Let’s say a subcontractor is engaged by a head contractor who in turn is engaged by a principal. All of the parties and the site are in NSW.
The head contractor (HC) engaged the subcontractor (SC) to supply and install wooden framing for the construction of a house.
SC does a bunch of work and, at the end of the month, submits a valid payment claim to HC for $500,000.
What happens if HC:
- provides a payment schedule but fails to pay the scheduled amount;
- fails to provide a payment schedule at all, and subsequently fails to pay the payment claim; or
- after an adjudication down the line, fails to pay the adjudicated amount?
In NSW, the Building and Construction Industry Security of Payment Act 1999 (SOPA) works with the Contractors Debts Act 1997 to provide options which allow subcontractors to bypass a head contractor and claim payment directly from the principal in certain circumstances.
This article focuses on some of the less used rights a subcontractor has to pursue an amount that has become due and owing in the ways described above.
Option 1: The right to suspend work
The suspension of work serves as a relatively simple and effective method of pursuing payment from a head contractor.
Let’s consider the first situation from our examples above: SC has received a payment schedule from HC, however SC has not been paid the scheduled amount.
SC now has the right to serve notice on HC of its intention to suspend the work under SOPA.
Two days after notifying HC of the intended suspension, SC may stop working completely until they have been paid.
SC can also then make a claim for any loss it suffers as a result of the suspension, whilst HC can’t claim any damages against SC for suspending work. SC can continue to suspend the work and claim loss until the end of 3 business days after HC makes payment of the outstanding amount.
Where construction projects are so often the subject of short timeframes and large deliverables, it isn’t hard to see the kind of commercial pressure legally walking off site might apply to a slow-paying contractor.
Option 2: The right to exercise a lien over plant and materials
Let’s say that SC has submitted a valid payment claim to HC, but HC has not issued a payment schedule by the due date. That payment claim included for $100,000 worth of wooden beams which are currently on site but have not been installed.
Regardless of what your contract might say about ownership, if:
- you have unfixed goods and materials on site;
- you have submitted a payment claim which included for those goods/materials; and
- that payment claim has become due and owing,
then, you might be able to exercise a “lien” over the unfixed plant and material.
The use-case for this particular strategy is a little more limited than the other options but may be useful if the goods you are supplying are pivotal to construction, are easily distinguishable and ownership is not otherwise retained by the terms of your contract.
Option 3: A payment withholding request
In this example, SC has claimed $500,000 for the framing works. SC then receives a valid payment schedule for less than the amount claimed. SC has read our previous article about SOPA and immediately applies for adjudication under the SOPA against HC.
Where HC is engaged for the same project by a principal, SC can serve a payment withholding request on that principal for the amount of the adjudicated payment claim.
The effect of this payment withholding request is that the principal must retain the $500,000 pending the resolution of the adjudication application.
Here is the process in a nutshell:
The eagle eyed among you will see that nothing in this process requires anything more than the money being retained by the principal (i.e. the money never reaches the Claimant). This doesn’t mean the option is useless, however, and the practical benefit of putting in this withholding request is so that you know there is a sufficient pot of money waiting for a claim under the Contractors Debts Act.
Practical Takeaways
Always ensure that you know when, and how, to avail yourself of these options to collect monies owed to you for construction work.
Not only do they apply significant commercial pressure on a non-paying head contractor, they can significantly improve your prospects of recovering outstanding money if the head contractor is in some kind of financial difficult. Of course it’s important to understand how to properly utilise each of these options, so get in touch with us if you need assistance.