July 31, 2013

Consider this scenario: a Subcontractor has been working on a project in Queensland.  The Contractor consistently made payment for many months but has not paid the Subcontractor for the past 3 months.  The Subcontractor desperately requires an injection of cash flow.  The Contractor believes there is no right to payment under the contract.

In recent times, the Subcontractor’s first and most obvious strategy may have been to issue a payment claim under the Building and Construction Industry Payments Act 2004 (Qld) (BCIPA).  But the market is changing.  Many participants are going through even tougher commercial times, threatening their very existence. It may now be the case that a Contractor is not paying a Subcontractor because it does not have the financial capacity to do so.  Because of this, for Queensland projects, there is a payment recovery option, other than BCIPA, that should always be considered – especially in circumstances where the Subcontractor is concerned about the Contractor’s ability to pay. This option is the Subcontractor’s statutory right under the Subcontractors’ Charges Act 1974 (Qld) (SCA) – a piece of often forgotten legislation unique to Queensland which has far reaching consequences.

Subcontractors’ Charges Act 1974 (Qld)

The SCA allows a Subcontractor to place a charge over monies owed or retentions payable by a Head-Contractor to a Contractor, freezing those monies pending final resolution of the payment dispute between the disputing parties through the court system.[1]

Notice of claim of charge

The Subcontractor’s first step in creating the charge is  by serving a Notice of claim of charge (Notice) on both the Head Contractor and Contractor (and where necessary the security holder) pursuant to section 10 of the SCA.  Notices that do not meet the strict requirements of section 10 of the Act do not create a charge and cannot be enforced.[2]

Head Contractor and Contractor’s responses to a Notice

Where a valid Notice is served, the SCA provides that a Head Contractor must retain the amount required by the Notice, until the court in which the claim is heard directs to whom and in what manner the monies are to be paid.[3]  Should the Head Contractor fail to retain the amount required by the Notice, it will be personally liable to pay to the Subcontractor the relevant amount under the claim.[4]

Within 14 days after receiving notice of the claim, the Contractor must (in the approved form) give the Head Contractor and the Subcontractor a notice (Contractor’s Notice) that the contractor either accepts liability to pay the amount claimed, disputes the claim, or accepts the liability to pay only part of the claim.

Where monies are not disputed, a Head Contractor must directly pay the Subcontractor those undisputed amounts.  Where monies are disputed, the Head-Contractor must pay the disputed monies into court until the proceeding is resolved.  Money paid into court under section 11 of the Act can only be paid out by an Order of the court.

Commencing Proceedings

To enforce a charge, the Subcontractor must commence legal proceedings within 1 month after a Notice has been given.[5]  Where the Notice is in respect of retention money only, proceedings must be commenced within 4 months after the retention money has become payable.

The statutory timeframes are strictly upheld and a charge will automatically extinguish should the subcontractor fail to meet the deadlines.[6]

However, should a Subcontractor fail to commence legal proceedings within time, where a second Subcontractor has successfully started proceedings against the Contractor, the first Subcontractor may still be able to pursue its claim by applying to the court to join in the claim of the second Subcontractor.[7]

SCA or BCIPA? Choose wisely

A Subcontractor cannot, in respect of the same construction works, serve a Notice of Claim of Charge and seek to recover monies under the Building and Construction Industry Payments Act 2004 (Qld) (BCIPA). [8] 

If a Notice under the SCA has been served, a respondent will not be required to meet a payment claim under the BCIPA and any running adjudication application will be deemed to have been withdrawn.

A Subcontractor must, therefore, before embarking on its payment recovery strategy, elect to use either BCIPA or the SCA (or another method) as its preferred method of payment recovery for construction works. 

A failure to elect the correct payment recovery strategy in these circumstances may lead to dire commercial consequences.  An obvious error could be for a Subcontractor to utilise the BCIPA process when the Contractor has no money.  An adjudication decision under BCIPA is only as good as the Contractor’s ability to pay.  If the Contractor becomes insolvent, the Subcontractor is likely to become an unsecured creditor in respect of its entitlement to the moneys.  On the other hand, a Subcontractor’s charge under the SCA, provided it is valid, may take priority over charges previously registered in favour of secured creditors.  

Equally, electing to utilise the SCA process may carry its own significant risks.

All participants should give due consideration to the commercial and legal landscape before making an election on the most appropriate path in the circumstances.

The authors would like to thank Katharine Chapman for her contribution to this Update.

[1] Section 5 of the SCA .

[2] Section 10 (4) of the  SCA.

[3] Section 11 (1) of the SCA.

[4] Section 11 (2) of the SCA

[5] Section 15 of the SCA.

[6] Section 15(3) of the SCA.

[7] Section 13 of the SCA.

[8] Section 4 of the BCIPA.