BIFA Refresher: Part 2 – Subcontractor’s Charges & Payment Withholding Requests

The second instalment of this BIFA refresher series will focus on two avenues under the Building Industry Fairness (Security of Payment) Act 2017 (Qld) (BIFA) to recover amounts owed to a party lower in the contractual chain, from a party higher in the contractual chain. Namely, a subcontractor’s charge, and a payment withholding request.?

Note – this article will refer to the contractual chain of a subcontractor’s entitlement against a head contractor, however these mechanisms may also be available to other tiers in the contractual chain.?

Subcontractor’s Charge

A subcontractor’s charge enables a subcontractor to secure payment of money (including retention money and security held under the head contract) owed to the subcontractor, from an amount which is, or is to become, payable to the head contractor under the head contract.

The entitlements and obligations for a subcontractor’s charge as outlined in Chapter 4 of BIFA are lengthy and stringent, and failing to strictly comply with BIFA (even a minor mistake in completing the forms) could invalidate your claim or the charge.

Subcontractor’s Entitlements

A subcontractor is entitled to a charge over money payable to the head contractor under the head contract. If there are no (or insufficient) moneys payable to satisfy the value of the charge, the subcontractor is entitled to a charge on security for the head contract, to the extent:

1. Of the security’s maximum possible value for securing performance of the head contract; and
2. It is not required to be used for securing performance of the head contract.

Claim for a Subcontractor’s Charge

A subcontractor’s charge over money payable to the head contractor under the head contract (which includes a retention amount), must be made in writing (in the approved form), state the amount of the claim and details of the work undertaken by the subcontractor, and be certified by a qualified person (notice of claim), and given to both the person who is obliged to pay the head contractor under the head contract (for example, the principal), and the head contractor.

The timing for giving a notice of claim must be strictly complied with, and differs depending on whether or not the claim is for retention moneys only. Namely:

1. If claiming retention money only, a notice of claim may be given at any time while the work under the head contract is being performed, and must be given within 3 months after the expiration of the defects liability period;
2. Otherwise, if work is not completed (or the related payment is not due), a notice of claim may be given at any time. However, if the work has been completed, a notice of claim must be given within 3 months of practical completion.

If the notice of claim fails to strictly comply with the requirements of BIFA, it is of no effect, and the subcontractor’s charge does not attach.

Further, unless the notice of claim relates to retention moneys only, proceedings for a subcontractor’s charge must be commenced within one month after the notice of claim was provided. Failure to commence proceedings within this time will extinguish the subcontractor’s charge.

A subcontractor’s charge cannot be made if, amongst others:

a. The adjudication process has been accessed as a means of resolving the payment dispute – only one avenue can be used;

b. The strict time limits and requirements under BIFA have not been complied with;

c. It relates to moneys held in trust under a project trust or retention trust (which will be discussed in Part 3 of this series);

d. A claim has already been made in relation to an item of work undertaken by the subcontractor under the subcontract (in this instance, the subcontractor’s charge is of no effect and does not attach) – each claim must be a separate and distinguishable item of work;

e. Amounts claimed relate to domestic building work, damages (for breach of contract or tort) or damages or other relief under BIFA or another Act; or an amount payable on the basis of an extra-contractual remedy (i.e., reasonable compensation for our done) – these amounts cannot be included in a subcontractor’s charge;

f. The total amount recoverable exceeds the amount payable to the subcontractor under its subcontract, or the amount payable to the head contractor under a head contract (if the subcontractor’s charge relates to money payable under the head contract). ?

Head Contractor’s Obligations

Unless the head contractor has a reasonable excuse, it must provide information regarding the head contract, and whether any security exists under that contract within 10 business days of a request from the subcontractor. Failure to comply means the head contractor will become liable to pay the subcontractor damages that it incurs as a result (the amount of which will be decided by a court).

Within 10 business days of receiving a copy of the notice of claim, the head contractor must give written notice (which must be made in the approved form) to the principal and the subcontractor (unless the head contractor has a reasonable excuse), either:

1. Accepting liability to pay the amount claimed;
2. Accepting liability to pay the amount stated in the response, but otherwise disputing the claim; or
3. Disputing the claim.

(Contractor’s Response)

Principal’s Obligations

If the principal receives a subcontractor’s charge, it must either:

1. Retain a sufficient part of the money that is payable or becomes payable to the head contractor under the head contract, to satisfy the claim. This amount must be retained until the court makes an order about to whom, and in what way, the money is to be paid; or
2. Pay the amount to be retained into the court, which discharges it of all further liability relating to that amount and the costs of any proceedings in relation to that amount (where the money will then only be paid out by an order of the court).

Failure to retain (or pay into court) the amount required, will result in the principal being personally liable to pay the subcontractor the amount of the claim which it was required to retain.

Following the Head Contractor’s Response

If the Contractor’s Response:

1. Accepts liability to pay the amount of the claim, the principal must pay the subcontractor the amount which it was required to retain; or
2. Accepts liability to pay the amount stated in the Contractor’s Response, the principal must pay the subcontractor the amount it is required to retain, up to the amount stated in the Contractor’s Response; or
3. Accepts liability to pay the amount claimed but that amount is more than the amount retained under the contract, or disputes the claim, the principal must either:

a.?????Retain security until the court makes an order to enforce the subcontractor’s charge over the security; or

b.?????Pay the balance amount to the subcontractor (if the security is held as an amount of money, or if convertible into money, by converting the security).

Once payment is made to the subcontractor (including under item 3b above), all liability is discharged from the principal relating to the amount paid and the costs of any proceeding relating to the amount paid.

Failure to retain security or pay from security under item 3 above, means the principal is personally liable to pay the amount claimed to the extent the security would have been capable.

Principal’s Use of Security

Notwithstanding the principal’s obligation to retain security, the principal is not prevented from exercising an entitlement to use the security for securing the performance of the contract, including keeping control of the security until it would be required to be surrendered, wholly or partly, if the above provisions did not apply. ?

Further, the court may make an order to enforce the subcontractor’s charge over security, but may only make an order to realise the security if the principal is no longer entitled, under any contract or other arrangement for the security (including under the security itself) to use the security:

1. For securing the performance of the contract; or
2. In some other way provided for in the contract. ?

Prejudicial & Vexatious Claims

The court may cancel or modify a subcontractor’s charge upon a claim that a person is prejudicially affected by the subcontractor’s charge (including where a subcontractor vexatiously, or without reasonable grounds, gives a notice of claim).

Payment Withholding Request

The payment withholding request mechanism was introduced as Part 4A of the SOP process in BIFA in 2020, as a means of reducing the risk of non-payment, and incentivising the payment of an adjudicated amount.

Where a subcontractor (for example) has been awarded an adjudication amount against a head contractor (which it has failed to pay), the Part 4A process entitles the subcontractor to require a principal (upon notice, which must also be given to a head contractor) to retain an amount from a “related amount payable” to the head contractor, which is sufficient to cover the adjudication amount.

A “related amount payable” to the head contractor is an amount that is payable or becomes payable by the principal to the head contractor under the head contract. ?????????????????????????????????????????????????????????????????????????????????????????????????????????????

The amount being retained by a principal in compliance with a payment withholding request is also subject to a statutory charge (to which the Personal Property Securities Act 2009 (Cth) applies, and which cannot be defeated) in favour of the subcontractor for securing payment of the adjudication amount, should the subcontractor become entitled to it.

Principal’s Beware

Similar to a subcontractor’s charge, if you receive a payment withholding request, do not ignore it. Doing so will result in you becoming jointly and severally liable with the head contractor, to pay the adjudicated amount to the subcontractor. ?

Upon receipt of a payment withholding request:

1. If the principal is not the “higher party” for the adjudicated amount (for example, it has already paid all amounts owed to the head contractor, meaning it is no longer a “higher party”), it must provide written notice of same to the subcontractor within 5 business days;
2. Otherwise, the principal must retain an amount of moneys from a related amount payable to the head contractor that is sufficient to cover payment of the adjudication amount (or if an amount less than the adjudication amount is payable to the head contractor, that amount). For example, if the adjudication amount is $50K, but the amount payable to the head contractor by the principal is only $40K, the principal is only required to retain $40K. If the amount payable to the head contractor is more than the adjudication amount, the principal is required to retain the full amount.

The principal’s obligations in this regard remain in force until the subcontractor is paid the adjudication amount by the head contractor (which the subcontractor must notify the principal of). Where part-payment by the head contractor has occurred, the amount which the principal must retain, will decrease accordingly.

Which One?

Whilst both a subcontractor’s charge and a payment withholding request provide an avenue for a subcontractor (or party lower in the contractual chain) to obtain an amount owed to it under a contract from a party higher in the contractual chain, there are many differences, and the most appropriate for use will depend on your specific circumstances.

For example:

1. Under a payment withholding request, a subcontractor can only claim an entitlement over money which is payable or becomes payable, whereas a subcontractor’s charge can extend to an entitlement over retention monies and security; and
2. A payment withholding request can only be made after an adjudication (where the adjudication amount has not been paid), whereas a subcontractor’s charge cannot be used when an adjudication has been undertaken.

Lamont Project & Construction Lawyers

Our Team have the industry knowledge and experience to assist both Principals and Contractors in all major projects and payment disputes, including preparing or dealing with a subcontractor’s charge or payment withholding request. If you would like to discuss any matters raised in the above article or this series as it relates to your specific circumstances, please contact Lamont Project & Construction Lawyers.

The contents of this article is for information purposes only; it does not discuss every important topic or matter of law, and it is not to be relied upon as legal advice. Specialist advice should be sought regarding your specific circumstances.

Contact:?Peter Lamont?or Lili Hoelscher

Email:[email protected] or [email protected]

Phone:?(07) 3248 8500

Address:?Suite 1, Level 1, 349 Coronation Drive, Milton Qld 4064

Postal Address:?PO Box 1133, Milton Qld 4064