Contractors Debts Act 1997

By Scott Mort and Rob Riddell of Gadens Lawyers, Sydney

Our October update entitled 'Building and Construction Industry Security of Payment Act 1999 - Change in the Air' focussed on the Department of Services Technology and Administration's (Department) proposed reforms to the Building and Construction Industry Security of Payment Act 1999.

One of those proposed reforms was that subcontractor-claimants be entitled to claim against both a head contractor and the principal (in the event of non-payment by the head contractor). As an alternative to this reform, the Department sought submissions on various proposed amendments to the Contractors Debts Act 1997 (Act).

The Act permits, in certain circumstances, a subcontractor-claimant to claim for unpaid monies further up the contracting chain by seeking an order assigning or "attaching" a payment due or to become due from the principal to the head contractor. "Attaching" is a process by which the debtor/principal is restrained from paying a debt owed or to be owed to a creditor/contractor until a notified third party/subcontractor claim is resolved (perhaps by court order assigning the debt).

Unfortunately for subcontractor-claimants, an amount that is "attached" by order of the court is not payable until judgment is given against the head contractor. The support it provides to subcontractor cash flow is handicapped by the time and cost involved with court action.

The Department has expressed concern as to subcontractor-claimants, reliant on cash flow, being left at the mercy of the engaging contractor and its willingness or ability to pay. The proposals are aimed at:

1. simplifying the process and reducing the cost of debt recovery for subcontractor-claimants;
2. providing more options to subcontractor-claimants to assess any moneys owed by the principal to the non-paying contractor; and
3. improving the supply of information to subcontractor-claimants about non-paying contractors.

Proposed Changes

The Department's proposals to amend the framework of the Act include subcontractor-claimants being entitled to provide a notice of charge to a principal.

Where such a notice has been given, it is proposed that the principal must retain money owed to the non-paying contractor, or to pay that money into court, to be held for the benefit of the unpaid subcontractor-claimant until a charge can be placed against the money.

Any notice given to the principal of the alleged charge would also have to be provided to the head contractor, allowing the non-paying contractor to respond to a notice of charge, within a specified time limit, by either accepting the claim made by the subcontractor-claimant for monies owed or disputing the claim.

This is intended to eliminate the need for a subcontractor-claimant to commence legal proceedings to obtain an attachment order and would provide some certainty to subcontractor-claimants (that funds are available) prior to expending resources making a security of payment claim or commencing legal proceedings.

To avoid undue prejudice to principals, any amount retained or paid into court could only be held for a specified period of time thus ensuring the subcontractor-claimant prosecutes its claim expeditiously.

It is also proposed to enable a subcontractor-claimant to compel a non-paying contractor and other third parties, to provide detailed and sufficient information to identify money owing to the non-paying contractor. The provision of such information would assist the subcontractor-claimant to draft and serve a notice of its charge.

Risks to the Industry

On the whole, the suggested provisions present some rather obvious risks to the industry, including:

• subcontractor-claimants will be able to hold contractors to ransom by 'freezing' their cashflow for the commercial benefit of the subcontractor;
• the amendments may be conducive to inflated claims being submitted by subcontractors;
• the amendments possibly slowing down cash flow, flying in the face of the objects of the Building and Construction Industry Security of Payment Act 1999; and
• the amendments may be inconsistent with, or even offend, the preference payment scheme under the Corporations Act 2001.

Further consideration is to be given to specifically whether:

1. the process resulting from the amendments to the Act should be in addition to, or as an alternative to, a subcontractor-claimant making a claim under the Building and Construction Industry Security of Payment Act 1999; and
2. this reform should apply only to smaller claims (<$100,000).

Streamlining Court Process

The Department is also considering whether it is necessary to change the forum in which legal action for such claims are conducted. The aim is to streamline the originating process for the commencement of claims and, possibly, further reduce the cost and complexity of pursing a claim.

The Department is of the view that, as an alternative to the Local and District Courts, there may be merit in permitting smaller claims (<$100,000) to be brought in an alternate dispute resolution forum, such as a tribunal similar to the Consumer, Trader and Tenancy Tribunal, which is considered by the Department to be a less formal, low cost, dispute resolution process. It may also assist with the development of the equivalent of a specialist bench, with the adjudicator being a building and construction specialist.

A similar approach has been implemented in respect of retail lease disputes, which are now conducted through the Retail Lease Division of the Administrative Decisions Tribunal.