Further reforms to the Security of Payment regime in NSW – Implications for the construction industry

One of the most important pieces of legislation for the NSW construction industry, the Building and Construction Industry Security of Payment Act 1999 (NSW) (SOP Act), is set to undergo further reform with the proposed Building and Construction Legislation Amendment Bill 2022 and accompanying regulation, the Building and Construction Legislation Amendment Regulation 2022 (together, the Amendment Bill) to be introduced and debated before parliament.

Friday was the last date for closing submissions for interested parties to provide comment on the Amendment Bill.

What are the proposed changes?

The Amendment Bill proposes the following key changes to the SOP Act:

1. establishing an ‘adjudication review model’ which will establish an entitlement for claimants and respondents to apply for a review of an adjudication determination;
2. strengthening the powers for adjudicators to arrange for the testing of, and engage experts to investigate and report on, relevant matters for the adjudication.
3. reduction in the threshold value of projects from $20 million to $10 million to trigger the retention fund requirement;
4. requiring payment claims to owner occupiers to attach a Homeowners Notice information to help them understand their obligations in responding to a payment claim and the consequences of not doing so.

Adjudication review

Under the current SOP Act, adjudicators have very limited time (10 business days) to digest and analyse often extensive technical material and, at times, complex areas of law. This can lead to potential for errors of law on the face of the record which, as the law currently stands, cannot be reviewed (Probuild Constructions (Aust) Pty Ltd v Shade Systems Pty Ltd [2018] HCA 4).

The proposed adjudication review model provides an additional opportunity for the original adjudication determination to be reviewed and a new determination issued (without the parties being required to go to court).

The proposed ‘adjudication review model’ will be available to both the Claimant and Respondent in circumstances where:

1. the adjudicated amount is:
   1. equal to or greater than $100,000 of the scheduled amount; or
   2. lower than $100,000 of the claimed amount; or
2. the adjudicator has rejected the adjudication application.

The ‘adjudicated amount’ is defined to mean the amount of the progress payment (if any) determined to be paid by the respondent to the claimant.

The review model (which has adopted aspects from both the Victorian and WA models) is designed not to inhibit cash flow, with a respondent to a dispute being required to pay part of the adjudicated amount that is not disputed to the original claimant before making any review application. Once a review application has been made, the disputed adjudicated amount must be deposited into a trust account, which is established with an authorised deposit-taking institution.

The review will be limited to the rehearing of the matters that the original adjudicator considered, which will mitigate prolonging the review process, and the review adjudicator will be required to make their decision within 10 business days after their appointment (or as otherwise agreed).

Further investigate powers for Adjudicators

The Amendment Bill aims to further improve the standards of adjudications under the SOP Act, by providing the adjudicator with new powers to arrange for testing and also engage an expert to investigate and report on a matter to which a payment claim may relate. The adjudicator can then incorporate that expert information into their determination, allowing for greater assurances in those adjudications made. It can be the case that a respondent to a payment claim submits expert evidence on an issue that the claimant has not. The claimant has no right of reply under the SOP Act. This reform might assist the claimant in that scenario if the Adjudicator seeks another expert’s view. This power will be voluntary, so as to not overcomplicate the process for the simpler of adjudications, and in many circumstances where such powers are invoked, it is likely that the parties will need to agree to allow for additional time for the adjudication determination.

Retention Money in Trust

In 2015 the SOP Act was amended by the Building and Construction Industry Security of Payment Amendment (Retention Money Trust Account) Regulation 2015 that required head contractors to hold subcontractor’s retention monies in a trust account. This requirement applies to projects where the head contract is valued at $20 million or more.

Following consultation with industry bodies, the government has concluded that it should lower the threshold value of construction contracts to $10 million before triggering the requirement by Head Contractors to hold subcontractor’s retention monies in trust.

Lowering the $20 million threshold to $10 million will require more head contractors to establish trust accounts on behalf of subcontractors they engage. This change is intended to provide greater protections over a larger number of projects in the industry, particularly where a head contractor may become insolvent.

Homeowners Notice

The Amendment Bill proposes to ensure that each time a payment claim is issued by a builder to a homeowner under the SOP Act, it must be accompanied by a Homeowners Notice.

The Homeowners Notice must set out in detail why the homeowner is receiving a payment claim, the procedure for responding to the claim, the consequences of not responding and how adjudication works.

As it currently stands, consumers are often left unaware of their obligations under the SOP Act through nothing more than lack of familiarity/knowledge of the process and face the serious consequences of non-compliance including judgment debts if no payment schedule is served in the required time frame and properly under the SOP Act.

Providing the Homeowners Notice assists builders as well because it negates the argument that the homeowner was not aware of their obligations under the SOP Act, and therefore is not required to comply. This change is designed to ensure that builders are not unfairly prevented from utilising the statutory payment mechanisms under the SOP Act to receive prompt payment for their work where they are doing residential building work.

Conclusion

The proposed reforms set out above continue the NSW Government’s overall drive toward reforming the construction industry. It will be interesting to see the extent to which the reviewable determination provisions (adopted from the current Western Australian regime) are utilised in the industry and the case law that develops when the second adjudication overturns the first.

The Amendment Bill is here: Bill and Regulation.

Further updates will be provided once the final drafting of the Amendment Bill is provided before assent.

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Authored by:

Matthew Taylor, Partner
Ryan James, Lawyer