Why the Contractors Debts Act 1997 (NSW) matters for NSW Government Agencies

While contracts between government agencies and suppliers are often managed through robust procurement and governance frameworks, one piece of legislation sometimes overlooked is the Contractors Debts Act 1997 (NSW) (Act).

This Act provides a means for subcontractors and suppliers to recover unpaid debts directly from the principal, bypassing the contractor who failed to pay. Understanding this process is critical for agencies acting as principals, as non-compliance can result in legal liability and reputational damage.

How the debt recovery process works

The Act applies when a subcontractor or supplier (called the unpaid person) has not been paid by a contractor (the defaulting contractor) for work carried out or materials supplied under a contract.

In this situation, the unpaid person can obtain payment from the principal if (and only if) the work or materials comprise all or part of (or are incidental to) what the principal engaged the defaulting contractor to deliver.

These are the relevant steps:

1. Obtain a debt certificate 

The unpaid person must apply to a court for a debt certificate under section 7 of the Act. This certificate confirms the amount owed by the defaulting contractor and is typically issued after a successful adjudication or court judgment against the contractor.

2. Serve a Notice of Claim

The unpaid person then serves a Notice of Claim on the principal, attaching the debt certificate, which operates as a statutory assignment of the debt. This notice must be in the approved form and include the following information:

• name and address of the principal (the entity owing money to the contractor)

• name and address of the contractor (the party who engaged the unpaid person)

• statement that the contractor has failed to pay the unpaid person for work or materials supplied

• reference to the agreement between the principal and the contractor under which the work or materials were provided

• copy of the debt certificate issued by the court under section 7 of the Act

• statement requiring the principal to pay the amount specified in the debt certificate out of any money payable to the contractor

• signature of the unpaid person submitting the notice.

3. Principal’s obligation to pay

Once the Notice of Claim is served, the principal is legally obliged to pay the debt directly to the unpaid person, provided funds are owing to the contractor. This obligation arises seven days after receipt of the notice.

4. Discharge Notice

After the debt is paid, the unpaid person must issue a Discharge Notice to the principal, releasing them from further obligation under the claim.

5. Priority of claims

If multiple Notices of Claim are served, the principal must pay them in the order received. Notices received within seven days of each other are treated equally. Failure to manage this correctly can result in disputes and further liability.

Consequences of non-compliance

NSW government agencies acting as principals must take these obligations seriously. Failure to comply can result in:

1. Legal liability

If a principal fails to make any payment required by the Act, the unpaid person can initiate legal action to enforce the debt certificate. The court can order the principal to pay the certified amount directly to the unpaid person, regardless of whether the principal has already paid the contractor.

The principal’s only real defence is if they have a valid reason not to pay the contractor – such as the contractor not completing the work properly or breaching the contract. If such a reason exists, the principal can use it as a defence against paying the unpaid person, just as they could have used it against the contractor if the debt hadn’t been assigned.

2. Operational disruption

Funds may be frozen unexpectedly, delaying payments to contractors and affecting project timelines. This can create administrative burdens and require urgent legal intervention.

3. Reputational risk

Non-compliance may be seen as a failure to support fair payment practices, especially in industries like construction, where subcontractors are vulnerable to insolvency risks.

Practical steps for compliance

To mitigate risk and ensure compliance, NSW government agencies should:

• maintain clear records of all contractual relationships, including those with subcontractors

• monitor payment obligations and ensure funds are not disbursed to contractors when a valid Notice of Claim is received

• seek legal advice promptly upon receiving a debt certificate or Notice of Claim

• include protective clauses in contracts that anticipate potential claims under the Act

• train procurement and finance staff on the implications of the Act and the correct response.

Author: David Creais

Read other Government Connect articles in this issue

This publication is intended as a source of information only. No reader should act on any matter without first obtaining professional advice.