Unfortunately, disputes over residential building work are a common occurrence. An area that will often be the cause of these disputes is defective work. A defect may relate to the design of the work, the materials used during construction or the way in which the builders had built the premises. Work may also be defective if it does not meet the standards of the National Construction Code. If a homeowner believes that the work you have completed is defective, they may choose to withhold payment. This article will outline what steps a head contractor can take to get paid for residential building work in NSW and, alternatively, what the consequences are if the work is found to be defective.
What is the Law?
Previously, under the Building and Construction Industry Security of Payment Act 1999 (NSW) (the Act), home-building contracts entered into between homeowners and builders in NSW were exempt from the Act's operation.
Following amendments to the Act, residential building contracts entered into on or after 1 March 2021 are no longer exempt from SOPA regulations. This means that residential builders in NSW now have a statutory entitlement to receive progress payments for residential construction work. These entitlements outline a clear path for home builders to get paid when carrying out residential building work.
When Does It Apply?
A residential builder can rely on the Act when submitting a payment claim when:
- the work is carried out in NSW;
- a residential construction contract exists; and
- the residential construction contract was entered into on or after 1 March 2021.
When submitting a payment claim, there must be an accompanying statement that confirms that the payment claim is made under the Act.
What Can You Do to Recover the Outstanding Debt?
If you are providing services for work over $5,000, you are required to have a written agreement setting out the terms of your relationship with the homeowner.
A well-drafted document setting out your business terms should contain information on how you intend to resolve disputes. While not all documents will contain this information, you should be aware that proceeding to court is a costly exercise and should be a last resort.
Instead of proceeding straight to court, below are some suggested steps that aim to keep costs low, save time and resolve the matter as swiftly as possible.
1. Contact the Homeowner
Contacting the homeowner to discuss why they have not paid the debt is a good first step in most cases. If you can explain the alleged defect or are happy to rectify the issue, then you may be able to settle the matter amicably. It is important to document what you discussed on the call and what the response was in the event the homeowner takes the matter to Fair Trading.
2. Send a Reminder Letter and a Copy of the Invoice to the Homeowner
If the first phone call was unsuccessful, you should send a reminder letter to the homeowner and a copy of the invoice. Alternatively, you can send a letter of demand which sets out the amount outstanding and the date that you require payment. It is important to balance the perceived forcefulness behind a letter of demand and the importance of maintaining communication with the homeowner at the early stages of resolving the dispute. You could consider suggesting a payment plan or offering a discounted sum as a compromise.
3. Engage in Formal Dispute Resolution
You can participate in dispute resolution via an independent third party or by using the government assistance that is available to both builders and homeowners. Dispute resolution processes aim to settle matters before they need to progress to court. In NSW, either you or the homeowner can approach Fair Trading in the event of a dispute over defective work that you are unable to resolve.
4. Apply for Adjudication
The Act provides a fast and cost-effective way to resolve payment disputes without going to court. To initiate the adjudication process, you need to serve a payment claim on the person or company that owes you money as outlined above. If they do not respond with a payment schedule or pay the claimed amount, you can then apply for adjudication. An independent adjudicator will review the case and make a decision that is binding on both parties. If the adjudicator finds in your favour, you can then enforce the decision as a judgment debt in court. Adjudication under SOPA can be a powerful tool to help you get paid for your work in a timely manner.
5. Consider Your Legal Avenues
If the homeowner does not comply with the letter of demand that you sent, then you may wish to take the matter to court. Escalating to court is an expensive process and one that you may not win, especially if the work performed was defective.
An alternative is to offer an early settlement through a Calderbank letter. A Calderbank letter can potentially reduce your costs if you are unsuccessful in court and is advisable should you want to end the matter as soon as possible. The court may require the homeowner to pay for some of your court costs for drawing out the proceedings if:
- you make a genuine settlement offer in your Calderbank letter that the homeowner did not accept;
- the case continues through court, and the court awards the homeowner damages less than your original settlement offer; and
- you can produce the settlement offer as evidence that the homeowner is in no better position than they would have been.
You should also be aware that the homeowner may try to make an early settlement. If this occurs, you will need to be cautious of how the homeowner's Calderbank letter may affect the costs that you need to pay.
What Can the Homeowner Do If They Claim the Work is Defective?
The homeowner may then choose to contact Fair Trading to make a complaint, at which point Fair Trading will assist by negotiating a resolution. If further negotiations fail, a Fair Trading building inspector may assess the quality of your work. The inspector will review the work that the homeowner claims is defective and determine whether a defect does, in fact, exist. If it does, the inspector may require you to fix it by issuing a rectification order. If it is not a repairable defect or the homeowners refuse you access, then you may not be required to correct the defective work. However, if the homeowner is still seeking compensation or other work, then they may be able to apply to the NSW Civil & Administrative Tribunal for further assistance if the work in question is less than the value of $500,000.
Key Takeaways
Disputes are an unfortunate reality for almost any business – this is especially the case for those who provide construction services and residential building work. It is important to try and handle each dispute over defective work in the most cost-effective way possible. Very rarely would this mean taking a matter directly to court. Instead, you should look to all other options that are available to you. You should also be aware of the legislation and government assistance that is provided to homeowners and how this can affect you during the process of recovering any unpaid funds.
If you have further questions regarding payment for your residential building work, our experienced construction lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to solicitors to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.