Australia: Construction Bulletin

Last Updated: 6 March 2007
Article by Alex Hartmann

Court Of Appeal Blows Hole In Security Of Payment Act

The New South Wales Court of Appeal has ‘blown apart’ one of the key features of the Building and Construction Industry Security of Payment Act 1999 (SOP Act). A payment claim could be defeated at any time by a claim of misleading and deceptive conduct.

In the case of Bitannia Pty Ltd v Parkline Constructions Pty Ltd [2006] NSWCA 238 the Supreme Court found that even though no payment schedule had been issued and the SOP Act specifically barred a defence after the time for putting in a payment schedule had expired, that if a payment claim involves misleading and deceptive conduct it can be defeated.

Background

Parkline Constructions Pty Ltd (builder) was appointed by Bitannia Pty Ltd and Rossfield Nominees Pty Ltd (owners) to build the Ettalong Hotel. The architect was nominated by the owners to act as their agents to administer the building contract. The building contract required the builder to make claims for progress payments from the owners, via their agents.

On one occasion, the builder sent its progress claim to another company associated with the owners. As a result of this, no payment schedule was prepared by the architects and the owners and under the SOP Act the owners became liable for the amount specified in the payment claim.

The owners claimed that they were not liable for the amount that was claimed, arguing that the builders engaged in misleading and deceptive conduct in serving their payment claim and this prevented the owners from preparing a payment schedule. The owners said they were only liable because of this breach of section 52 of the Trade Practices Act 1974 (Cth) (TPA) by the builder.

Issue for the Court of Appeal to decide

The District Court agreed with the Builder that the SOP Act prevailed. The owners appealed and asked the Court of Appeal to decide whether the no defence and cross-claims provision of the SOP Act stopped a party from raising section 52 of the TPA as a defence to the payment claim.

What the Court Said

The Court unanimously agreed that the NSW Government could not have wanted a builder to be entitled to enforce a claim under the SOP Act where that judgment was based on misleading and deceptive conduct. The Court said that when you look closely at the words used in the ‘no defence and cross-claim’ section of the SOP Act, they should not be interpreted so broadly as to cut out rights under the TPA.

The implications

For owners, this decision means that the SOP Act will no longer provide a sure-fire method for extracting payment from owners and principals. Instead of having to give a payment schedule on time a respondent will be able to resist enforcement of a claim by saying that it was brought about by misleading and deceptive conduct. It would also be open for a respondent to apply to a Court for an injunction under the TPA stopping an adjudication process if the respondent was able to show the process was fouled by misleading and deceptive conduct.

Essentially, for owners and others responding to payment claims this means that missing the 10 day time limit for putting in a payment schedule may not be fatal if there is misleading an deceptive conduct on the part of the builder. For the industry generally, the decision will weaken the impact of the SOP Act because it will mean that cash-flow can be held up while there are arguments about misleading and deceptive conduct. Depending on where you sit, this may be a good or a bad thing.

Change Of Control Clauses – Friend Or Foe?

Change of control clauses can be a helpful device to protect your interests, however in other circumstances change of control clauses can affect your ability to maximise value from your business.

You contracted with another company for it to perform complex work that is sensitive to your business. You took the time to examine all the potential contractors and you have found your desired contractor. They had just the right mix of people with the perfect skills and expertise and are known for their reliability and efficiency. You foresaw a long and productive relationship with them. You have now been told that your contractor has been bought out by your fiercest competitor. Are you compelled to continue with the contract?

Change in control clauses

Contracts routinely contain clauses restricting rights of one or both contracting parties to assign their interests under the contract to third parties. These clauses will generally not apply in a ‘change of control’ situation. If the corporate ‘personality’ of the company with whom you do business is critical then the inclusion of a clause entitling you to terminate the contract in the event of a change of control is advisable.

A change in control will be allowed with the consent of the other party, and, if not granted, the other party may terminate the contract. This means if your desired contractor is no longer controlled by the people with whom you negotiated the contract, you are then free to terminate and renegotiate with a different contractor.

Consequences

On the other hand, if you are a contractor and your contract includes change of control clauses, they will potentially reduce the value of your business if you attempt to sell out completely or even dilute your ownership of the business. The value of a contractor’s business, in many circumstances, is derived from the contracts it holds. The greater the value of the order book you are able to transfer, the higher the selling price for your business.

A purchasing party’s due diligence will pay specific attention to the potential effect of change of control clauses. If significant contracts cannot be readily transferred because they are terminable at the other parties’ discretion on a change of control, this will devalue the business being sold. This is a strong reason to try to exclude change of control clauses from your contracts, or at least clearly set out the limited circumstances in which a party may decline to approve of a change of control. For example, a change in control entitling the other party to terminate will only occur when 51% or more of the ownership of the contractor alters by transfer to a party unrelated to the contractor.

Conclusion

Whether you are a principal or contractor, you should be aware that standard prohibition of assignment clauses will not apply in the event of a business sale or change in control. If the ‘personality’ of the company with whom you deal is crucial, a change of control clause is necessary allowing you the right to exit the contract.

However, the inclusion of a change in control clause may be a double edged sword as it can adversely affect the value you can realise on sale of your company or a part of its business.

For purchases of a business the existence of change of control clauses will be relevant to business valuation. Even if ‘change of control’ clauses exist, the risk of customers ‘walking’ can be minimised by prior communication and the provision of assurances to customers prior to sale.

Contractors Entitled To Security Over Residential Property In Exceptional Circumstances Only

Contractors concerned about non-payment will often try to protect their position by seeking agreement from the principal to lodge a caveat over the property. However for residential construction, Section 7D of the Home Building Act (1989) (HBA) severely restricts the enforcement of caveats.

In Kell & Rigby Pty Ltd v Flurrie Pty Ltd [2006] NSWSC 1039 the NSW Supreme Court held, a contractor is prohibited from putting a caveat on residential property that it is working on, except where an interest in property is created by a court judgement. Even if the parties have agreed to grant a caveat over the property, the agreement to do so will be void under section 7D of the HBA.

The Facts

Flurrie Pty Ltd (Owner) and Kell & Rigby Pty Ltd (Contractor) entered into a contract for the provision of construction management services. The Contractor served a number of payment claims under the Building and Construction Industry Security of Payment Act 1999 (SOP Act) on the Owner which were not paid. Following further non-payment the Contractor ceased work on the property. The Contractor resumed the work after the Owner agreed to give the Contractor the right to lodge a caveat over the property. A caveat was subsequently lodged. The Contractor obtained an adjudication certificate under the SOP Act, and then registered the certificate as a court judgment.

The Owner attempted to have the caveat removed from its title property, claiming that the condition which allowed the caveat was void. The Owner said Section 7D of the HBA provides that a provision in a contract which gives an interest in land to a contractor is void and that a contractor is prohibited from lodging a caveat over the property except in exceptional circumstances. The Contractor said that it was caught by an exception to the rule, under section 7(3)(a), because it had a judgment based on an adjudicator’s determination. The exception stated that a charge, created to secure the payment by another party to the contract of money due under the contract, can only be made if a court or tribunal has made an order or judgment that such payment be made.

Issues before the Court

The two main issues before the court were:

Issue 1: whether the registration of the adjudication certificate under the SOP Act was a ‘judgment of a court’ that would allow a caveat; and

Issue 2: whether the SOP Act determination amounted to ‘money due under the contract’.

Findings of the Court

Issue 1

The court found that the Parliamentary intention behind section 7D of the HBA was to prevent contractors from abusing contract provision to allow them to claim interests in property on which they were working on. Consequently, the court held that caveatable interest can only be granted when monies are due under a contract and there is a consequent judgement in favour of the contractor.

The court concluded that the right to lodge a caveat was not given by the court, rather it was given by the agreement of the parties. As such, a caveatable interest did not arise as a result of a judgment and therefore was void by virtue of section 7D.

Issue 2

The Owner also argued that no interest was created because section 7D requires that the money be due under the contract, however in this case, the Owner contended that the money were payable under the SOP Act. The court found that the statutory right to seek progress payment was created from the contract itself.

In cases where the contract contained no express provision for such payments, money is payable under the contract, but will not be due until a later date. In the absence of express provisions, the effect of the SOP Act is to bring forward the due date, however the source of the entitlement to monies remained the contract itself.

The implications

In summary, section 7D does not prohibit the creation of all caveatable interests in land. A valid caveat can be lodged if a prior judgment has been made by a court that money is due under the contract (which will remain the source of payment of a claim under the SOP Act). Only at this point can a valid caveatable interest be created.

For owners the Kell & Rigby Pty Ltd v Flurrie Pty Ltd decision confirms that a contractor will not be able to have a right under a contract to lodge a caveat on residential property. Even if the parties agree that a caveat can be lodged the court can strike down the caveat.

For contractors, this case provides a new way of securing security of payment decisions over residential property. A contractor is allowed to lodge an adjudicator’s determination with a court and then use the judgment as the basis for lodging a caveat.

Waive Your Privilege Goodbye

The Federal Court has recently confirmed that privilege and confidentiality in legal advice can be lost if privileged advice is disclosed publicly.

In proceedings arising from the Cole Royal Commission (AWB Ltd v Cole (No 5) [2006] FCA 1234) the AWB tried to convince the Federal Court that AWB should be entitled to retain legal professional privilege over legal advice that it had received about its involvement in the United Nations Oil for Food program. The Court heard that representatives of the AWB had appeared before the Cole Royal Commission and had given evidence to the effect that they had legal advice that showed that AWB had not broken any law.

The Federal Court found that because the substance of the legal advice had been publicly disclosed the AWB had given up or waived its claim for privilege and the legal advice should consequently be disclosed to the Cole Royal Commission.

The Court also held that legal professional privilege was not available where the party asserting it was attempting ‘to facilitate a crime, fraud, improper conduct or trickery and sham contrivances’.

For those obtaining legal advice this case is a reminder of the need to keep your legal advice confidential and not disclose it. While it is common in dispute related meetings for parties to say ‘my lawyer tells me that I am going to win this case’ or for company management to raise morale by saying ‘the lawyers tell us we will beat them’ you might want to think twice about making such a comment unless you are prepared to hand over your advice. The same applies to contract negotiation – telling the other party that ‘my lawyer has told me I will be able to get out of that clause’ may mean you have waived privilege and in later proceedings are compelled to hand over the advice.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions