Security of Payment: Payment Withholding Request – How to get the Money

It is well known that the Building and Construction Industry Security of Payment Act 1999 (the “SOP Act”) makes pay when paid clauses unenforceable. In reality, however, a Claimant may be at risk of recovering an adjudicated amount because a Respondent has not been paid by a Principal.

To address this risk, Division 2A of the SOP Act creates the opportunity for a Claimant subcontractor to require a Principal to withhold the amount of money claimed in a Payment Claim from any money that the Principal owes to the Respondent contractor.

What is perhaps not well understood is how a Claimant can actually access the money that a Principal has withheld under a Payment Withholding Request.

This article sets out the steps that a Claimant must take in order to recover payment from a Principal in the event that a Respondent fails to pay an Adjudicated Amount.

 Division 2A of the SOP Act

Division 2A of the SOP Act is intended to provide some security to a Claimant in the event that a Respondent defaults on its payment obligations.

Division 2A works as follows:

  • Assume a Claimant has issued a Payment Claim to a Respondent and the Claimant now intends to file an Adjudication Application in respect of that Payment Claim.
  • A “Principal Contractor” for the purposes of the Payment Claim is a person by whom money is or becomes payable to the Respondent for work carried out or materials supplied by the Respondent to the person as part of or incidental to the work or materials that the Respondent engaged the Claimant to carry out or supply (s26A (4) of the Act).
  • Once the Claimant has filed its Adjudication Application, the claimant may then serve a “Payment Withholding Request” on the Principal Contractor.
  • Once served with a Payment Withholding Request, the Principal Contractor is required to retain sufficient money to cover the claim out of any money that is or becomes payable by the Principal Contractor to the Respondent (s26A (1) and (2), s26(B) (1) and (2) of the Act).
  • When the Adjudication Application is determined, the Claimant must serve a copy of the Determination on the Principal Contractor within 5 business days after the Determination is served on the Claimant.
  • The Principal Contractor is only required to withhold the relevant amount of money until whichever of the following happens first (s26B (3) (a) to (d) of the Act):
  1.  the Adjudication Application for the Payment Claim is withdrawn; or
  2.  the Respondent pays to the Claimant the amount claimed to be due under the Payment Claim; or
  3.  the Claimant serves a notice of claim on the Principal Contractor for the purposes of section 6 of the Contractors Debts Act 1997 in respect of the Payment Claim; or
  4.  a period of 20 business days elapses after a copy of the Adjudicator’s Determination of the Adjudication Application is served on the Principal Contractor.

Although Division 2A of the Act compels a Principal Contractor that has received a Payment Withholding Request to retain money owed to the Respondent to cover the amount of the Payment Claim, nothing in the Division or otherwise in the SOP Act compels the Principal Contractor to actually pay any money to the Claimant.

If a Principal Contractor is required to withhold money but is not compelled to pay the Claimant, what good is that to the Claimant? If the Respondent does not pay the Adjudicated Amount, how can the Claimant access the money that has been withheld by the Principal Contractor?

The answer to these questions is found in s26B (3) (c) of the SOP Act. In order to gain access to any withheld money, the Claimant must issue what is known as a “Notice of Claim” on the Principal. The Notice of Claim is obtained and issued under separate legislation known as the Contractors Debts Act 1997 (the “CD Act”).

The Contractors Debts Act

The general intent of the CD Act (refer to s5 of the CD Act) is to make it possible for a Subcontractor to obtain payment from a Principal for money owed to the Subcontractor by a Contractor in circumstances where the Contractor is unable or unwilling to pay the Subcontractor. The money is only recoverable by the Subcontractor out of money that is owed or becomes owing by the Principal to the Contractor.

In order to obtain a payment from a Principal under the CD Act, the Subcontractor must:

  • first a obtain a judgment from a Court that specifies a debt is owed by the Contractor to the Subcontractor; then
  • obtain a “Debt Certificate” from the Court (s7 of the CD Act); then
  • serve a “Notice of Claim” on the Principal attaching a copy of the Debt Certificate (s6 of the CD Act).

Therefore, a Claimant under the SOP Act that has issued a Payment Withholding Request on the Principal Contractor must follow the procedures set out in the CD Act and ultimately issue a Notice of Claim on the Principal Contractor in order to recover payment.

 Relationship Between the CD Act and Division 2A of SOP Act

Assuming a Payment Withholding Request was issued by a Claimant under the SOP Act, the amount determined to be payable in the Adjudication Determination has gone unpaid by the Respondent and the Claimant then wishes to gain access to money withheld under the Withholding Request, the Claimant will need to take the following steps:

  • obtain an Adjudication Certificate (s24(1) SOP Act);
  • file the Adjudication Certificate as a judgment debt in the appropriate Court (s25 SOP Act);
  • obtain a Debt Certificate from the Court (s7 (1A) CD Act); and
  • serve a Notice of Claim on the Principal Contractor attaching a copy of the Debt Certificate (s6 CD Act).

Once the Notice of Claim is served on the Principal Contractor, any money that has been withheld under the Payment Withholding Request (s26A Sop Act) will be required to be paid by the Principal Contractor to the Claimant.

Practical Advice

Although the above steps appear straightforward, the processes involved in obtaining each outcome can become complicated.

For example, in order to obtain a Debt Certificate, it is necessary to make an application to the Court by way of Notice of Motion and Affidavit in support. Schedule 10 of the Uniform Civil Procedure Rules 2005 sets out the process that must be followed to apply to the Court to issue a Debt Certificate.

The amounts involved in these types of matters will often mean that Local Courts are required to administer the processes and Registry staff may be unfamiliar with the type of application being made.

As a matter of practicality and in the interests of avoiding delays at the Court, Claimants (or their legal representatives) that intend to enforce the provisions of s26A and 26B of the SOP Act and the related provisions of ss5 to 7 of the CD Act should become familiar with the procedures involved and be able to explain those procedures to court staff if required.

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