Developer caught out: oral assurance to architect deemed a 'construction contract'
Dec 2012 |The Supreme Court of New South Wales has upheld an adjudicator's determination against a property developer in respect of architectural services rendered primarily under a Design and Construct contract with the developer's building contractor.
Notwithstanding the architect's other rights against the building contractor in respect of the services, the Court construed earlier verbal discussions between the developer and the architect as a "construction contract" sufficient to base a payment claim.
The Court considered in detail the requirements for an "arrangement" to constitute a "construction contract" under the the Building & Construction Industry Security of Payments Act 1999 (NSW)(BCISPA), and the circumstances in which the incorporation of a guarantee or indemnity provision will exclude the Act's application.
Facts
In IWD No 2 Pty Limited v Level Orange Pty Ltd1, Stevenson J considered an adjudication certificate registered by the defendant architect (Level Orange) as a judgment pursuant to BCISPA s252.
Level Orange's claim was in respect of architectural works undertaken for the purposes of the plaintiff's (IWD) property development at Randwick. By a contract dated 21 September 2010, IWD had engaged a builder, Link Constructions (NSW) Pty Ltd (Link), to design and construct premises on the property.
In January 2011, discussions were held between IWD and Level Orange to the effect that IWD would pay a deposit and otherwise make sure that Level Orange was paid for its architectural services provided for the project.
In February 2011, Level Orange submitted a fee proposal to Link in terms somewhat inconsistent with its earlier discussions with IWD. Level Orange's architectural services for the project were then provided between February 2011 and December 2011, with invoices for the work directed to Link.
By a deed of termination and transition made on 8 February 2012, Link's D & C Contract was terminated and IWD took over the project. Link was subsequently placed into external administration in March 2012.
Level Orange directed a payment claim to IWD in respect of the services which then remained unpaid, and succeeded on adjudication.
IWD sought declarations that the adjudicator's determination in favour of Level Orange was void on the following alternative grounds:
1. That there was no construction contract between the parties, whether of the kind found by
the adjudicator or at all; and
2. That any such construction contract in any event contained undertakings whereby IWD
guaranteed the payment of money owing to Level Orange, or agreed to provide an indemnity
to Level Orange, thus taking the contract outside the scope of the legislation by the operation
of BCISPA s7(3)(c)3.
"Construction contract"
Section 4 of the BCISPA defines "construction contract" 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".
"Arrangement" is not defined in the legislation but Stevenson J accepted4 that the concept must at least involve one party "undertaking to carry out construction work or to supply services related to construction work".
His Honour acknowledged the following general principles5:
-
An arrangement extends to something which goes beyond the concept of a contract;
-
An arrangement encompasses transactions or relationships which are not legally enforceable;
-
An arrangement includes an arrangement enforceable by reason of the doctrine of estoppel;
-
An arrangement requires something more than a "mere undertaking" and which "can be said to give rise to an engagement", although not necessarily a legal enforceable engagement; and
-
An arrangement requires "a concluded state of affairs, which is bilateral at least" under which one party agrees to undertake construction work or to supply related goods and services.
The adjudicator's decision had been based on his finding of a "construction contract" between IWD and Level Orange, comprised by the arrangement under which IWD took over the project in February 2012, including responsibility for the whole of the work and the payment of outstanding amounts to Level Orange.
The Court pointed out6 that as no architectural services had been provided by Level Orange since December 2011, any "arrangement" made with IWD in February 2012 could not have been an arrangement under which Level Orange "undertook to supply" architectural services related to the project. Any such arrangement would plainly have fallen outside the scope of the Act's definition of "construction contract"7.
The Court however found a different "construction contract" to exist between the parties, comprised by the conversations between Level Orange and IWD in January 2011. The Court was satisfied8 that promises or representations made at that time as to Level Orange being paid for its architectural services to be provided for the project, were at the very least an "arrangement" under which Level Orange undertook to supply the architectural services, and in fact probably constituted a legally binding contract with IWD.
The Court acknowledged that the payment arrangements made by Level Orange with Link were inconsistent with those offered by IWD in the January 2011 conversation, however it was held9 that nothing subsequently occurred to alter the nature of the arrangement made with IWD, and that Level Orange was a party to and entitled to the benefit of two separate contracts or arrangements with IWD and Link respectively.
Guarantee and indemnity provisions
The Court then had to consider whether the construction contract or arrangement between Level Orange and IWD was excluded from the BCISPA's operation by ss7(3)(c)(ii)-(iii)10 which provide as follows:
"This Act does not apply to a construction contract to the extent to which it contains:
…
(c) provisions under which a party undertakes:
…
(ii) to guarantee payment of money owing or repayment of money lent, or
(iii) to provide an indemnity with respect to construction work carried out, or related goods
and services supplied, under the construction contract".
The Court undertook a strict analysis of the terms "guarantee" and "indemnity" respectively11:
-
"Under a contract of guarantee, a surety assumes a secondary liability to a creditor for the default of another person who remains primarily liable to the creditor"; and
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Conversely,"a contract of indemnity is one where a party assumes primary liability for another's obligations, and agrees to hold the creditor harmless, whether or not that other person makes default".
The Court found that12 the January 2011 arrangement did not comprise a guarantee because IWD's obligation thereunder, whether leagally enforceable or not, was not secondary liability as it was not contingent upon any default by Link.
Similarly, the Court determined13 that the January 2011 arrangement did not comprise an indemnity because IWD was accepting an independent obligation to pay Level Orange's fees. It was not merely offering to keep Level Orange harmless for any loss it might suffer if Link did not pay its fees and, in fact, Link had not been referred to at all in the conversation.
Accordingly, the Court found that there was nothing in the January 2011 arrangement which comprised any undertaking to guarantee payment or to provide an indemnity which ss7(3)(c)(ii) and (iii) would have taken outside the scope of BCISPA.
The Court distinguished the 2008 Queensland Supreme Court decision of Walton Construction (Qld) Pty Ltd v Salce14, where a developer's representative had promised a sub-contractor that "[The developer] will make sure you get paid. If [the builder] does not pay you then [the developer] will pay you direct and hold back payment from [the builder]".
The Court considered the promise made in that case to be "quite different"15 from that made here by IWD in January 2011. As a result, the Court upheld the adjudicator's determination in favour of Level Orange, despite expressly acknowledging16 that it was entitled to the benefit of a further separate contract or arrangement with Link in respect of the work.
Comment
The IWD decision shows the Court's readiness to uphold the jurisdictional basis of an adjudicator's decision by finding a different "construction contract" between the parties to that relied upon by the adjudicator. The adjudicator's error in deciding the basis for his jurisdiction did not ultimately rob him of jurisdiction which was otherwise grounded in the facts of the matter.
The IWD decision is however most notable for its determination that the developer's oral undertakings were neither a guarantee nor an indemnity. It is surprising that the Court did not address the policy considerations which had been raised earlier in the Walton Construction case. There, McMurdo J had found17 that the developer's assurances to the subcontractor did comprise a guarantee (and were therefore outside the scope of the Queensland legislation) because they were "a collateral undertaking to answer for the debt or default of [the builder], against which [the subcontractor] retained his contractual right to payment, and his statutory right to progress payments according to the Act".
The prospect of a claimant being entitled, for the same work, to progress payments against different parties under different construction contracts, was cited in support of McMurdo J.'s interpretation of the legislation. As His Honour commented18:
"It is unremarkable then that according to s3(3)(c)(ii), the guarantor should be obliged to pay only what and when the principal debtor must pay, and should not be subject to progress claims or an adjudication by which the guarantor's liability could be different".
In the IWD case, the Court did not advert to the prospect that IWD could be liable to both Level Orange and to Link under different payment claims issued in respect of the same architectural services.
The finding in IWD that the January 2011 discussions did not comprise a guarantee or indemnity in respect of Link's payment obligations is curious also given that the D & C Contract between the parties had been entered some four months prior.
It appears likely that the IWD decision will, at least in respect of the guarantee and indemnity issues, be largely confined to its facts. A promise to ensure payment of costs which are contractually the responsibility of another will usually comprise either a guarantee or an indemnity and so fall outside the legislation.
The decision demonstrates also the very broad scope of "construction contracts" which may trigger liability. Most importantly, an "arrangement" need not be legally enforceable to constitute a construction contract under the Security of Payments legislation.
Parties should be acutely mindful of that potential exposure before agreeing to even informal or contingent payment arrangements for construction work or related goods and services. The terms of any undertaking to ensure that payment will ultimately be made should be precisely formulated and reduced to writing. On the reasoning in IWD, the primary contractual responsibility of another party for payment will be no defence to a Payment Claim served pursuant to unrelated and even legally unenforceable arrangements.
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[1] [2012] NSW SC 1439.
[2] Equivalent to s31 of the Building and Construction Industry Payments Act 2005 (Qld).
[3] Equivalent to s3(3)(c) of the Queensland Act.
[4] Ibid [24].
[5] Ibid [25].
[6] Ibid [29].
[7] The NSW definition of "construction contract" is effectviely identical to the Queensland
definition; BCIPA sch2.
[8] Ibid [41].
[9] Ibid [64] and [65].
[10] Effectively identical to BCIPA ss3(3)9c)(ii)-(iii)
[11] Ibid [68].
[12] Ibid [70].
[13] Ibid [71].
[14] [2008] QSC 235.
[15] Ibid [74].
[16] Ibid [64].
[17] Walton Construction at [20].
[18] Ibid [20].
