Building & Construction Industry Security of Payment Act 1999 Construction Contract Includes an Arrangement

20/06/2016

A Builder may claim against an Owner (in circumstances which are not excluded from the SOP Act) or a Subcontractor can claim against at Head Contractor for Construction Work pursuant to Construction Contract as defined in the Security of Payment Act (SOP Act).Section 4 of the SOP Act defines “Construction Contract” to mean:

“A Contract or other arrangement under which one party undertakes to carryout construction work or to supply related goods and services for another party”.

In the case of Machkevitch v Andrew Building Construction the Supreme Court of New South Wales considered issues relating to whether the “arrangement” in that particular case fell within the definition of Construction Contract so that the provisions of the Security of Payment Act applied.  In this case:

  1. The Builder entered into a written Contract and “Bonus Deed” with the Owner.
  2. The Builder asserted that in addition to the Builder’s Contract with the Owner, the Director (Machkevitch) of the Owner gave an oral undertaking to the Builder that Machkevitch would pay the Builder if the Owner of the site did not pay the Builder. The Builder claims to have relied upon that undertaking.
  3. The issue that arose was primarily whether the oral undertaking given by Mr Machkevitch amounted to a Construction Contract in terms of the Security of Payment Act.
  4. The Builder issued a Payment Claim against the Owner and the matter was determined by an Adjudicator under an Adjudication Application. The Adjudicator made a determination of the amount due under that Adjudication Application.  The Owner failed to make that payment.
  5. The Builder asserted that Machkevitch had entered into a Construction Contract within the definition of the SOP Act. The Builder served a Payment Claim and claimed that it could be made based on the Construction Contract under the SOP Act.  Many issues arose in this case relating to this aspect. 
  6. Justice McDougall found amongst other things that “other arrangements” within the definition of Construction Contract did not require a legally enforceable Contract.  Construction Contract could include an arrangement which was something less than a binding Contract and “it could be something in the nature of an understanding, or a plan not enforceable at law”.  In this case His Honour held that there was an arrangement which fell within the definition of Construction Contract under the Security of Payment Act.  This was separate to the Construction Contract between the Owner and the Builder in relation to the same site and the same works.  It was between Machkevitch who said that he would make the payment in some circumstances, namely that the Owner did not make the payment. 

This undertaking by Machkevitch may have been short of a guarantee but whether it was a guarantee or not or whether it was legally enforceable was not decided in the case of Machkevitch.  The only issue in this case was whether it was a Construction Contract as defined under the SOP Act.

As it was a “Construction Contract” under the SOP Act, the SOP Act applied and the Builder could serve a Payment Claim under the Security of Payment Act which would be dealt with in accordance with the SOP Act depending on the circumstances and the response. 

Other matters such as whether the Adjudicator had to make a similar finding as to the amount due in the claim against Machkevitch as an Adjudicator had determined in the case against the Owner was discussed.  This was discussed in the context of whether a determination of an Adjudicator attracted issue estoppel either in the narrow sense or as provided for in the case of Anshun

There is also a further issue that would arise in such circumstances which was not a matter for consideration in the case of Machkevitch V Andrew Building and Construction namely what would be the outcome of a subsequent Court case that is available to each of the parties to the Adjudication Determination pursuant to Section 32 of the SOP Act.  The Payment Claim and Adjudication process under the Security of Payment Act is a process where a Subcontractor can claim against a Builder or a Builder against an Owner without a full Court Hearing as to the merits of the case.  Section 32 of the SOP Act allows the parties to the Adjudication Determination to bring proceedings before a Court or Tribunal to properly determine on a legal basis what the rights are between the parties.  In those proceedings, if it is determined by the Court or Tribunal that there was an overpayment the Court or Tribunal must allow for any amount paid to a party under the provisions of the SOP Act and must make such orders as it considers appropriate for the restitution of any amounts overpaid.  The court must make such orders as it considers appropriate having regard to the decision in those proceedings.

In those circumstances there is still an issue as to whether the Builder could hold onto funds that were paid under an Adjudication Determination based on an arrangement which was not a legally enforceable Contract.

Richard Watson and his experienced team at Watson and Watson can advise you in relation to all aspects of the SOP Act and other issues relating to Building and Construction.  If you have any queries please telephone Richard Watson or his Personal Assistant Shereen Da Gloria to discuss your matter.

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