The decision of McDougall J of the Supreme Court of NSW in Class Electrical Services v Go Electrical  NSWSC 363 provides further clarity as to the categories of agreement that will not constitute a "construction contract" for the purpose of the Building and Construction Industry Security of Payment Act 1999 (NSW) (BCISPA).
Following the decision it is now unlikely in NSW that an over-arching commercial credit agreement (in the form of a credit application) between a company and its supplier that does not refer to a specific supply of particular goods or equipment related to "construction work" will be a "construction contract" under the BCISPA.
If on the other hand, there is an agreement to supply particular goods or equipment relating to "construction work" and only part of the terms of that agreement is a commercial credit arrangement between the parties relating to that particular supply then the contract may be a "construction contract" under the BCISPA.
Much will turn on the terms of the particular commercial credit arrangement and whether or not the credit arrangement can be linked to a specific undertaking to carry out "construction work" or to supply "related goods or services" as defined in the BCISPA.
Facts and key issues
In the Class Electrical v Go Electrical matter Go Electrical claimed more than $1.8 million from Class Electrical under the BCISPA for the supply and delivery of electrical fittings and appliances. The claim was referred to an adjudicator who ultimately made a determination in favour of Go Electrical.
A key issue on appeal to the Supreme Court of NSW was whether or not the amount claimed related to one "construction contract" (namely an agreement that Go Electrical would supply goods and equipment on credit which included terms and conditions of sale annexed to Class Electrical's application for commercial credit) for the purposes of the BCISPA. Relevantly, if the amount claimed related to multiple construction contracts then it was acknowledged that the adjudicator's determination could not stand in accordance with case law effectively stating that a payment claim under the BCISPA can only relate to one "construction contract".
The supply arrangement between the parties operated on the basis that Class Electrical would, from time to time, request the supply of goods or equipment by submitting purchase orders (such as supply of electrical fittings and appliances used by Class Electrical in connection with third-party contracts or sub-contracts to which it was a party that could be classified as "construction contracts") and that Go Electrical would supply those goods or equipment accordingly with such delivery being accompanied by an invoice.
McDougall J held that rather than there being one "construction contract" (i.e. the commercial credit agreement) there was a "multiplicity of construction contracts" (i.e. each individual supply the subject of a purchase order) and accordingly that the adjudicator's determination that the commercial credit agreement was the relevant "construction contract" was incorrect on the basis that:
- an "undertaking" in the context of the BCISPA means an "agreement or acceptance or promise" (that does not have to be a "contract" in the legal sense) to carry out "construction work" or to supply the related goods or services;
- the commercial credit application did not suggest that the credit was sought in respect of any particular contracts or sub-contracts (which would have been "construction contracts" under the BCISPA) that Class Electrical proposed to undertake with third-parties; and
- the commercial credit application did not evidence any undertaking from Go Electrical that it would supply the goods to Class Electrical, rather that it was clear from the credit application that there was no such arrangement indicating that Go Electrical undertook to make the relevant supply (this was made "particularly clear" by a provision in the credit agreement under which credit facilities could be withdrawn without prior notice at the discretion of Go Electrical). Noting that the usual "indicia of a supply contract" was not set out in the accepted commercial credit application (including that the goods, their prices and the delivery details were not specified in the credit agreement).
What does this mean for suppliers and their clients?
Following the Class Electrical v Go Electrical decision suppliers should carefully consider their commercial credit agreements and supply agreements to determine whether or not these documents are the relevant "construction contract" for the purpose of security of payment under the BCISPA.
If suppliers have an overarching commercial credit agreement with their clients then, depending on the particular terms of the credit agreement, it may not be possible to rely on the credit agreement to secure outstanding payment from their clients by serving a single payment claim under the BCISPA if the credit agreement is not linked to a specific undertaking to supply "goods or services" related to "construction work".
Clients who have entered into arrangements similar to the arrangement in Class Electrical v Go Electrical may be exposed to multiple payment claims from their suppliers for outstanding amounts if the relevant purchase orders amount to separate "construction contracts" under the BCISPA.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.