Unlicensed and Uninsured Contractors: Impact of Legislative Changes on Progress Payments Under the SOPA Regime

Co-Authored by Sophie McLean

KEY TAKE OUTS:

• Ensuring that builders and contractors are properly licensed and insured is crucial for maintaining safety, quality standards and consumer protection.
• Prior to the recent changes, contractors who were unlicensed or uninsured could still benefit from the protections available under the Building and Construction Industry Security of Payment Act 1999 (“SOPA”) to claim payment for work which was otherwise unlawful under the Home Building Act 1989 (NSW) (“HBA”).
• In response to concerns raised by the Sunshine East case decision, the New South Wales government introduced key amendments through the Better Regulation Legislation Amendment (Miscellaneous) Act 2024, which took effect on 20 August 2024 and apply retrospectively.
• The amendments now explicitly align the requirements for claiming progress payments under SOPA with the licensing and insurance provisions of the HBA. The changes ensure that contractors who are unlicensed or uninsured for residential building work are no longer entitled to claim progress payments under the SOPA.

The Building and Construction Industry Security of Payment Act 1999 (“SOPA”) aims to guarantee that contractors, subcontractors, and suppliers receive timely and fair payments for work completed. The purpose of the act is to provide a faster, cheaper and more efficient resolution of payment issues in order to minimise delays in building works.

As well as receiving payment however, ensuring that builders and contractors are properly licensed and insured is crucial for maintaining safety, quality standards and consumer protection. Prior to the recent changes, while homeowners could raise unlicensed or uninsured contracting as a reason for withholding payment in a payment schedule, contractors would still benefit from the protections available under the SOPA to claim payment for work which was otherwise unlawful under the Home Building Act 1989 (NSW) (“HBA”).

Recent case law has raised significant questions regarding whether unlicensed and uninsured contractors are entitled to make claims for payment under the SOPA. The Sunshine East Pty Ltd v CBEM Holdings Pty Ltd [2023] NSWSC 744 decision highlighted these concerns, particularly in cases where contractors fail to comply with the HBA. The ruling sparked fears that unlicensed contractors might still be able to claim payments under SOPA, despite not meeting the licensing and insurance requirements of the HBA. We explore this case in further detail below:

The Sunshine East Case: Unlicensed Contractors and the SOPA

In the Sunshine East Pty Ltd v CBEM Holdings Pty Ltd case (the “Sunshine East case”), the New South Wales Supreme Court considered whether an unlicensed contractor was entitled to claim progress payments under the SOPA, despite not complying with the requirements of the HBA. Specifically, the case raised two key issues:

1. Whether the works in question were classified as “residential building work” under the HBA.
2. Whether the contractor was entitled to payment under SOPA, despite failing to maintain the required Home Building Compensation Fund insurance (home warranty insurance) and holding the necessary trade licence to carry out residential building work.

The court ruled that contractors must not only comply with the SOPA provisions but must also satisfy the licensing and insurance requirements set out in the HBA to validly claim progress payments. This reinforced the principle that consumer protection laws—including those mandating home warranty insurance and contractor licensing—cannot be bypassed simply because a contractor is seeking payment under the SOPA. In essence, the ruling emphasised that the SOPA framework for ensuring timely payments does not override the critical safety and consumer protection standards established by the HBA.

Legislative Changes: The Better Regulation Legislation Amendment (Miscellaneous) Act 2024

In response to concerns raised by the Sunshine East case decision, the New South Wales government introduced key amendments through the Better Regulation Legislation Amendment (Miscellaneous) Act 2024 (effective 20 August 2024). These amendments close the potential loophole that potentially allowed unlicensed and uninsured contractors to claim progress payments under the SOPA, even if they failed to meet the licensing and insurance requirements outlined in the HBA.

The amendments now explicitly align the requirements for claiming progress payments under SOPA with the licensing and insurance provisions of the HBA. The changes ensure that contractors who are unlicensed or uninsured for residential building work are no longer entitled to claim progress payments under the SOPA.

These changes are encapsulated in Clause 1.2 of Schedule 1 of the Better Regulation Legislation Amendment (Miscellaneous) Act 2024, which inserts a new provision—Section 8(2)—into the SOPA. The new section reads:

8(2) A person is not entitled to a progress payment under subsection (1) if the construction contract:

• Does not comply with Section 4 of the Home Building Act 1989; or
• Involves construction work that is residential building work done in contravention of Section 92 of the Home Building Act 1989.

While the changes to the SOPA came into effect on 20 August 2024, the amendments retrospectively apply to contracts entered into before that date. Contractors must now ensure their licences and Home Building Compensation Fund insurances are up to date and comply with the HBA.

Implication for Contractors and Homeowners

The legislative amendments and the Sunshine East case decision provide important guidance for both contractors and homeowners in the construction industry.

For contractors, it underscores the critical importance of ensuring full compliance with both the HBA and the SOPA. Contractors must be properly licensed and insured before undertaking residential building work if they wish to maintain their entitlement to progress payments under the SOPA. This ruling reinforces that failure to meet these requirements will result in the forfeiture of the right to claim payment under the SOPA and the HBA.

For homeowners and property developers, the changes bring peace of mind, ensuring that only licensed and insured professionals can access the protections of the SOPA. This reduces the risk of engaging with unqualified or uninsured contractors, thereby protecting homeowners from potential financial losses due to incomplete, defective, or substandard work. The amendments align the SOPA with broader consumer protection laws, ensuring that progress payment claims are linked to the contractor’s ability to meet all relevant legal standards.

Conclusion

The recent legislative amendments have significantly reshaped the landscape for unlicensed and uninsured contractors seeking to claim progress payments under the SOPA. These changes underscore the importance of contractors and homeowners understanding their rights and obligations to avoid costly disputes and ensure full compliance with both the HBA and the SOPA.

As the construction industry adapts to these legal developments, our Building and Construction expert Melissa Care and her team at Coutts is here to provide expert guidance through the complexities of compliance, contractual obligations, and payment disputes. Whether you’re a contractor needing assistance with meeting licensing and insurance requirements or a homeowner who has engaged with an unlicensed or uninsured builder or contractor, our legal team is committed to providing expert advice and representation and can assist you in the process.

ABOUT MELISSA CARE: