Even if there is no contract, Principals and Head Contractors may still be at risk of an adverse claim under the Building and Construction Industry Security of Payment Act (Vic) (Act).
Section 7 of the Building and Construction Industry Security of Payment 2002 sets out that the Act applies to any construction contract, whether written or oral or partly written or oral. The reason for this stems from the fact that the definition of the term ‘construction contract’ in section 4 of the Act is:
“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 reference to ‘other arrangement’ in the definition of ‘construction contract’ contemplates situations which fall short of a construction contract whether written or oral.
Whilst ‘other arrangement’ may include a situation where works performed in anticipation of a contract being entered into, there remains some uncertainty as to what other situations may be ‘other arrangements‘ for the purposes of the Act.
In a recent case of Cranbrook School v JA Bradshaw Civil Contracting Pty Ltd, the Supreme Court of NSW examined the application of the terms ‘other arrangement’ under the Building and Construction Industry Security of Payment Act NSW (NSW Act), which contains the same definition of ‘construction contract’ as the Act.
In that case, the principal of a project made an agreement with the head contractor to sever contractual ties and sought to have subcontractors novated to it. The subcontractor in this case required the principal’s agreement to pay money owing to it before agreeing to the novation.
The subcontractor submitted its payment claim and adjudication application pursuant to the NSW Act and the adjudicator determined that the principal was required to pay the subcontractor.
The principal brought an application in the Court seeking to have the adjudication quashed on the basis that there was no construction contract for the purposes of the Act between it and the subcontractor.
Fortunately for the principal, the Court found that there was no ‘construction contract’ or ‘other arrangement‘ between the subcontractor and the principal, citing the fact that the subcontractor sought payment from the principal before it would agree to the novation.
The court stated that:
“for there to be an arrangement for the purposes of the definition of construction contract, one party to whatever the arrangement is must undertake to perform construction work for another party to that arrangement”.
In other case addressing the issue of what may constitute ‘other arrangements’ the NSW Supreme Court commented that:
“…the term ‘arrangement’ in the definition is a wide one, and encompasses transactions or relationships which are not legally enforceable agreements … In deciding whether a contract or other arrangement is within the definition of construction contract the only matter for consideration is whether it is one under which one party undertakes to carry out construction work, or to supply related goods and services for another party. There is no other requirement or qualification which is expressly or by implication included in the definition which must be satisfied.”
The above view in Okaroo was extended in Olbourne v Excell Building Corp Pty Ltd to include a ‘moral obligation’. When describing this moral obligation, the Court said:
“My attention was drawn to the statement of Wilmer J in Re British Basic Slag Ltd.’s Agreements  1 WLRS 727 at 746 that the statute there under consideration by using ‘arrangement’ “clearly contemplates that there may be arrangements which are not enforceable by legal proceedings but which create only moral obligations or obligations binding in honour… for, when each of two or more parties intentionally arouse in the others an expectation that he will act in a certain way, it seems to me that incurs at least a moral obligation to do so. An arrangement as so defined is therefore something “whereby the parties accept mutual rights and obligations”
Accordingly, principals and head contractors should be cautious in situations which could potentially arouse in others an expectation of payment for construction work to avoid the adverse effects of unforseen claims under the Act.
For more information, or to discuss any security of payment issues you may have, please contact Darren Cain, Principal Lawyer and Head of Construction and Infrastructure, on (03) 8600 8835.
Note: This update is a guide only and is not intended to constitute legal advice.