Ebert Construction Limited v Sanson concerned the question of whether payments made by a third party under a 'direct agreement' to finance construction are payments made by the company in liquidation for the purposes of the insolvent transaction regime. Direct agreements are an agreement between the developer, builder and financier of a construction project. The agreement in this case obliged the financier to make progress payments directly to the builder throughout the duration of the project. However, the financier continued to make payments to the builder after the developer had fallen into default under the facility agreement. The question was whether those payments were made by the insolvent developer and therefore recoverable by the liquidators.
In the High Court, Associate Judge Doogue held that the payments were recoverable by the liquidator because the payments made by the financier were payments by the insolvent developer. On appeal, this result was overturned.
The Court of Appeal held that the agreement created contractual privity between the financier and the builder. The financier was obliged to make payments to the builder, which depended on the builder not being in default under the agreement. It was not dependent on whether the developer was in default under the facility agreement with the financier. The financier's discrete obligation to the builder was as a principal rather than an agent of the developer. The financier was obliged to make payments upon the direction of the builder, not the developer. Accordingly, the payments were not made by the insolvent developer and could not be set aside by the liquidators of the developer.
It is worth noting that the direct agreement in question was reasonably contractor friendly. Relatively few direct agreements would allow payment to be made to the contractor once the developer was in default. The outcome may have been different had the drafting been more favourable towards the financier.
There may be a further appeal to the Supreme Court on this matter.
See the full case here.