30 September 2024

Loophole closed - unlicensed and uninsured contractors excluded from Security of Payment Act

David Creais

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In our article - Unlicensed contractors can claim under the Security of Payment Act – we highlighted a significant hole in the protection afforded to consumers against unscrupulous contractors by the Home Building Act 1989.

To briefly recap, in Sunshine East Pty Ltd v CBEM Holdings Pty Ltd, the Supreme Court of New South Wales ruled that under the Building and Construction Industry Security of Payment Act 1999 unlicensed and uninsured contractors could still claim payment for work done, even though the Home Building Act prohibits claims under a contract to do that work.

The Better Regulation Legislation Amendment (Miscellaneous) Act 2024, specifically clause 1.2 of Schedule 1, aims to rectify this issue, ensuring that contractors who are not compliant with the Home Building Act cannot seek progress payments under the Security of Payment Act. This article explains how this amendment directly addresses the risks identified in our earlier article.

The Problem: Unlicensed and uninsured contractors claiming payments

In the Sunshine East case, the Supreme Court ruled that the Security of Payment Act allows a statutory right to claim progress payments, even if the contractor is unlicensed and uninsured. This ruling was troubling for homeowners because the Home Building Act specifically bars unlicensed and uninsured contractors from enforcing contracts or demanding payments. However, the Supreme Court interpreted that the Security of Payment Act interim payment scheme operates independently of provisions regulating rights under a contract.

This interpretation effectively bypassed the consumer protections instituted by the Home Building Act, putting homeowners at risk of having to pay for work done by unlicensed and uninsured contractors. The result was the potential for significant financial exposure for homeowners who fail to respond appropriately to payment claims under the Security of Payment Act, even if the work was performed unlawfully.

The Solution: Clause 1.2 of Schedule 1 of the 2024 Act

Clause 1.2 of Schedule 1 of the Better Regulation Legislation Amendment (Miscellaneous) Act 2024 amends the Security of Payment Act to add a new section 8(2) to specifically address this loophole. The new provision states that a person is not entitled to progress payments under the Security of Payment Act if the construction contract:

Does not comply with section 4 of the Home Building Act, which requires that the contractor be properly licensed; or
Involves residential building work done in contravention of section 92 of the Home Building Act, which mandates insurance coverage.

How this clause fixes the problem

By explicitly tying the right to claim progress payments under the Security of Payment Act to compliance with the Home Building Act, the amendment closes the loophole identified in the Sunshine East case.

Now, if a contractor is unlicensed or has failed to obtain the required insurance, they are barred from making claims for progress payments under the Security of Payment Act. This ensures that only contractors operating within the legal framework of the Home Building Act can benefit from the advantages of the Security of Payment Act.

This change aligns the two Acts, reinforcing the consumer protections that the Home Building Act was designed to provide. It also addresses the Court's previous interpretation by making it clear that the right to claim progress payments is contingent on legal compliance under both Acts.

Impact on homeowners and contractors

For homeowners, this amendment provides much-needed protection against unlicensed and uninsured contractors. Homeowners can now be confident that if a contractor is operating unlawfully in breach of the Home Building Act, they cannot use the Security of Payment Act to demand payments. This restores balance and fairness, reducing the risk of being financially liable for unlawful work.

For contractors, the amendment signals the importance of complying with all legal requirements, including licensing and insurance. The Security of Payment Act's advantages are now only available to those who follow the law, which promotes better practices in the industry and ensures that consumers are engaging with qualified and responsible contractors.