Introduction
In the last few months, several South Australian residential building companies have collapsed, leaving behind a trail of debts.
Behind every collapse is concealed the pain of the suppliers and subbies. The devastating financial impact is likely to be felt for years to come. None of this is new. For decades, builders have come and gone, leaving in their wake hundreds of damaged small businesses, often taking years to recover.
There have been calls for increased regulation to prevent this cycle. However, it appears the residential sector continues to ignore the protections that are available. In this Update, we revisit the legislation that should form part of every subbie’s toolkit. This Update is not a full description of the legislation but gives some insight into the way it operates.
Fenwick Elliott Grace has recently written a new “Guide to the Building and Construction Industry Security of Payment Act 2009 (“Act”)”.
Legal right to progress payments in the residential sector
Subbies and suppliers who use the Act can control their credit risk and reduce their exposure. Almost all suppliers, subbies, service providers and contractors, whether working in the residential or the commercial sector, are entitled to use the Act as a means of obtaining payments.
The Act does not apply if one of the parties to the contract intends to live in the house under construction. In almost all cases, subbies and suppliers enter into a contract with the builder and are covered by the Act.
The Act is simple to use, and in most cases, would ensure payment within 3 weeks of sending a Payment Claim.
In the residential sector, many subcontracts consist of a quote from the subbie, sometimes verbal, accepted by the builder in an email, SMS or phone call. Often, the contract does not specify due dates for payments. This type of contract is covered by the Act and creates rights that cannot be set aside.
Under this type of contract, these rights include:
- the right to make a Payment Claim once every month;
- the right to be paid, in full, within 15 business days or alternatively, the right to receive within 15 business days a Payment Schedule, explaining why the payment is not being made in full; and
- the right to payment in full if no Payment Schedule is received within the 15 business days.
If the contract specifies a day in the month for making progress payment claims, the day is called the reference date and claims must be made on or after that day in the month. If the contract does not specify a day for the making of progress payment claims, a claim can be made on or after the last day of the month in which the work was performed.
The Payment Claim
Under the Act, a Payment Claim can be made once a month, but:
- must include the words “this is a claim under the Building and Construction Industry Security of Payment Act 2009”;
- must include a description of all the work that is claimed for; and
- must state the amount that is claimed, with an explanation of how that amount is calculated.
Provided the claim includes these three elements, the builder only has 15 business days to respond by sending what the Act calls a Payment Schedule.
Payment Schedule
A Payment Schedule is a response to a Payment Claim.
If the Payment Schedule is not provided within the 15 business days, there are two options available for the subbie to bring the issue to a head.
- Offer a five day second chance for the Payment Schedule. If the Payment Schedule then gives unsatisfactory reasons why the payment is not being made in full, the subbie can ask for the claim to be the subject of an adjudication. If no Payment Schedule arrives after the second chance period expires, refer to adjudication as per below.
- File proceedings in Court. No contractual defence or cross claim can be mounted by the builder. As this process can take months to reach conclusion, the first alternative is preferred unless there are strategic reasons to avoid offering a second chance to explain the non-payment.
If the Payment Schedule is provided within the 15 business day period, but gives unsatisfactory reasons why the payment is not being made in full, or the payment promised is not made on the due date, the subbie can ask for the claim to be the subject of an adjudication.
Business days
Given the tight deadlines in the Act, the definition of “business day” is critical. Public holidays, Saturdays, Sundays and 27 to 31 December are not “business days”. Days on which there is a Statewide shut-down of the operation of the building and construction industry are also not “business days”. Applying this last definition, a recent Supreme Court case found that having a significant portion of the workforce away on a rostered day off may result in the day after a long weekend not being a “business day”.[1]
Adjudication
An application for adjudication can be made online to a nominating authority, accompanied by a submission telling the subbie’s story as to why the Payment Claim should be granted. An adjudicator is appointed, usually within a couple of days and within 5 business days, the builder will have to provide any submissions to the adjudicator. Submissions in support of a Payment Schedule cannot introduce new reasons that were not included in the Payment Schedule. If no Payment Schedule was provided, no reasons and no submissions can be made.
Generally, within a further fortnight, the adjudicator publishes their determination and the subbie is armed with a decision as to how much money should be paid and the due date for payment.
Next steps after adjudication
If the payment is not made in accordance with the adjudicator’s determination, the subbie can ask for a certificate to be provided and then have the certificate registered as a judgment debt in Court.
A judgment debt can be used as part of a statutory demand or bankruptcy proceedings. Most builders will pay up before these steps are taken.
Conclusion
The summary in this Update omits many of the nuances that are contained in the Act. For example, there are several deadlines in the Act. Failures to comply with the deadlines can defeat claims or adjudications. The Act and the FEG Guide should be consulted for more information.
Sound financial management is the only method to avoid insolvencies in the construction industry. Subbies and suppliers should not allow credit to extend beyond reasonable trading periods.
[1] McMahon Services Australia P/L v John Holland P/L SADC [2018] 134
