensure they understand and comply with the provisions of the Act.

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