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Focus: Make informal payment arrangements for construction work at your own peril

5 September 2014

In brief: A recent decision of the New South Wales Supreme Court serves as a timely reminder that a 'construction contract' under security of payment legislation can include an arrangement to carry out construction work that is not legally enforceable. Managing Associate Nicholas Ng (view CV), Associate Matt Thomas and Lawyer Timothy Leschke report on this decision and its implications for the construction industry.

How does it affect you?

  • Owners and principals should be aware that:
    • A 'construction contract', as defined in security of payment legislation, is not limited to legally enforceable contracts to carry out construction work or to provide related goods and services.
    • An arrangement between a head contractor and subcontractor that the principal will pay the subcontractor directly for construction work performed by the subcontractor can constitute a 'construction contract' between the principal and the subcontractor under security of payment legislation (with the result being that the subcontractor can serve payment claims directly on the principal for that work), if this arrangement is made with the principal's authorisation.

Background

Seabreeze Manly Pty Ltd (Seabreeze) was responsible for developing land in Manly for residential purposes. It engaged Castle Projects Pty Limited (Castle Projects) as a builder under an amended form of AS4000-1997 General Conditions of Contract. Two of the amendments to the form of contract were material in the case. The first provided that Castle Projects could only retain subcontractors with the prior consent of Seabreeze. The second provided that, if subcontractors were retained by Castle Projects with Seabreeze's consent, Seabreeze would pay those subcontractors directly.

Castle Projects subcontracted the supply and installation of steel and aluminium in relation to the development to Toposu Pty Ltd (Toposu) on the basis that Seabreeze would pay Toposu directly.

Although Toposu addressed invoices to Castle Projects rather than Seabreeze, Castle Projects prepared payment schedules in response to these invoices as if Toposu had submitted a payment claim directly to Seabreeze (that is, Seabreeze was the named respondent in the payment schedules even though the invoices were submitted to Castle Projects), and submitted the payment claim to the superintendent. Seabreeze paid the amount of the payment schedule certified by the superintendent directly to Toposu. This occurred on at least four occasions.

The dispute

Seabreeze disputed one of Toposu's payment claims on the basis that the work the subject of the claim was defective, the scope of works had been changed other than as authorised by the development approval, and the original price for the works had been exceeded. The dispute was referred to adjudication under the Building and Construction Industry Security of Payment Act 1999 (NSW) (the Act).

Seabreeze applied to the New South Wales Supreme Court to restrain the adjudicator's subsequent determination in favour of Toposu on the basis that there was no 'construction contract' between Seabreeze and Toposu, as defined under the Act. A 'construction contract' is defined under the Act to mean 'a contract or other arrangement under which one party undertakes to carry out construction work, or to supply related goods and services, for another party'.

The decision

Justice McDougall held that while there was no contract between Seabreeze and Toposu, the evidence clearly demonstrated the existence of a trilateral arrangement between Seabreeze, Castle Projects and Toposu sufficient to amount to a 'construction contract' under the Act.1

His Honour referred with approval to two earlier decisions he made relating to the meaning of 'arrangement'. Those decisions are authority for the proposition that the only limitation on the meaning of the word 'arrangement' in the context of the definition of 'construction contract' under the Act is that it must be one in which one party to it undertakes to carry out construction work for another party to it. A person 'undertakes' to carry out construction work, or to supply related goods and services, if the first person agrees, or accepts an obligation, or promises, to do that work or supply those goods and services.

In this case, his Honour found that Toposu agreed to undertake to carry out construction work for Seabreeze. This was so because Seabreeze had instructed Castle Projects to put in place a system whereby subcontractors were to receive payment from Seabreeze directly; this system was communicated to Toposu; and Toposu took the job on that express and authorised basis. Seabreeze effectively acknowledged this arrangement by paying Toposu directly on four occasions.

The presence of a separate contract between Seabreeze and Castle Projects did not negate the parallel existence of this arrangement, as the true nature of the contract was, in effect (among other things) a conduit or medium between Seabreeze and the various subcontractors who did the actual work of building the project.

A warning

While each case is dependent on its individual facts, this decision serves as a timely warning to principals and other parties responsible for payment on construction projects to be aware that security of payment legislation can potentially apply to informal arrangements for the direct payment of subcontractors in return for carrying out construction work or supplying related goods and services for the project. This decision establishes that a multilateral 'arrangement' can arise if a head contractor and subcontractor arrange for the principal to make direct payment for the subcontractor's work and the principal authorises such arrangement (and acts consistently with it).

Footnotes
  1. Seabreeze Manly v Toposu [2014] NSWSC 1097, [39]. His Honour also held that 'an "arrangement" (and, for that matter, a contract) may be multilateral. That follows necessarily from the words "another party" [in the definition of "construction contract"].' ([35]).

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