Using the SOP Act to ensure your cash flow remains constant: Part 2 – Responding to a claim
Timely payment of progress claims is a long-standing issue in the construction industry.
Despite making up about 6 per cent of NSW's gross domestic product, the NSW construction industry accounted for up 20.6% of all companies calling in the administrators over the 2018-19 financial year.
Management and pursuit of outstanding progress claims is essential to avoid cash flow difficulties.
The Building and Construction Industry Security of Payment Act 1999 (NSW) (SOP Act) can help ensure the prompt resolution of disputes and maintain the timely flow of cash to industry contractors.
As previously discussed in Part 1, the SOP Act entitles a person (Claimant) who, under a construction contract, has carried out construction work or supplied related goods and services to make a payment claim to receive a progress payment.
But all rights under the SOP Act flow from the serving of a valid payment claim, so it is vital that Claimants serve a payment claim that meets all the requirements of the SOP Act.
In this Part 2 of our 3 part series, Bartier Perry considers how the person who is liable to make payment should respond to a payment claim made under the SOP Act, and how a failure to respond or comply with the SOP Act can have significant consequences.
A person on whom a payment claim has been served (Respondent) who disputes the amount claimed in the payment claim (Claimed Amount) and therefore does not intend to pay all or part of that amount, may respond by providing a payment schedule.
If you have been served with a payment claim and you dispute the Claimed Amount by your contractor, you must serve a payment schedule:
(a) within the time frame provided for in the SOP Act; and
(b) that provides all the information required by the SOP Act.
Timing of your payment schedule
The SOP Act requires that a payment schedule responding to a payment claim must be provided by the Respondent within 10 business days of receipt of the payment claim (or an earlier time if required under the construction contract).
This time frame is absolute and not able to be extended by agreement or by the court and accordingly processes need to be developed and then implemented to ensure that payment claims are responded to within the required time frame.
Information to be included in your payment schedule
A Respondent’s payment schedule must:
(a) identify the payment claim to which it is responding; and
(b) indicate the amount of the payment claim (if any) that the Respondent proposes to make.
Most Principals and Head Contractors comply with these requirements.
However most importantly, if the Respondent is proposing to make no payment or a payment of an amount lesser than the Claimed Amount, the payment schedule must include all the reasons for withholding payment.
The purpose of the payment schedule is to let the contractor know how much of the Claimed Amount the Principal or Head Contractor will be paying, and the reasons why they will be paying an amount less than the Claimed Amount.
If a payment schedule is not provided in response to a valid payment claim made under the SOP Act at all or within time, the Respondent becomes liable to pay the whole Claimed Amount to the Claimant by the due date identified in the payment claim.
Due date for payment
The SOP Act provides that the due date for payment of a valid payment claim is the earlier of:
(a) the date provided for under the terms of the construction contract; and
(b) if the construction contract is:
(i) between a principal and a head contractor, 15 business days after the payment claim is served; or
(ii) a principal or a head contactor and a subcontractor, 20 business days after the payment claim is served (unless the contract was pre-21 October 2019 in which case it is 30 business days); or
(iii) an exempt residential contract, 10 business days after the payment claim is served.
Consequences of failure to pay by the due date
If a Respondent does not dispute the amount claimed by the contractor, and intends to pay the whole amount claimed by the due date, then there is no need to provide a payment schedule.
However, a payment schedule must be provided if the Principal or Head Contractor disputes the amount claimed by the contractor, and does not intend to pay all or some part of the Claimed Amount, in order to avoid the severe consequences that automatically flow under the SOP Act.
If a Respondent does not provide a payment schedule at all (or within the required time period discussed above), the Respondent becomes liable to pay the entire amount claimed by the Claimant in its payment claim by the due date.
If a Respondent provided a payment schedule within the required time indicating a lesser amount that it proposed to pay (referred to in the SOP Act as the Scheduled Amount), then the Respondent becomes liable to pay that Scheduled Amount by the due date.
If the Respondent:
(a) did not provide a payment schedule and does not pay the entire Claimed Amount by the due date; or
(b) did provide a payment schedule indicating the Scheduled Amount that it intended to pay but does not pay that Scheduled Amount by the due date,
the SOP Act entitles the Claimant to either:
(c) go to court to recover the unpaid portion of the Claimed Amount from the Respondent as a debt due to the Claimant.
Importantly, in such proceedings, the Respondent cannot bring any cross-claim against the Claimant, or to raise any defence in relation to matters arising under the construction contract).
The intention of the SOP Act is quite clear.
The time and place to raise rectification costs or back charges for defective work as a reason for not paying a contractor’s payment claim in full or at all, is in the payment schedule;
(d) make an application for the payment claim to be sent for adjudication.
Importantly for a Respondent, if a dispute is sent for adjudication, it will only be able to make submissions to the Adjudicator as to the reasons why it withheld payment of the contractor’s payment claim, if:
(i) it provided a payment schedule;
(ii) and then its submissions are limited to those reasons that were included in the payment schedule.
A Respondent cannot add new reasons in its submission to the Adjudicator as to why it disputes the amount claimed by the contractor.
This means that if a Respondent did not provide a payment schedule, then it cannot make any submission to the Adjudicator and the Adjudicator must determine the adjudication having only considered submissions made by the Claimant.
This puts the Respondent at a significant disadvantage.
Regardless of whether the Claimant decides to pursue its payment claim in the courts or by adjudication, the SOP Act entitles it to suspend further performance of the construction work on the giving of 2 business days’ notice.
Steps to be taken by a Principal or Head Contractor upon receipt of the contractor’s payment claim
If the Respondent (Principal or Head Contractor) does not dispute the amount claimed in the contractor’s payment claim and intends to pay that amount, ensure that it is paid by the due date.
If the Respondent (Principal or Head Contractor) disputes the amount claimed in the contractor’s payment claim and intends to make no payment at all or pay a lesser amount, provide a payment schedule within 10 business days (or less if the contract provides for a shorter time) of receipt of the payment claim.
The payment schedule must set out ALL the reasons why the Principal or Head Contractor is paying less than the amount claimed in the contractor’s payment claim.
If the Respondent fails to provide a payment schedule, it becomes liable to pay the entire Claimed Amount by the due date.
Regardless if longer payment terms are set out in the contract, the due date for payment is:
(a) 20 business days after the payment claim is served by a subcontractor on a head contractor; or
(b) 15 business days after a payment claim is served by a head contractor on a principal.
No payment by the due date?
As stated above, the contractor’s options are to either go to court or lodge an adjudication application.
These options are discussed in greater detail in Part Three.
How Bartier Perry helped a business recover an amount claimed in a payment claim
Bartier Perry acted for a national floor covering supply business.
The flooring supplier was engaged by a head contractor to supply and install flooring.
The flooring supplier served a valid payment claim under the SOP Act.
The payment claim:
(a) identified the project and the flooring goods and installation services provided; and
(b) indicated the amount claimed for payment.
The head contractor did not serve a payment schedule in response to our client’s payment claim.
The due date for payment (being the earlier 20 business days as determined under the SOP Act and not the 30 days from the end of the month in which the work was carried out as provided for in the contract) passed without payment being received.
Bartier Perry reviewed the contract entered into by the parties and confirmed that the payment claims had been validly served.
Bartier Perry issued a letter of demand to the head contractor.
Attached to the letter of demand was a draft NSW Local Court statement of claim.
The head contractor responded to the letter of demand claiming that the amount claimed was not owing because the flooring was defective and was not in accordance with the contract.
Bartier Perry clearly pointed out to the head contractor that because it had not issued a payment schedule, the SOP Act prevented it from raising the allegedly defective and non-compliant flooring as a defence, or from bringing any related cross-claim against our client.
The head contractor quickly realised the consequences of not having provided a payment schedule and Bartier Perry was therefore able to secure recovery of the debt in its entirety without the need for the threatened court action, thereby protecting our client from the cost and worry of commencing formal legal proceedings.
How Bartier Perry can assist you
Bartier Perry’s Building and Construction team are experienced in assisting contractors and suppliers to use the SOP Act to make claims for payment and recoup unpaid invoices by:
reviewing your contract and assisting with the preparation of your payment schedule
drafting or resisting letters of demand; and
enforcing any rights under the SOP Act.