Introduction
The Building and Construction Industry Security of Payment Act 1999 (NSW) (‘SOP Act’) aimed to introduce a new system of dispute resolution in the construction industry which ensured that payments were made promptly and that those liable to make payments could not manufacture reasons for not making payments or delay the making of payments. This, in turn, aimed to reduce the risk of insolvency in an industry where cash flow is vital to the continued survival and stability of businesses.
The object of the SOP Act is to ensure ‘any person who undertakes to carry out construction work (or who undertakes to supply related goods and services) under a construction contract is entitled to receive, and is able to recover, progress payments’: SOP Act s 3.
A copy of the SOP Act can be found here.
Other jurisdictions have similar legislation. At Valorum Law Group, we have experience in security of payment legislation across jurisdictions and can assist with clear and sound advice on your matters.
Application of the Security of Payment Scheme
The SOP Act applies to all construction contracts where a person has undertaken to carry out construction work or to supply related goods and services. The SOP Act covers all such contracts and does not allow ‘contracting out’ of the operation of the SOP Act: SOP Act s 34.
Since 2021, the SOP Act now applies to residential construction contracts i.e. building or renovations of residential homes, as well as commercial construction contracts.
Progress Payments and Payment Claims
The SOP Act enshrines a right for a person who undertakes to carry out construction work or to supply related goods and services under a construction contract to receive progress payments, whether or not such a right is provided under the construction contract: SOP Act s 8.
To receive a progress payment, a payment claim under the SOP Act must be provided. Payment claims are usually served on 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 and on and from the last day of each subsequent named month, or as provided in the contract: SOP Act s 13(1A)-(1B).
Payment claims must identify the construction work or related goods and services to which the payment claim relates, must indicate the amount that the claimant believes to be due (Claimed Amount), and must state that it is made under the SOP Act: SOP Act s 13(2).
Under SOP Act s 11, the due dates for payment of progress payments are generally the dates specified in the construction contract or the following dates, whichever is earlier:
- Payments from principals to head contractors must be made within 15 business days after a payment claim is made (other than for ‘exempt residential construction contracts’)
- Payments to subcontractors must be made within 20 business days after a payment claim is made (other than for ‘exempt residential construction contracts’)
- Payments which are made under ‘exempt residential construction contracts’ must be made within 10 business days after a payment claim is made
Payment Schedules
After a payment claim is served, the respondent to the payment claim may reply to the payment claim by providing a payment schedule disputing the Claimed Amount and providing that the amount due is less than the Claimed Amount: SOP Act s 14(1). A payment schedule must be provided within 10 business days after the payment claim is served or in accordance with the contract: SOP Act s 14(4).
Payment schedules must identify the payment claim to which it relates and must indicate the amount of the payment (if any) the respondent proposes to make (Scheduled Amount): SOP Act s 14(2).
If the respondent does not provide a payment schedule within the required time, the respondent becomes liable to pay the full Claimed Amount: SOP Act s 14(4).
If the respondent provides a payment schedule in accordance with the SOP Act s 14, and the claimant does not object to the Scheduled Amount, the respondent must pay the Scheduled Amount before the due date under the payment claim: SOP Act s 16(1).
In either case, if payment does not occur in full, the claimant may recover the unpaid amount as a debt in judicial proceedings or may commence adjudication, and may also serve a notice of their intention to suspend the carrying out of the work: SOP Act ss 15(2), 16(2).
Adjudication Applications and Responses
Adjudication is the primary dispute resolution mechanism under the SOP Act. It aims to resolve payment disputes in a more efficient manner and at reduced cost compared to judicial proceedings.
Under SOP Act s 17(1), there are three circumstances where a claimant can apply for adjudication:
- The respondent provides a payment schedule but the Scheduled Amount in the payment schedule is less than the Claimed Amount in the payment claim
- The respondent provides a payment schedule but the respondent fails to pay the whole or part of the Scheduled Amount in the payment schedule by the due date for payment
- The respondent does not provide a payment schedule and the respondent fails to pay the whole or part of the Claimed Amount in the payment claim by the due date for payment
In Circumstance 1, the adjudication application must be filed by the claimant within 10 business days after the claimant receives the payment schedule: SOP Act s 17(3)(c).
In Circumstance 2, the adjudication application must be filed by the claimant within 20 business days after the due date for payment: SOP Act s 17(3)(d).
In Circumstance 3, an adjudication application can only be filed if the claimant serves a “s 17(2) notice” stating their intent to apply for adjudication and providing an opportunity to the respondent to provide a payment schedule within 5 business days of the notice. After such notice has been provided, the claimant may file an adjudication application within 10 business days after the period given to the respondent in the s 17(2) notice to provide a payment schedule: SOP Act s 17(3)(e).
After filing the adjudication application, the claimant must serve a copy of the application on the respondent: SOP Act s 17(5). The respondent may then lodge an adjudication response within 5 business days of service of the adjudication application or within 2 business days of the appointment of an adjudicator’s acceptance of the application, whichever is later: SOP Act s 20(1).
Payment Withholding Requests
“Payment withholding requests” can be made by subcontractor claimants who have made an adjudication application to ensure that principals retain sufficient money to cover the claim out of money that is or becomes payable to the head contractor: SOP Act s 26A. This allows the subcontractor to be paid directly by the principal from any money the principal is due to pay the head contractor if the adjudicator makes a determination in favour of the subcontractor.
Adjudicator’s Determination
The adjudicator will determine the amount of the progress payment to be paid, the date on which such amount became or becomes payable and the rate of interest on the amount: SOP Act s 22(1).
If the adjudicator determines that the respondent is required to pay an amount, the respondent must pay that amount to the claimant within 5 business days after the date on which the determination was served on the respondent, or a later date determined by the adjudicator: SOP Act s 23.
If the respondent fails to pay the whole or part of the adjudicated amount, the claimant can request the adjudicator provide an adjudication certificate: SOP Act s 24(1)(a). This allows the claimant to file the adjudication certificate as a judgment for debt in a competent court: SOP Act s 25. In addition, the claimant can serve a notice of their intention to suspend the carrying out of work: SOP Act s 24(1)(b).
How We Can Help
At Valorum Law Group, we understand that security of payment processes are complicated and often difficult to understand. We can help you to understand the different security of payment processes, each with their own unique technicalities and formalities, across different jurisdictions and can provide time-sensitive and commercial advice for your disputes or everyday business.
If you have any queries, please do not hesitate to contact us at admin@valorumlaw.com.au or voregan@valorumlaw.com.au. Our expert construction lawyers will be on hand to assist you.
The information contained in this article is general information only and not legal advice. The currency, accuracy and completeness of this article (and its contents) should be checked by obtaining independent legal advice before you take any action or otherwise rely upon its contents in any way.
Contributors: Harry Chen
