Unlicensed contractors can claim under the Security of Payment Act
The Supreme Court, in its recent judgment of Sunshine East Pty Ltd v CBEM Holdings Pty Ltd, reached the surprising and worrying conclusion that a builder who is not licensed and has failed to obtain mandatory insurance under the Home Building Act 1989 is still entitled to payment under the Building and Construction Industry Security of Payment Act 1999.
Although the judgment is consistent with the objective of the Security of Payment Act as an interim payment scheme for the benefit of contractors, it is unlikely that those who drafted the Security of Payment Act intended that it could be used by a contractor operating in breach of the law to obtain payment, particularly in an unsophisticated consumer situation.
The plaintiff was the owner of a residential property and had engaged the defendant to do work as part of building a dwelling on the property. Some of the work was residential building work regulated by the Home Building Act.
However, the defendant was not licensed to do residential building work, as required by the Home Building Act and had not obtained Home Building Compensation Fund insurance for the work, which is also required by the Home Building Act.
The defendant issued a payment claim for $420,952.39 under the Security of Payment Act. The plaintiff home owner failed to respond with a payment schedule or to pay the claimed amount.
The defendant therefore had an entitlement to get summary judgment in the District Court for the claimed amount under the Security of Payment Act, which is what it did.
Supreme Court proceedings
The plaintiff appealed the District Court judgment on the basis that:
1. The work was not performed by a licensed builder; and
2. The work was not insured.
Although both were true, the plaintiff was unsuccessful in its appeal.
The Home Building Act stipulates that a building contract is unenforceable by an unlicensed builder, and that an unlicensed builder is not entitled to damages or to enforce any other remedy in respect of a breach of the contract.
It also stipulates that a builder must not demand or receive a payment under a contract for residential building work if there is no Home Building Compensation Fund insurance for the work.
However, the Court determined that these provisions do not prevent a party from being entitled to payment under the Security of Payment Act because a claim under the Security of Payment Act is not for damages or any other remedy for breach of contract or for enforcement of payment under the contract: it is a statutory remedy outside the reach of the Home Building Act.
The decision highlights the significant risk to consumers and developers posed by not knowing the requirements of the Security of Payment Act.
It serves as a critical reminder that consumers and developers must:
1. do their due diligence thoroughly before engaging a contractor,
2. understand their rights and obligations under the building contract, and
3. be alert to Security of Payment Act progress claims to avoid being exposed to significant financial risk by failing to respond appropriately.
Authors: David Creais & Breitil Sulaiman