The recent Supreme Court decision of Broadview Windows Pty Ltd v Architectural Project Specialists Pty Ltd [2015] NSWSC 955 again demonstrates the contrast between the security of payment statutory regime for the accrual of reference dates and the corresponding rights under a typical contract, and the consequences for builders and developers alike.

Broadview Windows concerned whether the claimant had made more than one payment claim in respect of the same reference date, which is prohibited under section 13(5) of the Building and Construction Industry Security of Payment Act 1999 (NSW) (Act).

Reference dates

Section 8 of the Act states that a person who has carried out construction work or supplied related goods and services is entitled to a progress payment “on and from each reference date”.

A reference date is to be determined in accordance with the contract as the date on which a progress claim can be made for work carried out or undertaken to be carried out. If the contract does not “make express provision” for a reference date, section 8 of the Act provides that the reference date is the last day of the named month in which construction work was first carried out and the last day of each subsequent month.

Typical contractual regime v statutory regime

In Broadview Windows, the contract was formed by an acceptance of a quote and, unsurprisingly, the contract did not make express provision for a reference date. The reference date was therefore, in accordance with the Act, the last day of each month.

The work under the contract was completed by the end of August 2014. The claimant made two subsequent payment claims on 24 November 2014 and 23 February 2015 and proceeded to adjudication on the second payment claim. The respondent applied to the Court for an order quashing the adjudication determination because it claimed that the second payment claim was in respect of the same reference date (as the first payment claim).

The Court dismissed the respondent’s claim and affirmed the position that, under the statutory regime, reference dates continue to accrue on a monthly basis until 12 months after the construction work to which the claim relates was last carried out (as per section 13(4) of the Act).

Unintended benefits for builders

As we have noted in recent updates, the absence of express reference dates in a construction contract can (and often unintentionally does) have benefits for builders.

1. If a contract is terminated, reference dates continue to accrue under the statutory regime, thereby entitling a builder to make a payment claim after termination and enabling a builder to apply for adjudication if unsatisfied by the principal’s payment schedule. In contrast, contracts rarely expressly state that the accrual of reference dates survives termination and therefore the builder’s right to make further payment claims in accordance with the Act is terminated with the contract.
2. As can be seen in Broadview Windows, the statutory regime entitles the making of a payment claim each month, even where no work has been carried out. The only limitation on this period is the 12 month period after completion of the construction work. Accordingly, a builder can continue to make payment claims (including for the same work) each month, up to a year after work has been completed. Conversely, typically a contract will limit an entitlement to make a payment claim to the months in which work under the contract is being undertaken and a final payment claim (usually at the expiration of any defects liability period).

The recent decisions of the Supreme Court exemplify the need for principals and head contractors to make express provision for reference dates in contracts. Although this usually occurs, Broadview Windows, where the contract was formed by the acceptance of a quote, demonstrates the potential adverse consequences for a principal or head contractor of lax contract documentation.

Head contractors who enter into construction contracts with subcontractors after 1 May 2015 on projects with a value of more than $20 million must hold retention money retained as security in a retention money trust account.

The introduction of retention money trust accounts arises out of the Building and Construction Industry Security of Payment Amendment (Retention Money Trust Account) Regulation 2015 (“Amending Regulation”) published in March 2015.

The Amending Regulation imposes burdensome and costly administrative obligations and reporting requirements on head contractors, which will almost certainly result in the increased use of insurance bonds and bank guarantees as security under construction contracts. Typically, insurance bonds and bank guarantees are the favoured form of security for head contractors, however the introduction of the Amending Regulation is likely to signal the death knell for retention money being used as security under contracts between head contractors and subcontractors.

Scope of the Amending Regulation

The Amending Regulation applies to retention moneys held by a head contractor under its contracts with subcontractors where the value of the contract between the principal and the head contractor exceeds $20 million, ie the “project value”.

If the project value exceeds $20 million during the course of the project, most likely pursuant to variations of the head contract, the Amending Regulation applies to contracts entered into by the head contractor after the date that the project value exceeded $20 million.

Interestingly, notwithstanding the definition of ‘head contractor’ under the Security of Payment Act, the Amending Regulation appears to contemplate that there will only be one head contractor on a construction project.

Retention Money Trust Accounts

The Amending Regulation provides that retention money must be held by the head contractor in a trust account established with an approved deposit-taking institution.

A head contractor is only entitled to withdraw from a trust account if:

1. it is to pay money in accordance with the terms of the construction contract under which the money was retained by the head contractor;
2. as agreed in writing by the head contractor and the subcontractor concerned; or
3. in accordance with an order of a court or tribunal.

Importantly, from the subcontractor’s point of view, the money held in the retention trust account cannot be used to pay any debts of the head contractor and is not liable to be taken as satisfying a judgment debt owed by a head contractor, eg a garnishee order against the trust account.

Administration

The Amending Regulation requires compliance with a number of administrative obligations, by head contractors in particular, including:

1. notifying the Chief Executive of the Office of Finance and Services (“Chief Executive”) when a trust account is opened, becomes overdrawn or is closed;
2. retaining records in relation to a trust money account for three years after the closure of the trust money account;
3. preparing annual account review reports and retention account statements in respect of the trust account; and
4. paying an annual fee of $1,500 to the Chief Executive to review the account review reports and retention account statements.

A failure to comply with the administrative obligations in respect of a retention money trust account, typically, results in a maximum penalty of $22,000.

Implications and Public Policy

The introduction of the Amending Regulation is a response to the inquiry conducted by Bruce Collins QC into contractor insolvencies, which was commissioned by the NSW Government. One of the findings of the Collins Report was that some head contractors were misappropriating retention money and using the retention money, supposedly provided as security by subcontractors, to boost their cash flow.

Inevitably, this had adverse consequences for subcontractors whenever a head contractor encountered financial difficulties and subcontractors were often out of pocket in head contractor insolvencies.

Undoubtedly, with respect to larger projects, the Amending Regulation should achieve the public policy aim of preventing head contractors from misappropriating retention moneys, primarily because very few head contractors will elect to use retention moneys. The Amending Regulation will drive most head contractors to require their subcontractors to use insurance bonds or bank guarantees, thus avoiding the scope of the Amending Regulation.

To the extent that head contractors intend to use retention moneys as security, they should consider whether the Amending Regulation may apply and, if so, they should remain mindful of their obligations to avoid incurring penalties.

The Supreme Court has determined that a payment claim is not validly served in accordance with the Building and Construction Industry Security of Payment Act 1999 (NSW) (“Act”) if it is not accompanied by a supporting statement from a head contractor. The decision in Kitchen Xchange v Formacon Building Services clarifies the effect of non-compliance with one of the amendments to the Act that became operative on 21 April 2014.

A ‘supporting statement’ is essentially a declaration by a head contractor that all subcontractors have been paid all amounts that are due and payable in relation to the construction work the subject of the payment claim.

Section 13(7) of the Act says that a head contractor must not serve a payment claim on the principal unless the payment claim is accompanied by a supporting statement that indicates that it relates to the payment claim.

The Court has determined that, if a supporting statement does not accompany the payment claim, the payment claim may be valid, but, importantly, the payment claim is not validly served in accordance with the Act.

Valid service of a payment claim is an essential requirement for invoking the jurisdiction of the Act and therefore empowering an adjudicator to make a determination on an adjudication application. If a payment claim is not validly served, the adjudicator has no power to make an adjudication determination based on the payment claim and any determination by an adjudicator would be susceptible to being quashed by the Courts.

Contractors should bear this in mind before electing to expend significant time and expense in proceeding down the path of adjudication, only for a Court to render a favourable determination invalid and unenforceable.

Builders are reminded that the amendments to the Act made in April 2014, including the requirement for payment claims to be accompanied by a supporting statement, do not affect construction contracts entered into prior to 21 April 2014.