How does the Contractors Debt Act work?

The Contractors Debt Act 1997 (NSW) (the CDA) provides for individuals (often subcontractors) to recover payment they are owed for work carried out or materials supplied. In essence, the CDA allows the individual to go to the top and recover debt directly from the principal when the contractor defaults. 

For example, in circumstances where the principal engages a builder to perform a project. The builder may then engage a subcontractor to do certain work on the project, such as tiling. If the subcontractor completes their work and the contractor does not pay them, then the CDA may enable the subcontractor to receive payment from the principal. 

The CDA cannot be contracted out of by agreement between the parties. 

Debt recovery – how does it work?

Limitation: Claims under the CDA must be commenced within 12 months from when the debt became payable. 

Pre-requisite: To seek payment under the CDA, the unpaid person must first obtain a debt certificate. This can be obtained through court proceedings. It is most likely, however, that the unpaid person will first obtain an adjudication certificate filed as a judgement for a debt under the Building and Construction Industry Security of Payment Act 1999. The unpaid person can then apply to the court to issue a debt certificate.

Step 1:  The unpaid person must serve a Notice of Claim attaching the debt certificate to the principal.

Step 2: By serving the Notice of Claim on the principal, the principal’s obligation to pay the defaulting contractor under the contract is assigned to the unpaid person (up to the amount owed to the subcontractor). 

Step 3: After 7 days from which the Notice of Claim was served, the principal must pay the money owed to the defaulting contractor to the unpaid person until a discharge notice is received or the payments are no longer payable. 

When doesn’t the principal need to pay?

The principal does not need to pay if:

1. They do not owe any money to the defaulting contractor.
2. The work or materials supplied for which the unpaid person is seeking payment are not part of or incidental to the work or materials that the principal engaged the contractor to perform or supply. 

What if there are multiple claims?

When the principal receives more than one Notice of Claim, the priority of the claims are in order of their receipt. However, when notices are received within 7 days of each other, they have equal priority. This is why the principal must wait 7 days before making any payments. 

What if the principal does not pay?

If the principal fails to pay the unpaid person in accordance with the Notice of Claim, the unpaid person can sue the principal directly to recover the debt.

Attachment

If the unpaid person commences proceedings to recover money from the defendant (principal), on the application of the unpaid person, the court may make an order (known as an attachment order) against another person to pay the debt. To make an attachment order, the court must be satisfied that:

1. The defendant owes the unpaid person money for work carried out or materials supplied; and
2. The work or materials are part of or incidental to work for which the principal is to be paid under a contract by the person against whom the attachment order is sought. 

Takeaway

This is an overview of the main steps involved in recovering debt under the Contractors Debt Act. This mechanism can be very useful for subcontractors to receive payment directly from the principal for work performed or materials supplied if the contractor defaults on payment.

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