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16 February

Contractors, subcontractors, builders and developers in the building industry should be aware of the Contractors Debts Act 1997 (the Act) and its potential ramifications. The Act provides a mechanism for unpaid persons (usually subcontractors) to recover monies owed to them in certain circumstances, usually payable by the head contractor or principal. It permits the unpaid person to go "up the chain" as it were and recover from the entity that has obtained the benefit of the work.

Most large building sites are owned or managed by a developer who engages a builder. Often the builder or head contractor performs some of the work itself and engages subcontractors to perform the remaining work. For example the builder may perform the structural work required but engage subcontractors to perform the other work such as glazing, tiling, painting, carpeting and perhaps even carpentry, plumbing and electrical. Typically agreements to perform these works are between the head contractor and the subcontractor.

Going up the Chain
In the instance that the head contractor fails or is unable to pay the subcontractor, in certain situations the subcontractor may be able to recover from the principal. The Act permits an "unpaid person" (the subcontractor) who is owed money for work performed or materials supplied to the "defaulting contractor" (the head contractor) to be paid out of money that is payable or becomes payable to the defaulting contractor by the principal. However the work being claimed by the unpaid person must be work that the principal engaged the defaulting contractor to perform.

However, in most cases the ability of the unpaid person to recover from the principal will depend on what money is or becomes payable to the defaulting contractor. That is if the defaulting contractor has been paid and is not owned money by the principal, the unpaid person will not be able to recover from the principal.

The Statutory Requirements
To obtain payment from the principal the unpaid person must have:2

  1. obtained a debt certificate for the unpaid amount.
  2. Served a Notice of Claim attaching the debt certificate to the principal.

Usually to obtain a debt certificate the unpaid person would have obtained an adjudication certificate against the defaulting contractor and filed it with the Court.3

Assignment of the Debt to the Principal
Once the Notice of Claim is served on the principal, it operates to assign the obligation of payment under the contract between the principal and the defaulting contractor, to the unpaid person. After seven days of receipt of the Notice of claim the unpaid amount becomes payable by the principal.4

Priority of Claims
Where more than one Notice of Claim is served on a principal, the payment of the claims are to be in order of receipt of the notice. However where notices are received within 7 days of each other, they should be given equal priority as to payment. This is why payment of a claim is not due until 7 days after receipt of the notice of claim.5

Principal's Failure or Refusal to Pay and Why
It is not uncommon and in many cases appropriate for a principal to refuse to pay a claim or part thereof. However if resolution does not occur the unpaid person may commence proceedings against the principal to recover the debt.6

However, the unpaid person's right to recover is subject to any defence the principal would have had against the recovery of the debt by the defaulting contractor had there been no assignment.7 This means that whatever defences that would have been available to the principal against the defaulting contractor are also available against the unpaid person.

Examples of defences are:

  1. There are no monies payable to the defaulting contractor at the time of or after service of the notice of claim. However if the principal continues to make payments to the defaulting contractor after receipt of the notice of claim, this defence fails and the payments made to the defaulting contractor will not offset the unpaid person's claim.
  2. The defaulting contractor's work is defective giving rise to a "set off" or reduction in the amount payable to the defaulting contractor by the principal.
  3. The defaulting contractor owes money to the principal.

Other ways to Recover Under the Act
The Act permits the Court to make an order (attachment order) for the payment of money to the unpaid person by third parties who owe money to the principal. However the unpaid person must have commenced proceedings against the principal and the work performed by the unpaid person must relate to the money owed to the principal by the third party.8

The Act also compels the defaulting contractor to provide details of persons that own it money to the unpaid person but only if a debt certificate has been issued. This permits the unpaid person to recover debts using other remedies such as a garnishee order. Providing misleading or false details is an offence.9

All claims under the Act must be commenced within 12 months from when the debt becomes payable.10

No Contracting Out
Any clause in a contract that seeks to exclude the operation of the Act is void.11 This means that the Act cannot be circumvented even by agreement.

1 Contractors Debts Act 1997 (NSW) s 5.
Ibid s 6.
Building & Construction Industry Security for Payment Act 1999 (NSW) s 25.Ibid s10.
4 Contractors Debts Act 1997 (NSW) ss 8,9.
Ibid s11.
6 Ibid s11(4).
Ibid s14.
Ibid s15.
Ibid s17.
10 Ibid s18.