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Under changes to the Building and Construction Industry Security of Payment Amendment Act 2010 which came into operation on 28 February 2011, subcontractors have obtained direct rights against principal contractors for payments due from contractors. This basically means that where a subcontractor is owed money, they may seek out money owed from the principal contractor to the contractor which has yet to be paid. This also has the advantage for subcontractors that the risk of non-payment due to insolvency of a contractor will be reduced. For a subcontractor to deal directly with the principal contractor they must serve them with a ‘payment withholding request' which requires the principal to withhold payment of the amount specified to the contractor pending adjudication. If a principal does not comply with the request they will become jointly and severally liable to the subcontractor along with the contractor. The obligation to withhold money will expire at the withdra! wal of the adjudication application, the payment of the amount claimed by the contractor, the subcontractor serves a notice of claim and debt certificate on the principal or a period of 20 days has elapsed since the principal contractor was served with the adjudication determination. The subcontractor is responsible for serving the adjudication determination on the principal within 5 days.
This new regime may significantly restrict the cash flow for the contractor and so may be used as a bargaining tool as the subcontractor may claim more than it is really owed, possibly preventing the contractor from paying other subcontractors or continuing work. In essence this increases the project risk for the principal contractor and may be a reason for greater interest in the contractual relationships between contractors and subcontractors.
Payment withholding requests may also offer an advantage to reduce risk where it is likely a contractor will become insolvent. In such a situation the first subcontractor to serve a payment withholding request to the principal contractor may be at an advantage.