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As a principal developer or builder, you are responsible for paying contractors for any construction work they carry out. However, under the New South Wales (NSW) security of payment laws, contractors can demand timely payment by submitting payment claims that outline the amount that you owe them. If you miss an invoice and fail to pay on time, you risk paying a large debt to the contractor that may not be justified. This article will set out your options if you fail to respond to a payment claim in NSW.

What is the Payment Claim Process in NSW?

Traditionally, contractors did not have to state that payment claims are made under the Building and Construction Industry Security of Payment Act 1999 (NSW) (“the Act”). Consequently, principals may be unaware that some contractor-issued tax invoices are for payment claims that require a quick response. However, recent changes to the Act in 2018 (which come into effect in 2019) mean that every payment claim should state that they were submitted under the Act.

A payment claim for construction work (which generally covers commercial buildings) needs to:

  • identify the construction work (or related goods and services) that is the subject of the payment claim; and
  • state a claimed amount.

The principal must respond to the payment claim by sending the contractor a payment schedule within a specified time. That time is outlined in the contract or within 10 business days after the principal receives the payment claim.

When you fail to serve a payment schedule within the specified timeframe, the contractor can:

  1. file an adjudication application; or
  2. start court action to recover the money claimed.

An adjudication application is an alternative dispute process where both parties submit their case for correct payment to an independent third-party, known as the adjudicator. The adjudicator then decides on the final amount that the principal owes to the contractor.

In the meantime, the contractor can suspend work on the construction site, which can add further costs to your business. The contractor gets to choose between court action or adjudication. As a principal, you should know how to respond if the contractor chooses either option.

Adjudication Application

If the contractor chooses adjudication, they must notify the principal. That means you have five more business days to respond to the payment claim.  However, the contractor is unlikely to choose this option because you get to serve a payment schedule later without any sanctions. If the contractor does choose this option, make sure you do serve the payment schedule within the following five days. Your payment schedule must state:

  • which payment claim it relates to;
  • the amount you propose to pay (scheduled amount); and
  • reasons why you will not pay the full claimed amount, if you choose not to pay the amount claimed.

Court Action

The contractor is more likely to take court action. If you miss a payment claim, the contractor’s claimed amount (whether correct or not) becomes a debt that you must repay. The contractor can file a claim in court to recover the amount due. They do not have to give you any prior notice for taking that action. 

If the contractor serves court documents on you, there are only 28 days to file a defence to the proceedings. You have limited options to defend the claim under the Act. You cannot dispute the claim because:

  • the works were defective;
  • the claimed amount is too much; or
  • you want to file an opposing action (known as a cross-claim) to the contractor’s claim because he breached his end of the contract.

If you want to avoid paying the debt, you can argue the payment claim is invalid for jurisdictional reasons. Jurisdictional reasons refer to any events or conditions that invalidate payment claims.

For example, the contractor may not be eligible to claim the amount under the Act because their business is insolvent.

Other examples that may invalidate payment claims include the:

  • claimed amount is irrelevant because the claim refers to security under the contract, not about the construction work; or 
  • contractor claims amounts that arise from a separate contract.

Settlement

If your defence options fail, you can always seek a settlement with the contractor. Litigation is expensive and contractors may not want to lose money to recover a debt. Even if the contractor succeeds in court action, they may find it difficult practically to recover the money from your business.

You can offer the contractor a compromise where you would pay part of the claimed amount. That way, you increase the contractor’s cashflow and persuade them to continue with the construction works. If negotiated carefully, a settlement can be a win-win scenario where the contractor gets some payment for their work and you do not lose money on your construction project.

Key Takeaways

Missing a payment claim can be a costly exercise for a principal builder in NSW. If you miss a payment claim, you have three options. They are to:

  1. serve your payment schedule within five days business days when the contractor seeks adjudication;
  2. dispute the payment claim’s validity if the contractor takes you to court; or
  3. settle with the contractor for a specific sum that allows for cashflow and the construction works to continue.

If you have any questions or you need assistance with responding to a payment claim, get in touch with LegalVision’s construction lawyers on 1300 544 755 or fill out the form on this page.

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