On 1 September 2020, the NSW Government issued the Building and Construction Industry Security of Payment Regulation 2020 (“the Regulation”), which drastically altered how residential builders and homeowners resolve disputes about progress payments after 1 March 2021.
Currently, a residential builder who takes out construction work for an owner-occupier cannot employ the modernised requirements of the security of payment laws to resolve disputes by Adjudication. Nor can they invoke the significant statutory rights to payment that arise when a homeowner does not promptly dispute a progress claim.
This has all changed from 1 March 2021, a date that residential builders should be excited about and will apply to all residential building contracts regardless of whether they are made before or after said date.
However, these new reforms may cause concern for home owners wanting to build their home.
The new Regulations provide that the Building and Construction Industry Security of Payment Act 1999 (NSW) will apply to residential construction contracts entered into after 1 March 2021. The Act itself has been in place for over 20 years but has never before applied to residential building projects.
For those unfamiliar with the Act, it creates an alternative form of dispute resolution for disputes over payment in the construction industry. It has been designed to promote cash flow on an ‘interim’ basis by protecting a party’s final rights at law. It is commonly referred to as a ‘pay now, argue later’ scheme.
Whom does the Act apply? And what does the process involve?
The process involves:
- a builder (the ‘Claimant’) issuing a ‘progress claim’ (invoice) to the party responsible for payment (the ‘Respondent’);
- the Respondent providing a written response to that progress claim, setting out how much the Respondent proposes to pay and the reasons they are not paying the full amount;
- if the Claimant is unhappy with that response, they may apply for adjudication, which involves:
- filing a written application and any supporting evidence and documentation;
- the Respondent filing a written adjudication response, with any supporting evidence and documentation;
- an Adjudicator issuing a Determination in writing – which is immediately enforceable.
The entire process outlined above has strict time-frames, and a Determination will be achieved within 6 – 9 weeks of a Claimant first issuing a claim for payment. In the context of the complexities of litigated building disputes, that is extremely fast (by comparison, a standard NCAT dispute typically takes 6 – 9 months to resolve, and District or Supreme Court cases take even longer).
To achieve that rapid result time, the Act imposes rather draconian consequences upon the parties, particularly the Respondent and their obligation to provide a written response to a claim for payment. In the context of commercial or infrastructure building contracts, those consequences are somewhat mitigated by the fact that the Respondent is (presumably) a larger and more sophisticated entity than their subcontractor, who is issuing a claim for payment.
In the context of commercial or infrastructure building contracts, the draconian consequences are somewhat mitigated by the fact that the Respondent is (presumably) a larger and more sophisticated building and construction entity than their subcontractor, who is issuing a claim for payment. The concept being that even if a larger builder (for example Multiplex) is required to pay (under the Act) their subcontractor an amount that a Court later determines was not actually owed, they can afford to pay now and sue their subcontractor later.
When the draft Regulation was released for industry consultation, the amendment making the Act apply to residential construction contracts was not included. Consequently, there was no industry consultation about how the scheme might apply in the residential building context.
Homeowners building their home will need to be conscious of the significant statutory debt they will be subject to pay (after 1 March 2021), simply if they do not respond to a Payment Claim with a Payment Schedule disputing the amount claimed within the allowed time.
Homeowners should also be mindful of the need to respond swiftly to Adjudication Applications (typically within five business days) to avoid Applications being determined based purely on a residential builder’s submissions.
Chamberlains Director, Michael Terry-Whitall, has written a letter to the Hon. Minister Kevin Anderson expressing his concerns regarding the adverse outcomes for parties building their own home, which in his view, requires urgent attention. Mr. Terry-Whitall also encourages everyone to raise awareness for parties planning to construct their own homes of their obligations under the Act and its existence more generally, as he suspects many will have never even heard of the Act, let alone are aware of their obligations under it.
Chamberlains have outlined a hypothetical case study demonstrating just how bad it could get for someone building their home, under the new reforms, who fails to issue a payment schedule on time (which you can download below).