Between a rock and a hard place: how to deal with a payment withholding request under the Building and Construction Industry Security of Payment Act 1999.

Receiving a payment withholding request under the Building and Construction Industry Security of Payment Act 1999 has serious legal implications. However, few councils properly understand their obligations under them.

These notices were added to the Act in February 2011. They are issued by subcontractors who are owed money by their head contractor. They oblige a council, in turn, to withhold money from the head contractor so that the subcontractor can get paid.

If a payment withholding request lands on your desk, take it seriously. After all:

1. A council that doesn’t meet its obligation to withhold certain amounts from its head contractor may be required to assume the head contractor’s debts, and

2. Many subcontractors misinterpret the Act and issue invalid payment withholding requests. If you withhold payment in response to one of these, you will be breaching your contractual obligations to the head contractor.

Understanding the background to the Act

The Act’s purpose is to make sure contractors carrying out construction work (or supplying related goods or services) on NSW-based commercial developments receive progress payments as they become due.

It does this by establishing a summary procedure, which involves:

•    A contractor making a payment claim

•    The principal providing a response, and

•    A third party adjudicating the dispute.

The act also applies between subcontractors and head contractors.

In a dispute between a subcontractor and a head contractor, if the adjudicator finds in favour of a subcontractor, the subcontractor is entitled to a debt certificate under the Contractors Debts Act 1997. This directs the principal to pay the amount owed to the subcontractor from any money the principal is due to pay the head contractor.

In practice, securing payment of a debt this way is often frustrated because, by the time the determination is made, the principal has already fully paid the head contractor or the head contractor has become insolvent.

In an attempt to prevent this from happening, the Act was amended in February 2011.

The amendments: introducing payment withholding requests

The amendments allow a subcontractor who has made an application for adjudication to serve a payment withholding request on the principal.

A payment withholding request requires the principal to retain enough money to cover the claim out of money it owes, or will owe, the head contractor, until:

• the adjudication application is withdrawn

• the head contractor pays the subcontractor the amount claimed

• the subcontractor serves a notice of claim on the principal under the Contractors Debts Act 1997 (NSW), or

• 20 business days elapse after a copy of the adjudicator’s determination is served.

If the principal fails to comply with the payment withholding request, it becomes jointly and severally liable with the head contractor for the head contractor’s debt to the subcontractor.

Where a principal doesn’t owe the head contractor money, it must give notice within 10 days of receiving the payment withholding request. Failure to do so is an offence and can lead to a fine.

Principal protection

The Act protects the principal against the head contractor by:

1. Making the obligation to retain money under a payment withholding request a defence against a head contractor claiming money from the principal.

2. Not taking the period it retains the money into account for working out any amount owed to the head contractor, such as when calculating interest.

3. Penalising subcontractors who don’t notify the principal within five business days of withdrawing an adjudication application.

4. Letting the principal rely on the head contractor’s statutory declaration that the amount claimed has been paid or the adjudication application has been withdrawn.

The case law (and a warning for councils)

The decision in Hanave Pty Ltd v Nahas Construction (NSW) Pty Limited [2012] NSWSC 888 showed some of the difficulties payment withholding requests can cause.

In that case, the principal commenced proceedings to quash an adjudication determination in favour of the head contractor. The court ordered the principal to pay the amount outstanding under the adjudication determination into court rather than to the head contractor while the case was heard. After eventually hearing and dismissing the principal’s challenge to the adjudication determination, it ordered the money paid into court to be paid to the head contractor.

In the meantime, however, a subcontractor on the project obtained an adjudication determination against the head contractor and served a payment withholding request on the principal.

As the principal had now effectively paid the head contractor, the subcontractor brought proceedings against the principal claiming it had contravened the Act’s requirement to retain the money and had become liable for the head contractor’s debt.

However, the court held that the principal was not liable because the payment to the head contractor was not voluntary – the principal had been compelled to do so by a court order. The principal could (and perhaps should) have informed the court of the subcontractor’s payment withholding request, but failing to do so did not mean it had contravened the Act.

What to do when you receive a payment withholding request

There are several steps you can take to avoid the risks and difficulties associated with a payment withholding request. These include:

1. Checking that the request is in the approved form and attaches a statutory declaration that complies with the Act.

2. Checking whether any money is payable or may become payable to the head contractor for the subcontractor’s work.

3. Informing the subcontractor within 10 business days that no relevant amounts are (or will become) payable to the head contractor or take internal steps to ensure that no relevant payment is made to the head contractor.

4. Informing the head contractor if you’re retaining an amount from them.

5. Waiting until you receive a notice of withdrawal of the adjudication application, a notice of claim under the Contractors Debts Act, a statutory declaration from the head contractor that the amount claimed has been paid, or 20 business days have passed since the adjudicator’s determination was received before paying the head contractor.

Author: David Creais