Litigation & Insolvency Partner, Tim Crumpton, looks at the
importance of the importance of having the terms of a construction
contract clearly set out and agreed between the parties, preferably
The security of payments legislation in the various States and
Territories is designed to ensure those carrying out construction
work receive progress payments as quickly as possible for goods and
services they provide. The legislation achieves that aim by having
an adjudication process within a short timeframe, thereby avoiding
lengthy Court processes.
However, the legislation does not extinguish a party's other
legal rights, including the right to recover or 'claw back'
part or all of a progress claim. Indeed, the legislation
specifically provides for the final rights and liabilities of
parties to be reserved for determination in subsequent court
CONTRACT OR OTHER ARRANGEMENT
A fundamental requirement to engage the jurisdiction of the
security of payment legislation is that there exists between the
parties a 'construction contract'. This term is defined as
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. It can be written, verbal or
a combination of both.
THE IMPORTANCE OF HAVING A LEGALLY BINDING CONSTRUCTION
Having a construction contract that is in clear and agreed terms
is not only fundamental to invoke the jurisdiction under the
security of payments legislation, but it will also reduce the
possibility of a dispute which may lead to costly Court litigation.
Recently, an architectural firm undertook extensive design work on
a project for a multinational company. The firm provided a fee
schedule on commencement and asserted it was accepted orally.
However, the fee schedule was not countersigned by the
multinational. When the decision was made not to proceed with the
project, the firm issued a payment claim on its understanding that
the fee schedule had been verbally accepted. The multinational
denied the existence of a contract or arrangement on the basis that
the firm had agreed to undertake design work on the condition it
would not render any fees until it was appointed as the architect
to the project.
Although the claim by the firm was settled, had a security of
payments claim instituted by the firm resulted in an order for
payment of its claim (in excess of $1 million), the multinational
could have taken court action to claw back that amount, on the
basis that whilst there may have been an 'arrangement'
which invoked the security of payments jurisdiction, there was not
an enforceable contract at law. Had that happened, the firm would
have needed to argue a 'quantum meruit' entitlement to its
fees (ie that it should be paid a reasonable amount for work
performed, even in the absence of a legally binding agreement).
It's easy to see how the costs associated with the dispute
could have escalated quickly if Court proceedings were commenced.
What's worse, the firm would have an uncertain result, with the
Court trying to assess the value of its work.
PAY NOW, ARGUE LATER
It is therefore critical for both parties to a construction
contract to ensure that the terms of their agreement are clear and
that they have been agreed on, otherwise you run the risk of
'paying now and arguing later'. The terms of the agreement
should, wherever possible, be in writing and signed by the parties
or at least there should be some evidence of the terms and the
parties agreement to them, such as an email exchange.
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