How does security of payment work in NSW?

The purpose of the security of payment legislation is to promote cashflow down the contracting chain. It does this in two ways. First, it contains a number of general protections for contractors.  Second, it contains a mechanism for the (relatively) speedy recovery of progress payments.

Who is covered by the legislation?

The legislation applies to building work carried out in NSW. Certain types of contract are excluded, the most notable being a construction contract for carrying out residential building work, as defined in the Home Building Act 1989 (NSW).

The comments below only apply to construction contracts covered by the Act.

General protections for contractors

Some of the general protections for contractors under the legislation are as follows:

• Minimum interest rates on late progress payments. You will be entitled to claim interest on late payments at the rate set out by your client, or the rate prescribed by the Act, whichever is higher. As of 1 July 2021, the rate prescribed under the Act is 6.0%. Note that this rate changes over time.
• ‘Paid if paid’ provisions are deemed to have no effect. If your contract contains a clause to the effect that a payment to you is conditional upon your client (typically a head contractor) first receiving payment from someone else, that clause has no legal effect.
• Maximum payment terms. The maximum payment term allowed under a head contract is 15 business days, starting on the date of the payment claim. For subcontracts, the maximum term is 20 business days.
• A statutory right to suspend work following non-payment. Note that this right only exists where there is an amount that has become due and payable (for example, following the principal’s approval of a progress payment) and where you have given prior written notice of your intention to suspend.

The Act gives contractors a statutory right to receive progress payments. This right operates in addition, and parallel, to any right you might have to receive progress payments under your contract.

Procedure for recovering progress payments

The process for recovering progress payments is the better-known part of the Act, and where the legislation derives its name from.

In short:

• You have a statutory right to receive regular progress payments under the Act.
• You can recover a progress payment by making a payment claim, which you can read about here.
• The principal has 10 business days to respond to your claim, unless your contract requires its response to be given in a shorter period. This is done through a document called a ‘payment schedule’.
• If the principal provides a payment schedule within the required timeframe but you disagree with their assessment, you have the right to apply for adjudication. We explain this below.
• If the principal fails to provide a payment schedule within the required timeframe, you will be entitled to recover the full amount of your progress claim. To do this, you would need to commence court proceedings. If you do, your client’s defences will be limited. For example, it will not be entitled to challenge the substance of your claim by reference to the contract. Alternatively, if you would prefer not to go to court, you could give your client notice of their failure to issue a payment schedule and then proceed to adjudication.

What is adjudication under the Act?

Adjudication under the security of payment legislation involves the determination of dispute over a progress claim by an independent adjudicator.

The adjudicator is not a judge (and is often not a lawyer), and is appointed by an independent ‘nominating authority’. You can find a list of nominating authorities here. If you apply for adjudication, you make your application to one of those authorities, who then appoints the adjudicator for you.

Your adjudication application is a written document that must be sent to the nominating authority within a fixed period – usually 10 business days from the date you receive the payment schedule. You must also serve a copy of your application on the client. Most nominating authorities have their own application form.

By making an application, you will assume responsibility for paying the adjudicator's fee. If your application is successful, you would normally be able to recover this cost (or most of it) from your client.

Your client will only have a short time to respond to your application – either 5 business days from receiving the application, or 2 business days after the nominating authority has appointed an adjudicator and accepted their application, whichever is longer.

Importantly, your client can only include reasons for withholding payment in its adjudication response if those reasons were included in its payment schedule.

A claimant has an express right to withdraw an adjudication application at any time before a determination has been made. The respondent may object to a withdrawal if an adjudicator has been appointed.

Once the time for your client to provide a response has lapsed, the adjudicator is required to determine the application. Unless the parties agree to extend the timeframe, the adjudicator’s decision is required to be issued within 10 business days after the date on which the adjudicator notified the claimant and the respondent of their acceptance of the application.

What effect does an adjudication determination have?

Once an adjudication determination has been issued, the respondent (your client) must pay the ‘adjudicated amount'.

If your client does not pay, you will have a right to suspend work (subject to giving the required notice) and you will also have the right to obtain an ‘adjudication certificate’ and proceed to file that in court to obtain judgment.

There are very few situations where an adjudication determination can be set aside. In most cases, the adjudicated amount must be paid. However, where the adjudication determination is affected by jurisdictional error, the Act give the court an express right to set aside that adjudication determination. If only part of a determination is affected by jurisdictional error, the court may set aside that part only, while confirming the balance of the determination.

Finally, it is important to recognise that a payment under the Act is an interim payment only, effectively a payment on account. If you receive an amount under the Act to which you are not contractually entitled, your client will have the right to recover the difference from you. This is where the legislation gets its name from – any payment you recover under this statutory payment is effectively ‘security’ pending the determination of the final position under the contract.