The Building and Construction Industry Security of Payment Act 1999 - or, as most people call it, the 'Security of Payment Act', is NSW-specific legislation that is intended to reduce the incidence of insolvency in the construction industry.
It does this by:
All States and Territories in Australia now have security of payment legislation. However there are differences from State-to-State. This page only relates to the NSW Security of Payment Act. You can read about security of payment in other jurisdictions here.
Section 7 explains who is covered. Broadly, most commercial construction contracts will be caught by the legislation. Residential building work is excluded where the principal resides in, or proposes to reside in, the premises where the work is performed.
The main protections given to contractors under the NSW Security of Payment Act are:
The legislation also contains a mechanism, involving a 'payment withholding request', that allows a subcontractor to obtain payment direct from a head contractor's client where an adjudication application is made.
The process for recovering payment under the NSW Security of Payment Act starts with the contractor making a payment claim. Click here if you'd like to learn more about how to make a payment claim in NSW.
Although previously a payment claim had to identify itself as being made under the Act, that is no longer the case. Where the claim is made by a head contractor, it must be accompanied by a 'supporting statement'. (You can find the template here.)
A payment claim cannot be made under the NSW Security of Payment Act without an available ‘reference date’ – being a date fixed by the contract or the legislation as a date for making payment claims. Only one claim can be made in respect of each reference date.
Once a payment claim has been made, the principal (or head contractor) only has 10 business days to respond, unless the contract prescribes a shorter period. This response must be in writing and is called a ‘payment schedule’. If you'd like to learn more about how to respond to a payment claim, click here.
If the principal or head contractor fails to provide a payment schedule within the required timeframe, it will be liable for the entire amount of the claim. The contractor can then recover this amount as a debt in court.
If the principal issues a payment schedule but the contractor disagrees with the assessment, the contractor can make an ‘adjudication application’. We explain this further below.
Adjudication is a streamlined process that allows a contractor to recover a disputed or unpaid progress payment. The dispute is determined by an independent adjudicator.
The adjudicator is not a judge (and is often not a lawyer), and is appointed by an independent ‘nominating authority’. You can find a list of nominating authorities in NSW here.
The adjudication application is a written document that must be sent to the nominating authority within a fixed period – usually 10 business days from the date the payment schedule is served on the principal or head contractor. The exact timeframe will depend on the circumstances. (You can find the relevant part of the legislation here.)
Any response to an adjudication application must be made within 5 business days of receiving the application, or 2 business days after receiving notice of the adjudicator having accepted their appointment, whichever is longer. This is often an exceptionally short timeframe.
Critically, the respondent is not entitled to include in its adjudication response any reasons for withholding payment that were not included in its payment schedule.
Once the time for a response has lapsed, the adjudicator is required to determine the application. Typically, this is done by reference to the application and the response, with neither party having any right to appear before the adjudicator. It is not uncommon for the adjudicator to seek further submissions from the parties.
Adjudication determinations under the Security of Payment Act are usually issued within 10 business days of the date the adjudication response was required (although extensions are often sought by the adjudicator and approved by the parties).
Once an adjudication determination has been made, the respondent must pay the ‘adjudicated amount'. If it does not:
If the judgment debt is not paid, the contractor can then commence debt recovery proceedings.
The entry and enforcement of an adjudication certificate can have negative implications for the respondent’s credit rating and, if it is a head contractor, its ability to secure future work. This is because some principals and government bodies will take this type of behaviour into account when awarding tenders.
If the principal is insolvent, an adjudication determination may not be worth much unless it can be enforced against another party.
In NSW, the Act allows subcontractors to issue a ‘payment withholding’ request to principals. In broad terms, the mechanism works as follows:
The parties to an adjudication must each bear their own costs. That is, you will not be able to recover any costs you incur in preparing or responding to an adjudication application from the other side.
If you are the claimant, you will need to pay the adjudicator’s costs before he or she releases a determination. If you are successful, the adjudicator will normally allow you to recover most or all of those costs from the other side. Those costs form part of the adjudication certificate if they are not immediately paid by the respondent.
Yes, however the circumstances in which they can be appealed are extremely limited.
The mere fact that an adjudicator makes a mistake is not a sufficient reason for a determination to be set aside. In NSW and South Australia (and potentially other jurisdictions as well), this is the case even where the adjudicator has incorrectly interpreted and applied the terms of the contract.
To be able to set aside a determination, the respondent will generally prove some form of ‘jurisdictional error’. A jurisdictional error is an error that involves the adjudicator having acted outside the scope of his or her authority. For example, by:
You can read more about this here.
Any payment made under the NSW Security of Payment Act is an interim payment only.
If the contractor recovers more under the security of payment legislation than it would be entitled to receive under the contract, the principal (or head contractor) will have a contractual right to recover the difference.
This interim nature of the payment is reflected in the name of the legislation. Also, when the legislation was originally passed, respondents had the option to pay the adjudicated amount into court pending the final determination of the dispute. Unless there are exceptional circumstances (potentially including the insolvency of the claimant), that is no longer the case.