Construction industry beware - two recent decisions of the New South Wales Supreme Court (Machkevitch v Andrew Building Constructions [2012] NSWSC 546 and IWD No 2 Pty Ltd v Level Orange Pty Ltd [2012] NSWSC 1439) remind us that the Building and Construction Industry Security of Payment Act 1999 (NSW) (SOPA) and its equivalents in the other eastern states, apply not just to construction contracts in the strict sense of the term, but to arrangements for construction work more broadly.  This means that a payment claim may be served against you, even where you are not party to a formal or legally binding construction agreement.  IWD also raises the additional (and perennial question) of under what circumstances will a mistake made by an Adjudicator potentially nullify an adjudication.

The First Case: Machkevitch v Andrew Building Constructions [2012] NSWSC 546

Machkevitch concerned three arrangements, a written building contract, a "bonus deed" and what the builder alleged to be an additional oral undertaking from Mr Machkevitch to the builder, for the purposes of securing any amount due to the builder by the owner, if the owner failed to pay.  As these cases tend to go, the owner failed to pay and the builder issued a payment claim arising out of the alleged oral undertaking, which the builder claimed constituted a construction contract for the purposes of the SOPA. In defence, Mr Makevitch claimed that as an evidentiary matter there was no undertaking and even if there was, such an oral undertaking could not constitute a construction contract.

McDougall J was satisfied on the evidence that Mr Machkevitch did provide an oral undertaking and that an oral undertaking can constitute a construction contract for the purposes of section 4 of the SOPA.  His Honour’s decision was based on the plain meaning of the definition of construction contract under the SOPA:

“… 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."

Interpreting the above definition, McDougal J held that by adding the word “arrangement” to the definition of construction contract, the legislation evinces a clear intention that an entitlement to payment under the SOPA should not depend on the degree of formality of the arrangement.  McDougall J contrasted this position with the Home Building Act 1989 (NSW), which mandates that a builder is not entitled to enforce a contract unless it is licensed, and carriesout work pursuant to a written contract

McDougall J (at [27]) concluded that for a construction contract under the SOPA:

“there be something more than a mere undertaking; or something which can be said to give rise to an engagement, although not a legally enforceable engagement, between two parties; or a state of affairs under which one party undertakes to the other to do something; or an arrangement between parties to like effect.”

A similar decision was reached by Nicholas J some years earlier in Okaroo Pty Limited v Vos Construction [2005] NSWSC 45.

The Second Case: IWD No 2 Pty Ltd v Level Orange Pty Ltd [2012] NSWSC 1439

The second case is IWD, which involved a challenge by a property developer (IWD) to an Adjudicator's decision.  The Adjudicator found that upon the developer taking over responsibility for the whole of the work under the project, a construction contract  for architectural services was formed between the developer and the architect (Level Orange). 

At hearing, the architect did not seek to defend the Adjudicator’s decision that a construction contract was formed upon the developer taking over the work and effectively accepted that the Adjudicator’s decision on this point was erroneous.  Instead, the architect argued that a construction contract was constituted by an "arrangement" made orally between the parties.  Stevenson J(applying Machkevitch) found that there was an oral arrangement between the parties and this was sufficient to constitute a construction contract under the SOPA.  Unsurprisingly, given the architect’s concession, his Honour rejected the basis on which the Adjudicator found the relevant construction contract

Interestingly, despite the Court finding that the Adjudicator made an error as to the basis for the construction contract, his Honour held that this did not constitute a jurisdictional error as a relevant construction contract existed, albeit for a different reason to that relied on by the Adjudicator.  Therefore, despite the Adjudicator being mistaken about the reasons for his jurisdiction, he did not ultimately lack jurisdiction.

Key lessons

The first key lesson from these two cases is that a payment claim may be served with respect to something less than a formal contract, including an arrangement which is not legally binding.  Put differently, a statutory right to payment can arise with respect to an arrangement which would not otherwise be legally enforceable.  For this reason, parties should exercise extreme caution before agreeing to a regime in any form, lest it be construed as a construction contract and be inadvertently subject to the SOPA regime.

The second lesson is that even where an Adjudicator makes an erroneous decision as to his or her jurisdiction, if the Court is satisfied that despite the Adjudicator’s decision, the Adjudicator had jurisdiction to hear the matter, the decision will not be quashed for jurisdictional error. Stevenson J did not provide any authority for reaching this conclusion.  As far as we can see the question has never been squarely decided.  There was some suggestion by McDougal J in the seminal case of Chase Oyster Bar v Hamo (2010) 78 NSWLR 393 at 418 that this is the correct approach.  In our view, this is the common sense approach, as where an Adjudicator has the jurisdiction to decide a question, irrespective of the basis on which the Adjudicator thought his or her authority arose, the Adjudicator will not be acting outside its jurisdiction by making a decision.  Therefore the decision should stand.

Finally, despite the broadness of the term construction contract, IWD reminds us that the SOPA does not apply to an infinite variety of construction contracts.  In IWD, the developer sought to argue that the SOPA did not apply because the relevant construction contract was a guarantee or indemnity of the original builder’s services and such arrangements are carved out from the SOPA by subsections 7(3)(c)(i) and (ii) of the Act.  The Court rejected the developer’s argument, finding that, properly construed, the oral arrangement was neither a guarantee nor an indemnity.  Despite the developer’s argument failing, IWD highlights the importance of considering the content of each purported construction contract carefully.  Readers should note that in addition to the carve out for guarantees and indemnities discussed in IWD, the SOPA, in subsections 7(2),(3),(4) and (5), carves out any arrangements forming part of a loan, arrangements for residential building work, work where payment is calculated otherwise that in reference to the work provided, work that is carried out as an employee, work carried out outside NSW and any other contract or class of contract prescribed by the regulations. 

As a final aside, it is curious that in Machkevitch, Mr Makevitch did not seek to argue that his oral undertaking was a guarantee or indemnity and therefore not a construction contract, despite, at least on the face of the judgment, this being the case.  It’s unclear from the judgment why this argument was not raised, but perhaps there were good reasons.  Irrespective, in considering whether a contract is a construction contract, the above cases remind us that while the definition of construction contract is broad, it is not unlimited.