Security of Payments Act 1999: NSW Building and Construction

This report addresses the Building and Construction Industry Security of Payments Act 1999, focusing on its role in the NSW construction industry. It begins by explaining the Act's adjudication process, which aims to expedite payment disputes, and outlines how adjudicators determine payment amounts and how decisions are enforced. The report then explores the Act's introduction, highlighting the persistent payment issues within the construction sector and the Royal Commission's findings that led to its enactment. It examines how the Act interacts with regular court actions, emphasizing its protection of construction parties and the framework for claiming and tracking payments, including the 'dual railroad system' and modifications to contractual freedoms. Furthermore, the report details recent amendments to the Act, specifically those related to the definitions of principal, head contractor, and subcontractor, and how these changes impact subcontractor rights in relation to the property owner. The report concludes by providing a thorough analysis of the legal and practical implications of the Act within the construction industry.

Building and Construction Industry Security of Payments act 1999 1
Building and Construction Industry Security of Payments act 1999
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Address the Property Council of New South Wales on the Building and Construction Industry Security of Payments
act 1999.
1 How does the Act work?
The NSW act was primarily enacted to help in hastening adjudication procedures in
relation to cases involving progress payments in the construction industry. The NSW act allows
an adjudicator to analyze and determine how much should be paid to a claimant. The respondent
is then called upon to address issues that have been raised by the claimant. Upon the submission
of claims by the adjudicator, all parties will eventually be expected to submit their point of view
on the matter. The claimant is responsible for nominating the adjudicator, who is this case is
appointed by an established Authorized Nominating Authority (ANA). The Act defines and
outlines the timeframe and approaches that should be taken during the adjudication process. In
all instances, the adjudicator does make a final determination. The decision that is made should
be accepted as binding on all the involved parties. Final decision can only be altered by a court,
external agreement, or any other process that may be suitable between the grieving parties
(Coggins, 2011 p.34).
Where the respondent fails to pay up the amount that has been determine by the
adjudicator, the case can be referred to a court of sufficient jurisprudence. This process should be
undertaken through a suitable administrative approach as defined within the NSW Act that is
enforceable. In the instance that a respondent subsequently tries to request a court to do away the
established judgement, then the latter party will have no option as they cannot present any form
of cross claim against the party that presented the case. Additionally, the respondent cannot

Building and Construction Industry Security of Payments act 1999 3
undertake to defend themselves with regards to issues that have been brought forth within the
construction contract (Hughes, Champion, & Murdoch, 2015). More importantly, the
adjudicators determination cannot be challenged, other than through jurisdiction of the same
adjudicator. Finally, the respondent will be expected to pay up the full amount of the unpaid
amount as set by the adjudicator as the results of the court proceedings are being awaited.
Payment entitlement
The Act outlines that irrespective of the nature of a contract, the contractor ought to
receive payment once the task at hand is complete. Contracts defined under the act include
written, verbal, and absent contracts. Absent contracts are the type that outline the contractor’s
inability to claim payments for the progress or milestones that have been achieved. In such a
case, payment ought to be expected at the completion of a task. The Act also encompasses the
Independent Contractor Agreements. These contracts define the obligations and rights of each
any party associated with a contract (Wu, Kumaraswamy, & Soo, 2008 p.400).
Progress payments can be calculated based on portion of work or amount of goods that
have been supplied up to a certain point. In the instance that the amount owed is being disputed,
the involved parties have the obligation to select an arbitrator so as to resolve their differences.
Unless it has been defined within the contract terms, it is expected that progress payment is only
claimed once in a month (Wu, Kumaraswamy, & Soo, 2010 p. ).

Building and Construction Industry Security of Payments act 1999 4
2. Why was it introduced?
The NSW Act was introduced due to the recurrent irresolvable payment issues that kept
cropping up within the construction industry. The federal Royal Commissioner appointed the
Honorable Terrence Cole to undertake necessary steps and make a fully-fledged inquiry into the
issues that kept affecting the New South Wales and construction industry. A primary concern for
the Royal Commissioner revolved around Payments securities due to the inability of property
owners to fulfill payments for completed projects (Ramachandra & Rotimi, 2011). In essence,
the commissioner focused on the relevance of payment securities in the construction industries.
While reviewing the payment of securities, the royal commissioner aimed to establish an
act that would ascertain payments for any party that is mandated to undertake a construction
work. This also applies to parties that have been tasked with supply of materials in the
construction industry. Under the NSW act, all parties under the construction contract have the
right to receive, or recover payments where there is a delay. Progress payments associated with
the supply of goods or services are also covered by the NSW Act. In order to ensure that a
contractor’s interests are fully secured, various statutes were added into the Act. These include;
interests on delayed payments, the right to claim progress payments, right to lien, and the right to
forego work (During, 2011).
Currently, security of payment is considered to be a collective term that refers to the
rights of subcontractors, consultants, and principles within a contractual chain. Hence, the
problem revolving around the security of payments stems from the continuous failure to ensure
that every party is duly paid at the right time. The security of payment issue reflects on the

Building and Construction Industry Security of Payments act 1999 5
arbitrary non-payment, devaluation, or late payment of the contractual progress claims. The issue
had become largely persistent for parties operating within the construction industry (Lim, 2014
p.7). Contractors and property principals in Australia adopted a policy where they would unduly
delay revise down payment expectations, and or delay payments intentionally. This approach
ensured that they were able to maintain positive gains continuously regardless of the loses being
made by the suppliers and subcontractors.
Before the enactment of the NSW act, suppliers and subcontractors heavily relied on
traditional approaches for dispute resolution, which included litigation or arbitration. The latter
method was only applicable only if it had been specified within a contract. The downside of such
approaches included lengthy periods involved in regaining the claimed amount. This led to the
development of other hidden costs to the point that subcontractors would give up on the follow
up. This was motivated by the thought that claiming unpaid dues would only lead to more costs,
and it be better invest the capital in other projects that had the potential of being paid much
earlier (Brand & Davenport, 2012 p.190).
3. How does the act work in relation to the regular court actions?
This section will analyze how the NSW ACT is normally implemented from the point of
view of the courts. Emphasis will be on the effects of the judicial review on the approaches of
resolving disputes as defined under the act, the Act’s objectivity, and how the status of judicial
analysis as defined within the NSW Act.
The ACT is seen to contain the following primary targets

Building and Construction Industry Security of Payments act 1999 6
The NSW Act is primarily designed to protect the interest of parties that are normally
involved in construction works. The ACT ensures that such aforementioned groups can be able
to claim payments in the instance that they are never paid, and track progress dues as the contact
is underway. All this is defined within Section 3(1) of the NSW Act, but this definition is vague
in comparison to the Second Reading Speech. In general, the NSW act ensures that a framework
is established to ensure that statutory rights can be exercised by concerned parties without
oppression of interests (Supardi, Adnan, & Mohammad, 2010). Firstly, the claimant of unpaid
dues is expected to consolidate a “payment claim” on the party that is expected to pay up the
unpaid dues as initially defined within the construction contract. Where there is a dispute in
interests between the respondent and the claimant, the former ought to come up with a “payment
schedule” that outlines the broken-down amounts that will be paid. A tangible reason for not
being able to pay in time must also be provided to the claimant (Ashwort & Perera, 2018).
There are notable feature of the new system, and the most tangible is the fact that it does
not deviate from any entitlement that ought to be associated with the claimant within
construction contract. The NSW Act then creates a “dual railroad system,” which function partly
with, but does not eliminate the importance of other approaches that are usable within a
construction contract (Wong, 2014). Where contractual progress claim approaches exist, a
function that is more or less left to decision making by the architect or engineer, the respondent
and claimant are expected to use the rail road mechanism prior to implementing the NSW Act.
The functionality of the dual approach tends to be limited in instances where the contract may
end up excluding, modifying, or restricting the Act’s applicability. ACT: s 34

Building and Construction Industry Security of Payments act 1999 7
The act also includes critical changes to the contractual freedom. The modification is
essential, and in line with the need to ensure that cash flow certainty is maintained within the
construction industry. The NSW act’s S.12 renders “pay if paid” and “Pay when paid” clauses
within construction contracts ineffective. The clauses served the purpose of ensuring that a
subcontractor’s payment is delayed up to a point where the primary contractor has been paid by
the property owner, hence the concept of “pay when paid.” The “pay if paid” clause ensured that
a subcontractor’s payment remains limited to a particular amount that had been received by the
head contractor especially where there is a dispute (Ross, 2013 p.47). The reasoning behind the
NSW act helps to ensure that payments are made first, then arguments can follow later (Maritz &
Robertson, p.30 2012).
The Act’s applicability is very broad as seen where s.7 encompasses both oral and written
construction contracts, provided it involves construction or supply of goods and services. This
happens to be the case despite the governing law that is selected by contracting parties.
Construction contract work is outlined to be an agreement in which one party undertakes to
supply services and goods for another. Construction work is also defined quite broadly by
sections 5 and 6 of the NSW ACT.

Building and Construction Industry Security of Payments act 1999 8
4 Recent amendments and Subcontractor’s rights in relation to the Principal
Principal, head contractor and subcontractor
Amendments to the NSW act in 2013 led to the clear definitions of the principal, head
contractor and subcontractor. Definitions of the involved parties are essential to the amendments
and they appear to cause major challenges for adjudicators. Under any construction contract,
there are two unique categories of claimants which are; the subcontractor and the head
contractor. Also, the NSW act is also applied uniquely for all the categories of claimants. If the
amendment is to be classified in terms of winners and losers, the head contractors are bound to
gain most whilst the subcontractors might end up losing the most (McAdam, Brand, &
Davenport, P., 2011). The challenge for adjudicators will be based on the fact that it will be
difficult address status quo. In this case, it is impossible to define who is the principle between
the three parties. Where the status definition is provided, wrong assumption might easily end up
being drawn. Hence, the amendments are seen to have the possibility of creating ambiguity and
confusion, which is a huge mistake for an act to give a different meaning to a term other than the
ordinary.
Subcontractors Rights in relation to the property owner
Amendments to the NSW act create a one to one relationship between the subcontractor
and the principle. The subcontractor is now able to bring a claim against the principal in order to
secure the payments expected from the contractor. The subcontractor can direct the principal to

Building and Construction Industry Security of Payments act 1999 9
avoid paying the contractor as a determination is awaited from an adjudicator in relation to
unpaid dues from a specific contractor (Wong, Wang & Do, 2014). The CDA outlines that the
principal’s obligation to avail payments to the contractor can be transferred to the subcontractor
so as to fulfill a judgment brought forth by the subcontractor. However, the amendments will be
of little use in the instance that all money had already been paid to the contractor before the
subcontractor was able to acquire the judgment. The amendment ensures that the subcontractor
can earmark payments that were initially intended for the contractor by the principle. In this case,
a debt certificate or judgement isn’t necessary to ensure that payments are withheld. Only the
adjudication application is necessary in this case (Brand & Uher, 2010 p. 24).

Building and Construction Industry Security of Payments act 1999 10
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