Due Dates for Payment on Exempt residential construction contracts

The intention of Security of Payment legislation has always been to provide a simple pathway for small contractors to improve cashflow, without the need for legal assistance. However, experience gained as an adjudicator in Queensland , NSW and Victoria since 2014 and over 175 determinations has shown that some of the details of the Act are not always clear to first-time users without proper legal advice.

A case in point is the due date for payment under the NSW Building and Construction Industry Security of Payment Act 1999 (“the Act”). The Act and its accompanying Regulation were amended in 2019 to include claims against residential owner-occupiers regarding contracts formed after 1 March 2021, with a different timeframe for payment applying. What appears to be less well known is that on those projects the same payment terms have applied to subcontractors since the inception of the Act. This is demonstrated in the legislative history summarised in the Appendix below.

Unfortunately, many web sites that provide information on Security of Payment fail to differentiate between subcontractor claims on owner-occupier residential projects and other residential projects, or fail to mention subcontractor claims on owner-occupier residential projects at all. Often, emphasis is placed on a construction contract between the owner-occupier and a builder or an owner-builder and direct subcontractors. However, the different payment timeframes in section 11(1C) the Act apply to any Exempt Residential Construction Contract, which is a wider term that captures subcontractor contracts all the way down the contracting chain.

The outcome now is that both head contractors and subcontractors can be subject to two different timeframes for payment on residential projects, depending on whether or not the person at the top of the contracting chain, for whom the works are being carried out, is an owner occupier who resides or intends to reside on the premises. If the project is an investment or a second residence or a holiday house or multi-unit, then the timeframe is a maximum of 15 business days for the head contractor and 20 business days for a subcontractor, or a lessor period in the contract. But if the project is a single residence for an owner-occupier, the timeframe for both is according to the contract, or 10 business days if the contract is silent.

The problem faced by subcontractors is that, while many standard form residential head contracts ask the owner to nominate if they are intending to occupy the premises, this information does not necessarily pass down the subcontracting chain. It is also not always the case that a head contractor can be sure, as was demonstrated in Cardiacos v Cooper Consulting & Construction Services [2009] NSWSC 938 where the builder’s successful adjudication application was declared void because, despite what the owner had said to the builder, the court accepted that the owner had intended to reside in the dwelling after works were completed.

A subcontractor is even less likely to have a clear view. However, when a subcontractor does not receive a payment schedule in reply to a payment claim and must serve a notice under section 17(2) of the Act after the due date has passed, and within 20 business days of that due date, a clear knowledge of which payment terms are applicable is critical to a valid adjudication application.

How the Act will apply to the construction of private holiday homes, given the current popularity of Airbnb style of arrangements, remains to be seen.

Section 11 of the Act includes three timeframes:

A further subtlety that is often missed on web sites is that the first two categories provide a maximum timeframe, but the timeframe can be less if the contract period is less and section 11(8) of the Act makes any contract period that is longer of no effect. On the other hand, under an Exempt Residential Construction Contract, it is the contract term that takes priority, and there is no maximum. It is only if the contract is silent that 10 business days applies.

The difficulty caused by these dual payment periods is affecting adjudication matters. An adjudicator must determine the due date for payment. If a claimant has relied on advice from certain published web sites, they may have relied on 10 business days for the due date for payment without realising that a longer contract term is valid, or may have thought it was 10 business days merely because it is a residential project.

Where the matter involves a section 17(2) notice, the adjudicator must be satisfied that it was served in time and the application was made in time after that service. If the Adjudication Application does not contain sufficient information for the adjudicator to be satisfied that the contract is an Exempt Residential Construction Contract, it will be necessary to seek further submissions, and the limited timeframes and small value of many of these claims limits the opportunity for parties to get proper legal advice, both before and during the adjudication process.

It must be remembered that the most widespread source of published internet information on Security of Payment is law firms and government departments. Some of the published information is wrong, and some of the published information is incomplete. If the organisations that publish this information can’t get it right, it cannot be expected that a claimant that is expert in their trade and general business procedures but has no legal training or advice will be able to interpret and understand parts of the Act that elude the supposed experts.

The outcome is that in some cases, an adjudicator has no option but to determine that a section 17(2) notice was issued early or too late, or the application was late, making the adjudication application invalid. And that is leaving claimants frustrated because they may have relied on information published by an otherwise trustworthy source that has given them an incorrect expectation.

The first step is for any entity that purports to be an expert on the Act and publishes information on its operation to review that material, and ensure it is not subject to error or omission. However, it remains that the way the Act has sought to differentiate between owner-occupier and other projects might be the source of the problem, given the difficulty for subcontractors down the contracting chain to have clear knowledge of the owner’s intentions.

An appropriate outcome might be for the legislators to consider if the Act would be more able to be applied by parties without legal training or advice if the payment terms were simpler, giving one term for all head contractors and one term for all subcontractors. Or maybe just one term for all, which can be applied without a party needing to consider the intentions of a person at the top of the contracting chain when they have never met that person.

That was the recommendation of the Federal Government report reviewing Security of Payment Laws prepared by John Murray in December 2017, albeit for different reasons. But the outcomes being seen in adjudication matters where claimants are relying on incorrect or inaccurate published information would say that the recommendation for a single payment term should be given further consideration.

APPENDIX – Legislative History

Subcontractors have always been able to claim under the Act, irrespective of the project type or the nature of the head contract. As originally implemented, It was only head contractors who contracted directly with an owner occupier that were excluded, under section 7(2)(b). All contractors were subject to the same payment terms under section 11(1) of the Act, being in accordance with the contract or 2 weeks (later amended to 10 business days) if the contract made no provision.

7. Application of the Act


2. This Act does not apply to:


2. a construction contract for the carrying out of residential building work (within the meaning of the Home Building Act 1989) on such part of any premises as the party for whom the work is carried out resides in or proposes to reside in, or

11. Due date for payment
    
    A progress payment under a construction contract becomes due and payable:


1. on the date on which the payment becomes due and payable in accordance with the terms of the contract, or


2. if the contract makes no express provision with respect to the matter, on the date occurring 2 weeks after a payment claim is made under Part 3 in relation to the payment.

Amendments in 2014 introduced new payment terms in sections 11(1A) and 11(1B) that had a maximum cap and different terms for head contractors and subcontractors. Section 11(1C) referred to “a contract that is connected with an exempt residential construction contract”, which was a new term that referenced the exclusion for residential head contractors with owner occupiers in section 7(2)(b). A new Section 4(2) clarified what was meant by “a contract that is connected with” to be one where the works are a part of or incidental to the works under the exempt residential construction contract. This phrase captured the subcontractors, so their payment terms did not change on these residential owner-occupier projects.

4. Definitions


1. In this Act:
   
   exempt residential construction contract means a construction contract specified in section 7 (2) (b) as a construction contract to which this Act does not apply.


2. A reference in this Act to a contract that is connected with an exempt residential construction contract is a reference to a construction contract to carry out construction work or supply related goods and services as part of or incidental to the work or goods and services carried out or supplied under the exempt residential construction contract.

11. Due date for payment


1. Subject to this section and any other law, a progress payment to be made under a construction contract is payable in accordance with the applicable terms of the contract.
   
   (1A) A progress payment to be made by a principal to a head contractor under a construction contract becomes due and payable on:
   
   
   1. the date occurring 15 business days after a payment claim is made under Part 3 in relation to the payment, except to the extent paragraph (b) applies, or
   
   
   2. an earlier date as provided in accordance with the terms of the contract.
   
   Note—
   
   This Act does not apply to a progress payment to be made by a principal to a head contractor under an exempt residential construction contract. (See section 7 (2) (b).) Subsection (1C) applies to progress payments under a construction contract that is connected with an exempt residential construction contract.
   
   
   (1B) A progress payment to be made to a subcontractor under a construction contract (other than a construction contract that is connected with an exempt residential construction contract) becomes due and payable on:
   
   
   1. the date occurring 30 business days after a payment claim is made under Part 3 in relation to the payment, except to the extent paragraph (b) applies, or
   
   
   2. an earlier date as provided in accordance with the terms of the contract.
   
   (1C) A progress payment to be made under a construction contract that is connected with an exempt residential construction contract becomes due and payable:
   
   
   1. on the date on which the payment becomes due and payable in accordance with the terms of the contract, or
   
   
   2. if the contract makes no express provision with respect to the matter, on the date occurring 10 business days after a payment claim is made under Part 3 in relation to the payment.


8. A provision in a construction contract has no effect to the extent it allows for payment of a progress payment later than the relevant date it becomes due and payable under subsection (1A) or (1B).

Amendments in 2019 used the same phrases, but placed them in slightly different locations. A new term of owner occupier construction contract was introduced, and it used the definition previously attached to exempt residential construction contract which in turn was given a new definition of “a construction contract that is connected with an owner-occupier construction contract” or one prescribed by regulation. In turn, the note under section 11(1A) was removed and section 11(1C) was adjusted to be a reference to a payment under an exempt residential construction contract. Essentially, nothing changed because the payment terms only applied to contracts connected to an owner occupier construction contract, and the Regulation did not prescribe any other contracts, and in fact noted in section 3A that the Act does not apply to owner occupier construction contracts. But the stage had been set for the next change.

4. Definitions


1. In this Act:
   
   exempt residential construction contract means—


1. a construction contract that is connected with an owner occupier construction contract, or


2. any other type of construction contract for the carrying out of residential building work that is prescribed by the regulations for the purposes of this definition.

owner occupier construction contract means a construction contract for the carrying out of residential building work within the meaning of the Home Building Act 1989 on such part of any premises as the party for whom the work is carried out resides or proposes to reside in.

11. Due date for payment

(1C) A progress payment to be made under an exempt residential construction contract becomes due and payable—


1. on the date on which the payment becomes due and payable in accordance with the terms of the contract, or


2. if the contract makes no express provision with respect to the matter, on the date occurring 10 business days after a payment claim is made under Part 3 in relation to the payment.


Building and Construction Industry Security of Payment Regulation 2008

3A Application of Act

For the purposes of section 7(5) of the Act, owner occupier construction contracts are prescribed as a class of construction contracts to which the Act does not apply.

Amendments that took effect from 1 March 2021 relied on a changed Regulation, that removed the exclusion of owner occupier construction contracts from the Act and in turn in regulation 3(1A) made them prescribed under the definition of exempt residential construction contract. In that way, the head contractors became subject to the same payment terms that had always applied to subcontractors on projects where an owner occupier was a party to the highest-level contract on the project.

Building and Construction Industry Security of Payment Regulation 2020


3. Definitions
   
   (1A) For the purposes of paragraph (b) of the definition of exempt residential construction contact in section 4(1) of the Act, an owner occupier construction contract is prescribed.

The broadness of the definition “part of or incidental to” potentially captures situations where an owner-occupier has a head contractor but separately subcontracts minor works such as garden landscaping. Where an owner-occupier is undertaking construction as an owner-builder and engages subcontractors directly, each contracting chain will be comprise contracts that are Exempt Residential Construction Contracts.

The wording that once appeared in the repealed section 7(2)(b) that exempted contracts with owner occupiers from the Act has been mirrored in the current definition of owner occupier construction contract. Therefore, earlier caselaw such as Oppedisano v Micos Aluminium Systems [2012] NSWSC 53 is likely to be applicable, such that where a contract is for works on all parts of a multi-unit residential development on a single site where the owner only intends to live in one unit and have family members in the others, then the contract does not meet the definition of owner-occupier construction contract. The person must intend to live in the entirety of the premises that is the subject of the contract. Also, if the person at the top of the contracting chain is, in fact, a corporation, or is a person who is undertaking a residential development for sale or is building a residential investment property that they do not intend to live in, then the works will not be under an owner occupier construction contract and none of the contracts or subcontracts will be Exempt Residential Construction Contracts.