Alstef sows doubt on security requirements for unfixed goods and materials

Anything excluding the statutory right to progress payments is void 4 min read

Many in the construction industry will be familiar with standard provisions not allowing valuation or payment for goods and equipment until they're incorporated into the project and affixed to the land—this is due to concerns around title and insolvency. On many projects, payment is possible if enhanced requirements (usually the trifecta of bonding, insurance and storage) are satisfied. Whether these remain effective as conditions precedent to the entitlement to payment in the face of security of payment legislation is in further doubt following the decision in Alstef v Brisbane Airport Corporation (BAC).¹

Key takeaways 

• Anything that purports to exclude the statutory right to progress payments is void and of no effect.
• That concept applies to render void an unfixed goods and materials clause that excludes the value of such goods and materials from the progress payment process unless additional bonding is provided.
• A court will restrain the call on a bond provided under this type of clause.

The legislative framework 

Qld's Building Industry Fairness (Security of Payment) Act 2017 (the BIF Act) is, relevantly, consistent with the security of payment framework that operates elsewhere in Australia, including NSW.

Importantly, the Act:

• creates an entitlement to progress payments under construction contracts from each reference date where a person has carried out construction work or supplied related goods and services under the contract;
• deals with questions of valuation, referring to the valuation process under the contract or, where the contract is silent, the amount calculated by reference to the value of construction work carried out; and
• (in section 200) contains the typical broad prohibition on contracting out—a provision of the contract is of no effect to the extent it:
  • is contrary to the Act;
  • purports to exclude, limit or change the Act's operation;
  • has the effect of excluding, limiting or changing the Act's operation; or
  • may reasonably be construed as an attempt to deter a person from taking action under the Act.

Background to Alstef v BAC

The parties entered into a design and construct contract for the baggage handling system at Brisbane Airport. The contract had been terminated and the parties were in dispute about which of them had validly terminated it.

The contract contained reasonably standard terms in relation to security and progress payments. In particular, it regulated the right to seek payment for unfixed goods and materials. The key clause in question prohibited the inclusion of unfixed goods or materials in the value of work and payment statements unless certain preconditions were satisfied, including the provision of additional approved security. In the usual way, title passed upon payment for those goods and the additional security was to be released once they were physically incorporated into the works.

The bank guarantees had been provided and payment had been made, but there were questions about whether there had been intermingling of the goods in a warehouse. Separate issues emerged regarding among other matters, and whether the purported exercise of rights constituted repudiation. Following competing notices of termination, there was then a question as to the status of the bonds that had been provided.

Alstef argued:

1. The clause was void, as contrary to the provisions of the BIF Act.
2. In those circumstances, BAC's continued retention of the bonds was unconscionable within s21 of the Australian Consumer Law (ACL).
3. Alstef had a strong prima face case for the immediate return of the bonds, and the balance of convenience favoured the granting of the interim injunction preventing any call by BAC on the bonds.

The decision 

The court found that Alstef had a strong prima facie case for immediate return of the unfixed goods bonds. This was on the basis that the relevant clause was of no effect by reason of s200 of the BIF Act, and that it would be unconscionable, and so contrary to s21 of the ACL, for BAC to retain the bonds in those circumstances. Accordingly, the balance of convenience favoured the granting of an interim injunction.

It should be noted that :

1. Unusually, the NSW Supreme Court (Justice Williams) was called upon to consider Queensland legislation.
2. The decision was made on an interim basis only—the final hearing and determination of the matter might yield a different result.

Steps to take

Many contracts continue to contain similar provisions as those the court considered here. Perhaps the decision is simply a reminder that where there is a broader breakdown in the relationship, there is a risk to the operation of these clauses. Parties who genuinely seek to work within the legislative framework but consider the risks surrounding unfixed goods and materials to be too great might consider using a valuation solution—this appears to be an option, on the face of the legislation. Owners could also simply view the overall bonding as being adequate.

The decision also calls into question any relaxation (often with the contractor's interests in mind) of the requirement to receive bonding, parent company guarantees or evidence of insurance on signing or as a condition precedent to the contract.

If you would like to discuss the issues raised in this Insight, please contact any of the people below.