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Robert Riddell

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A Christmas Gift for Small Residential Builders - Dec 2018

19 Dec 2018

A Christmas Gift for Small Residential Builders

Most Security of Payment updates at this time of year are the ubiquitous warning about how your spawn of the devil contractor will ruin your long overdue break with their massive ambush claim, served on Christmas Eve. But this time we have something different – we have good news. On 21 November 2018, both houses of NSW Parliament passed an extended exemption of owner occupied residential construction work from the clutches of the Security of Payment Act.

Partner, Robert Riddell, and lawyer, Brianna Smith, consider the exemption and how it will impact subcontractors on owner occupied projects.

What is -

Currently, construction contracts for residential building work, where the principal lives in, or intends to live in, the premises are exempt from the payment provisions of the Building and Construction Industry Security of Payment Act 1999 (NSW) (SoP Act). These contracts are currently known as “exempt residential construction contracts”.

However, this exemption does not apply down the chain, meaning that even where the head contractor is a party to an “exempt residential construction contract”, payment claims between the head contractor and a subcontractor are subject to the SoP Act.  So the subcontractors have access to the shortened payment periods and expedited determination of payment claims, but the head contractor does not – an outcome that is somewhat unbalanced.

What was proposed -

The first draft of the Amending Bill proposed to omit the “residential construction contracts” exemption from the SoP Act and replace it with a general exemption on any type of construction contract that was specifically exempt by the regulations. The intention was that an exemption not dissimilar to the current exemption would be introduced via the regulations to the Act. However, at the time the Bill was read in the Upper House, that regulation had not been drafted. 

What will be -

The Upper House amended the Amending Bill to introduce an “owner occupier” exemption, and then sent it to the Lower House for concurrence which occurred the following day. Quite possibly accidentally, the new “owner occupier” exemption is broader than the existing “residential construction contracts” exemption. Under the “owner occupier” exemption, any construction contract connected with an “owner occupier” construction contract will be exempt from the SoP Act. The “owner occupier” exemption will apply to all construction contracts down the chain i.e. those between the head contractor and the subcontractor, and beyond.  

After almost two decades, the balance is restored.

Subcontractors

The change will reduce the level of protection available to subcontractors who perform residential construction work in connection with owner occupier projects, as they will be unable to rely on the payment provisions of the SoP Act and its rapid adjudication system. 

This is not insignificant.  This impacts most subcontractors in NSW.   

Subcontractors will be more vulnerable to late, incomplete or non payment by head contractors, and will not have the most effective method of dispute resolution (adjudication) available to them.  Subcontractors will need to ensure their contracts contain a strong right to suspend, or even terminate, if the head contractor is tardy with payment.

Head Contractors

These changes will be welcomed by head contractors as they will provide some cash flow relief. Head Contractors will not have to comply with strict payment schedule and rapid adjudication procedures in circumstances where they themselves are not receiving the benefits of the Act. Head contractors will also need to ensure their contracts have a strong right to suspend work, or even terminate the contract, in the event the owner withholds progress payments.

Principals

The deletion of the owner occupier exemption would have been significant for owner occupiers who are often mums and dads, as they would have to come to grips and comply with the technical requirements of the SoP Act. Retaining the owner occupier exemption is tantamount to dodging a bullet. 


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