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How can I get paid when the head contractor goes “belly-up”? (The Subcontractors Charges Act 1974)

When a head contractor in a construction or building project goes to the wall, the repercussions for contract builders and subcontractors can be severe.

Subcontractors are often well down the line for payment when administrators or liquidators step in and take over the affairs of the developer.

However, if there is money in the hands of the developer, then there is still hope.

Securities for Payment for Subcontractors

In Queensland, the two relevant pieces of legislation are the Building And Construction Industry Payments Act 2004 (” BCIPA”) and the Subcontractors Charges Act 1974 (“SCA”).

A subcontractor who is seeking to enforce payment from a higher order contractor or developer may use one but not both of these frameworks to pursue payment.

There are strengths and limitations inherent in each and a number of Australian states have recently reviewed or are in the process of reviewing how to improve the operation of the current frameworks to provide better security of payment for subcontractors.

Subcontractors Charges Act

The SCA creates a security interest over the right that the contractor has to receive payment from a developer, in relation to “work” as it is defined in the SCA.

Provided the proper timeframes and procedures in the SCA are adhered to, the subcontractor can take advantage of that security interest to by-pass the Head Contractor and claim payment directly from the Developer as illustrated below.

This allows the subcontractor to skip the flow of contractual obligations and make direct claim to payment from the Developer.

developer_contractor_diagram

If the Head Contractor is being wound up, this can put the Subcontractor at the front of the line for payment before the unsecured creditors and even other secured creditors.

A note of caution:

  • The SCA contains strict timeframes and procedures.
  • The subcontractor’s charge will not be of any practical use if the Developer has already paid the money to the Head Contractor.
  • A claim must be in relation to ‘work’ as defined in the SCA.
  • A claim is only as good as the head contractors’ right to payment from the developer – liquidated damage clauses can erode the pool of funds.

Where to?

Prevention is generally better than the cure.

If you are considering entering into a subcontractor arrangement, it is prudent to get proper advice on not only the subcontract, but the Head Contract and all project documents. This can help identify potential pitfalls and allow you to formulate your risk strategy.

If you are having difficulty getting paid, you need to act quickly.

Our team of commercial lawyers have extensive experience in drafting subcontractors and other charges and will gladly assist you.

If you would like more information, please contact Gordon Stünzner on 4936 9100 or by email.

It is important to seek specific advice regarding your circumstances as this fact sheet provides general information only and does not constitute legal advice.

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