As building and construction contractors, you may often find yourself in circumstances where payment has fallen due, but you have not been paid. There can be various reasons for this, including:

  • that there are a number of parties involved, which can affect the flow of payment, or give rise to disputes or delays;
  • whether procedures for requesting variations and making payment claims have been followed; or
  • disputes over payment. For example, a disagreement over the completion of the work.

Whatever the reason, as a contractor, you should prepare yourself for the possibility of engaging in debt recovery at some point in time. This article will explain how to ensure you get paid in a commercial and legally-sound way.

Legislation Governing Your Contracts

If NSW legislation governs your construction work, you will need to be aware of the Building and Construction Industry Security of Payment Act 1999 (NSW) (SOP Act). The SOP Act applies to construction work contracts and has a broad application.

However, there are specific types of contracts that will not be governed by the SOP Act. One example is residential building work, where the owner lives, or intends to live, in the building.

Irrespective of whether the SOP Act governs the contract, this article will set out steps you should follow to recover money owed under your contract.

Put it in Writing

‘Getting it in writing’ is one of the most important things you can do to get paid.

The number one rule is to have a contract. Whether you are doing large-scale works or a small renovation job, always have a contract.

You may have your own contract that you use for certain jobs. For large-scale construction works, you may need to familiarise yourself with (and potentially negotiate the terms of) the contract provided by the principal (who is the project owner).

Variations to any contractual terms, or other instructions, should always be in writing. If they are verbal, you should follow up in writing. Ideally, you should keep a written record of everything, right down to when you receive and use materials on site.

Review Key Contractual Clauses

There are numerous key clauses in construction contracts, including:

Clause Details
Scope of work The scope of work should be provided in as much detail as possible, with plans, specifications and/or a project brief. If you are excluding certain works, this should be noted.
Requirements for issuing instructions for variations This should also deal with how such instructions would affect the value of the contract and payment claim procedures.
How you will be paid For example, you could be paid in installments along the way (progress payments) or a lump sum.
Requirements for payment claims issued under the SOP Act

This should include when you can make a payment claim for a progress payment (the reference date) and the interest rate for unpaid amounts.

If there is no reference date, the statutory default is the last day of each month.

Payment terms

Payment terms should be specified even if the SOP Act does not govern your contract.

This clause should include interest charges and the timeframe for payment, for example, 30 days.

Dispute resolution

The contract should always include dispute resolution clauses, as these set out how the parties must attempt to resolve the dispute before escalating the matter to court.

Standard form construction contracts will usually include a requirement to provide a notice of the dispute, and then state that if the parties cannot resolve the dispute within 28 days, the matter must go to arbitration.

 

Take Administration Seriously

Whether or not the SOP Act governs your contract, there are straightforward administrative actions you can take to help ensure you get paid. These include:

Installing accounting and project management software

Implementing a good accounting and project management software into your IT system will ensure you do not miss key dates.

Many preliminary steps such as following up on overdue payments can be automated through such a software, saving you time, and, ultimately, money.

Keeping a digital record

Keeping a digital record of everything, such as invoices, contracts, plans and sketches, and any amendments, is crucial.

Even if an email does not seem relevant at the time you receive it, it may be important in the future to prove that certain instructions were given or received.

 

Timelines for Payment Claims

You can make a payment claim for non-payment under the SOP Act. The following table sets out different scenarios and associated timelines, once you have made a payment claim. You need to be very mindful of these timelines when managing a claim.

 

You receive a payment schedule, and payment of the full claimed amount.

 

There is nothing more to do.

If you are a head contractor, you should receive payment either within 15 days of serving the payment claim, or on the date stated in the contract.

If you are a subcontractor, you should receive payment either within 30 days after serving the payment claim, or on the date stated in the contract.

You receive a payment schedule outlining a lesser amount than the amount of the payment claim.

 

There are two possible outcomes. You either receive payment of the lesser amount, or you do not receive payment.

Receiving Payment:

If you receive payment but dispute the amount, you must lodge an adjudication application within 10 business days of receiving the payment schedule.

Not Receiving Payment:

If you do not receive payment, you have 20 business days after the due date (10 days after issuing the claim) to lodge an adjudication application.

An adjudication application is a form you submit to start the adjudication process. Adjudication is an independent, less formal process to resolve a payment dispute quickly and cost-effectively.

You receive no payment schedule, and no payment.

 

You have 20 business days after the due date of the claim to issue a section 17(2) notice.

The principal or head contractor (the respondent) has five business days to respond to the notice and send a payment schedule.

Once you receive the payment schedule (or five days pass, and you do not receive the payment schedule), you have ten business days to lodge an adjudication application.

 

Non-Court Options

A number of factors will influence how you go about recovering a debt as building and construction contractors. These include:

  • the terms of your contract;
  • the amount of the debt; and
  • whether the SOP Act governs your contract.

First, if there is a dispute resolution clause in your contract, you must follow it. If there is not a dispute resolution clause, there are non-court options available. These options can help recover the money owed to you, without incurring substantial costs. These non-court options include:

  • issuing a letter of demand;
  • issuing a statutory demand (if the debtor is a company and the debt is over $2,000);
  • reaching a commercial settlement via alternative dispute resolution, such as through mediation;
  • applying for adjudication under the SOP Act; or
  • exercising a lien (a right of possession) over any unfixed plant or materials you have supplied for the construction work (set out in section 11(3) of the SOP Act).

Beyond this, you can choose to recover the debt through the NSW courts. For debts up to $100,000, you can recover the debt through the Local Court.

You can recover the debt directly through the court if:

  • you have made a payment claim under the SOP Act, but the debtor has not provided a payment schedule; and
  • the debtor has not made payment by the due date.

As set out above, you can also take advantage of the adjudication procedure under the SOP Act before proceeding to court.

The nominated adjudicator will provide its decision within 10 business days of accepting the application, so it is a fast way of getting a determination on a debt.

Successful Adjudication Applications

If an adjudication decision is in your favour, the respondent must pay you within five business days of receiving the decision. The SOP Act says that you cannot challenge an adjudicator’s decision. However, there are some recent court cases which have given scope to challenging adjudication decisions.

If you do not receive payment of the adjudicated amount, you can request an adjudication certificate from the relevant Authorised Nominating Authority (ANA) and file it with a court to have it entered as a judgment debt. This judgment debt will appear on the other party’s credit file.

Court Options

Even if you have exhausted all non-court options, you should consider whether going to court is the right option. In some situations, walking away is a more commercial decision.

You should consider whether:

  • the amount of the debt justifies the legal costs involved. Keep in mind that the NSW Local Court caps the recovery of legal costs for claims of $20,000 or less;
  • the time commitment is realistic. Time is money for building and construction contractors. It may not be commercially viable to spend a large chunk of time away from work to chase an uncertain debt;
  • you have sufficient evidence to prove your claim. A strong claim will rely on contemporaneous, recorded evidence. A weak claim will involve ‘handshake’ contracts and ‘he said/she said’ accounts; and
  • the debtor can pay the debt. You should research the debtor’s financial status, assets, and business structure. There is no point in obtaining a court judgment if you cannot enforce it.

You should seek legal assistance with any potential court proceedings. This includes the drafting of your Statement of Claim and enforcing a judgment debt. Court proceedings are highly process driven, with various time frames, rules and regulations.

Key Takeaways

It is important for building and construction contractors to understand the debt recovery process. Doing the work and getting paid for it are two different things, so knowing how to recover unpaid debts is key. There are both non-court and court options available, but the best choice will be one that is commercial.

If you need assistance recovering a debt owed to you by a principal or head contractor, contact LegalVision’s debt recovery lawyers on 1300 544 755 or fill out the form on this page.

Bonnie-Anne Talese
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