Section 7(2) of the Building and Construction Industry Security of Payment Act 2002 (Vic) provides that the Act does not apply to domestic construction contracts within the meaning of the Domestic Building Contracts Act 1995 other than contracts where the building owner is in the business of building residences and the contract is entered into in the course of, or in connection with, that business.

In Ian Street Developer v Arrow [2018] VSC 14 a challenge was brought by a developer to an adjudication decision in favour of a builder on several grounds including the submission that the developer was not in the business of building residences and therefore the Security of Payment legislation did not apply.  The developer (Ian Street Pty Ltd) argued that it was a one off special purpose vehicle incorporated solely for the purposes of the entering into a building contract as a building owner, for the construction of 83 residential units and 6 ground floor retail premises, that it did not own the land or intend to carry out any other developments and did not intend to make a profit.  Ian Street also submitted that there was no continuous or repetitive business to make a profit.

The Victorian Supreme Court rejected the arguments of the developer and found that:

  • The developer was incorporated for the purpose of completing the construction of the project, including entering into the construction contract for a sum in excess of $10 million.  The sole purpose of the developer was to complete the project for the purpose of the units in the project being resold by its related corporation Ian Street Land Pty Ltd for a profit.
  • The fact that Ian Street did not intend to make a profit did not mean it was not in the business of building residences.  It was an integral part of the business structure established to commercialise the project.  To say that it was not in the business of building residences because it was part of a larger commercial structure where profits would be directed to other entities, defies the commercial reality of the situation.
  • An interpretation that an entity must intend to make a profit would enable the application of the Act to be avoided by the incorporation of intermediary entities.  Such a narrow interpretation would not advance the object of the Act.
  • While activities carried out on continuous and repetitive basis may be consistent with the conduct of a business, it is well recognized that a single joint venture may constitute a carrying on of the business.

Impact of decision

The Courts have now dealt with a number of cases which concern whether or not a person is in the business of building residences.  While each case will turn on its own facts, where in circumstances special purposes vehicles are established for the purposes of carrying out and completing residential construction developments, it is likely that such entities will be held to fall within the category of being in the business of building residences and thus the Security of Payment legislation will apply.