The Supreme Court of New South Wales in Olbourne v Excell Building Corp Pty Limited  NSWSC 349 has held that the Building and Construction Industry Security of Payment Act 1999 (NSW) (Act) will apply when there is a moral obligation to pay for construction work. The Court held that an 'arrangement' under the Act will exist where there is a morally binding obligation to pay for construction work. The decision has major implications for security of payment claims in New South Wales by providing greater opportunities to secure payment even where a contract may not exist.
Dr Olbourne (Olbourne) as the director, shareholder and secretary of Meccashore Pty Ltd (Meccashore) entered into a Joint Venture Agreement with Mr and Mrs Diskoroses (Diskoroses) for the development of residential units at Ethel Street Seaforth (development). The Diskoroses owned the property and Meccashore agreed to lend $1.3 million for the development. In return for the loan, the Diskoroses gave a mortgage over their property in favour of Meccashore and Olbourne. The Diskoroses entered into a building contract with Excell Building Corp Pty Ltd (Excell) for the development. However the Diskoroses could not meet the payments to Excell and work was stopped shortly afterwards.
Excell made a payment claim and then applied for an adjudication determination under the Act. Excell claimed that Olbourne had made representations to the Managing Director of Excell to the effect that he would pay the outstanding payments that the Diskoroses had failed to meet. Excell submitted that this conduct made Olbourne a party to the 'construction contract' within the meaning of the Act. The adjudicator agreed and found that Olbourne was a party to the 'construction contract' and was liable to pay Excell.
Olbourne challenged the validity of the adjudication in the Supreme Court and argued that he was not a party to the construction contract. The Court was asked to determine if the conduct of Olbourne constituted an 'arrangement' under section 4 of the Act.
Previous interpretation of an 'arrangement'
In the earlier decision of Okaroo Pty Ltd v Vos Construction & Joinery Pty Ltd  NSWSC 45, the Court found that an arrangement:
- Describes something less than a binding contract.
- Must be more that a mere expectation that as a matter of fact a party will act in a certain way.
- Includes transactions which are not legally enforceable.
- Requires one party to undertake to carry out construction work, or supply related goods and services, for another party.
Justice Rein reviewed the earlier interpretation of an arrangement and considered a statement made by Wilmer J in Re British Slag Ltd's Agreements  1 WLRS 727 at 746 that the use of the word arrangement:
'Clearly contemplates that there may be arrangements which are not enforceable by legal proceedings but which create only moral obligations binding in honour... for, when each of two or more parties intentionally arouse in the others an expectation that he will act in a certain way, it seems to me that incurs at least a moral obligation to do so. An arrangement as so defined is therefore something "whereby the parties accept mutual rights and obligations".'
Justice Rein formed the view that Olbourne had intentionally created an expectation in Excell that he would takeover and fund the project shortfall. The expectation aroused by Olbourne created rights in the context of the building works and therefore constituted an arrangement within the meaning of the Act. Justice Rein dismissed Olbourne's appeal and found him liable to pay for the building work.
This case sends an important message to principals or head contractors that assurances of payment in the absence of a written contract could create rights to payment under the Act. Gentlemen's agreements, handshake deals and letters of comfort while being binding under moral codes of conduct, may also be binding under the Act. An inducement by a principal for a subcontractor to return to site could create a moral obligation for the principal to pay. Principals must be careful when entering into any direct discussions with subcontractors to avoid creating moral obligations. Contractors will also need to be careful when holding toolbox meetings or subcontractor meetings, for example, that they do not accept a moral obligation to pay for work. The absence of a contract with a supplier will be no excuse if there is an arrangement under the Act. For subcontractors operating in a softening economic environment, this decision potentially gives new opportunities to recover payment for construction work.
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