Questions Relating to Adjudication of NSW Residential Payment Disputes

Background

From 1 March 2021, a payment claim may be made under the Building and Construction Industry Security of Payment Act 1999 (NSW) (the Act) by a head contractor or subcontractor to a principal in relation to construction work performed under an owner occupier construction contract. Prior to 1 March, under owner occupier construction contracts, subcontractors could make payment claims on head contractors (home builders) but head contractors could not make payment claims on principals (homeowners).

Since the Act commenced in 2000, 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 was exempt from the operation from the Act. Such contract was defined as an ‘exempt residential construction contract’.

The 2019 Act amendments, effective on and from 21 October 2019, removed the homeowner exemption from the Act and redefined an exempt residential construction contract as a construction contract to one ‘connected with an owner occupier construction contract’ or other type of construction contract for the carrying out of residential building work prescribed in the Regulation.

Clause 4 of the new Building and Construction Industry Security of Payment Regulation 2020 (NSW) (the 2020 Regulation) prescribed owner occupier construction contracts as a class of construction contracts to which the Act does not apply.

Schedule 2 of the same 2020 Regulation omits clause 4 from 1 March 2021.

In summary, through this process of omission, on and from 1 March 2021 home builders who have entered into an owner occupier construction contract with a homeowner to perform work or supply products can make payment claims under the Act to homeowners.

Practitioners have raised 2 questions with Adjudicate Today.

1. After 1 March 2021, what is the due date for payment when a home builder makes a payment claim to a homeowner?

   Certainty around calculating the due date for payment of a progress payment is of critical importance to parties subject to the Act and adjudicators determining matters under the Act.

   The due date to pay a progress payment after a payment claim has been made will depend on whether or not the home builder has entered into an owner occupier construction contract.

   Section 11 ‘Due date for payment’ of the Act, downloadable from Building and Construction Industry Security of Payment Act 1999 No 46 - NSW Legislation (at date of writing 22 February 2021) relevantly is:

   11(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.
   11(1A)	A progress payment to be made by a principal to a head contractor under a construction contract becomes due and payable on: 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 an earlier date as provided in accordance with the terms of the contract.
   11(1B)	A progress payment to be made to a subcontractor under a construction contract (other than an exempt residential construction contract) becomes due and payable on: the date occurring 20 business days after a payment claim is made under Part 3 in relation to the payment, except to the extent paragraph (b) applies, or an earlier date as provided in accordance with the terms of the contract.
   11(1C)	A progress payment to be made under an exempt residential construction contract becomes due and payable: on the date on which the payment becomes due and payable in accordance with the terms of the contract, or 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.

   Adjudicate Today requested the Department of Customer Service (DCS) to clarify the question. DCS advises:

   Subsections 11(1A) and 11(1B) of the Act apply to progress payments to be made under construction contracts other than exempt residential construction contracts.

   An amendment to subsection 11(1A) of the Act was introduced by the Statute Law (Miscellaneous Provisions) Act 2020 in October 2020 which inserts “(other than an exempt residential construction contract)” after “construction contract” in section 11(1A). This means both subsections 11(1A) and 11(1B) of the Act apply to progress payments to be made under construction contracts other than exempt residential construction contracts. (AT bolding, noting the amendment commences from 1 March 2021).

   Subsection 11(1C) applies to progress payments under a construction contract that is connected with an exempt residential construction contract. As of 1 March 2021, paragraph (b) of the definition of exempt residential construction contact in section 4(1) of the Act means an owner occupier construction contract.

   The intent and correct interpretation of subsections 11(1A),(1B) and (1C) is also indicated in the Note in subsection 11(1A) in the 27 June 2017 version of the Act. The Note was subsequently removed when the Act was updated because of a new rule that Notes are to be removed where they provide guidance only and going forward they will only be used to further the meaning if a provision, not to clarify it.

   Therefore, with respect to subsections 11(1A), (1B) and (1C), the first thing to ask when determining when a progress payment becomes due and payable is:

   1. Is the construction contract an exempt residential construction contract? If it isn’t, subsections 11(1A) and 11(1B) will apply.
   2. If it is an exempt residential construction contract subsection 11(1C) will apply.

   When applying Section 11, the following definitions of exempt residential construction contract and owner occupier construction contract are important.

   An exempt residential construction contract means a construction contract that is connected with an owner occupier construction contract. An 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.

   Section 11(1A) provides that the maximum period for a principal to pay a progress payment to a head contractor is 15 business days from the date the head contractor made the payment claim (unless an earlier period is provided for by contract).

   Section 11(1B) provides that the maximum period for paying a progress payment to a subcontractor who has made a payment claim under the Act is 20 business days after the subcontractor made the payment claim (unless an earlier period is provided for by contract).

   Section 11(1C) relates to payment claims made under exempt residential construction contracts. Section 11(1C) provides if the construction contract is silent on the issue, then the period for making payment is 10 business days after the payment claim was made.

   Consistent with DCS advice and the Act’s amendment, Adjudicate Today will inform industry participants that on and from 1 March 2021, the due date for payment when a home builder makes a payment claim to a homeowner under an owner occupier construction contract is the date it becomes due under the contract, or if the contract makes no express provision with respect to the matter, 10 business days after the home builder makes the payment claim.

2. Will payment claims made to homeowners under an owner occupier construction contract entered into before 1 March 2021 be subject to the Act? Can these payment claims be adjudicated?

   Some practitioners have taken the view that, in the absence of a clear transitional provision in the 2020 Regulation, a home builder may make a payment claim to a homeowner under the Act in relation to an owner occupier construction contract made before 1 March 2021.

   Other practitioners say this is clearly wrong and a payment claim under the Act can only be made in relation to owner occupier construction contracts entered into on and from 1 March 2021.

   Again, Adjudicate Today requested DCS to clarify the question. DCS advises:

   From 1 March 2021, the Act will apply to owner occupier construction contracts entered into on or after this date. This is because there is a significant body of authority from the High Court on the presumption against retrospectivity. That is, legislative amendments affecting a person’s rights, interests, and liabilities are to be construed as having a prospective operation only, in the absence of clear legislative provisions to the contrary. The Act and 2020 Regulation do not contain any transition provisions that would counter this presumption.

   Therefore, with respect to owner occupier construction contracts entered into prior to 1 March 2021, the laws in place at the time these were entered into will continue to apply.

   With regards to owner occupier construction contracts that were entered into before 1 March 2021 but a variation of the contract has occurred after 1 March 2021, this would need to be determined on a case by case basis. It is likely, however, that a contract, once varied, is still the same contract as in force from the date the original contract was entered into.

Conclusion

By requesting DCS respond to these questions, Adjudicate Today is not advocating any particular statutory interpretation. The first question is clearly answered by the amendment, the second question goes to whether an adjudication determination is validly made and accordingly may be subject to a Court decision. Unless and until a Court finds otherwise, Adjudicate Today information to parties will be consistent with DCS advice.