The New South Wales Supreme Court has delivered a judgment on an issue vital to any construction project: what is a construction contract under the Security of Payment Act (SOP Act)?

The respondent in an adjudication convinced the judge not to follow previous judgments on this point, so it is important that those involved in building stay up to date with this issue.

As the decision was about the unique Security of Payment Act regime, it will not directly apply to situations outside of SOP Act claims.

The ruling targets situations in which there is some understanding between two parties that construction work is to be done in exchange for remuneration, but where there is no clear oral or written contract spelling out the terms.

These cases sit right at the borderline of what the law will enforce and will not enforce. We discuss the case, where it sits among other similar cases, and what we can learn from it.

Case facts

The dispute was between two groups:

• Timecon Pty Ltd (Timecon) which was the claimant; and
• The unincorporated joint venture between Lend Lease Engineering Pty Ltd and Bouygues Construction Australia Pty Ltd (LLBJV), which were the respondents.

LLBJV was the principal contractor for the NorthConnex Project, which was constructing two nine kilometre road tunnels linking the M1 to the M2. The project involved excavation and tunnelling, which produces waste known as Virgin Excavated Natural Material (VENM), or “spoil”.

Throughout the project, LLBJV stored 201,700 tonnes of spoil at a site in Somersby, NSW. The site was owned by a company that had the same sole director as Timecon.

Timecon claimed that it entered into a contract or arrangement with LLBJV, for LLBJV to store the waste generated at the NorthConnex project at the Somersby site. Timecon claimed that such an arrangement was for $4.00 per tonne of spoil.

LLBJV claimed that there was no “construction contract”, or else that it had deposited the spoil at the site pursuant to a contract with another party, Laison Earthmoving Pty Ltd (Laison). Laison had been managing the site at the time.

At first instance in adjudication, Timecon had won an adjudication determination in its favour to the tune of $887,532.80 (incl. GST).

In the NSW Supreme Court review of this determination, LLBJV’s main argument was that the adjudicator had no jurisdiction to hear the matter, as there was no “construction contract” between the parties.

Key issues

The key issue was the definition of “construction contract”. The issue is clear cut when there is a written document signed by both parties that are involved in the adjudication, with construction work or goods being the subject matter.

More complicated is the situation in which one party has given to another party some measure of assurance or indication (often only verbal) that it will pay for such goods or services. How do you draw the line between negotiation and a construction contract?

Under the SOP Act in NSW, a construction contract 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.” (emphasis added)

All States and Territories except Western Australia and Northern Territory use this or a very similar definition, so the decision has wide implications.

Ball J found that before any other SOP Act questions can be asked, every claimant must ask themselves: is the arrangement “a legally binding obligation by which the claimant is entitled to be paid by the respondent for the services the claimant undertakes to provide”? (emphasis added)

The key part here was that to be able to use the SOP Act, there had to be a “legally binding obligation” for the respondent to pay for the work.

This did not necessarily have to be a contract. Though there are not many other examples, one is estoppel which if proven prevents businesspeople from going back on their word, even where there is no actual contract.

For Ball J, the rationale was that if Security of Payment regime could be used even where there was no underlying legal obligation to pay, then in all cases the claimant would have to later return the sum awarded by the adjudicator. His Honour considered that this cannot have been the intention of the SOP Act. It would also be difficult for adjudicators to draw the line between what types of non-legally binding arrangements were to be enforced, and which ones were not.

Back to the case

It was up to Timecon to prove that a contract or other legally enforceable arrangement was in place.

LLBJV and Timecon had exchanged some contractual documents, including a document called “Heads of Agreement” and a draft agreement that was sent “for review”. Both had left the price section blank. Later, LLBJV had even sent an execution copy of an agreement, which Timecon had not signed and returned.

Timecon pointed to a meeting at the Somersby site between a few of the interested parties. During this meeting, the director of Timecon gave the LLBJV representative a Heads of Agreement with the rates left blank. Someone proposed trialling the tipping of 50,000 tonnes of spoil at $4 per tonne.

Unfortunately for Timecon, Ball J was not satisfied with the director of Timecon’s presentation as a witness, as he had failed to address important points in his written evidence and gave evasive answers in person. His version of the meeting was disbelieved.

Moreover, the conduct of the parties subsequent to this meeting was not consistent with there being a legally enforceable arrangement. The director of Timecon had later sent emails asking if LLBJV was still interested in tipping spoil to the site, there had been an unexplained time gap between when an unsigned contract was finalised and when the deliveries of spoil took place.

There was also an issue that Timecon should have known that LLBJV had engaged another party, Laison, to perform the work.

As a separate issue, the tipping of spoil at the site was not construction work. Nor was it supply of related services, as it was not integral to construction work at the NorthConnex project. It was also not a “good”, as it was not a component of the relevant building, structure or work, and was not used in connection with carrying out construction work.

The decision of the adjudicator was void. Timecon walked away with nothing.

Conflicting authority

Unfortunately, this issue of what is a “construction contract” is not done and dusted. We may not know definitively how courts treat this issue until a Court of Appeal rules on this question.

This is because there have been three previous judgments that went the opposite direction and found that an arrangement that is not legally enforceable can still be the subject of adjudication.

Ball J acknowledged these cases, but did not consider them to be “binding”. His Honour’s interpretation was that these cases in fact concerned arrangements that were legal obligations. To the extent that they spoke to hypothetical situations, they were persuasive but not binding.

Upshots

One thing is common to all of these cases. They address the difficult situation in which Party A has made assurances or indications of some description to Party B that it will be paid, but there is no contract. This situation is right at the borders of when the SOP Act can be used and when it cannot be used.

The conflict in authority will make it difficult to predict how cases in the near future will end up. However, regardless of how the law is ultimately decided, there are a number of things that developers and builders can learn from Timecon v Lendlease Engineering to avoid being in this grey area.

The first regret of Timecon will be assuming that contractual documents will be “sorted” down the line. It had a chance to sign and return the contractual documents but failed to do so. This was apparently because it still had to test the capacities of the site to take spoil. However, this non-response led LLBJV to look elsewhere and no contract was signed.

Timecon’s failure to seal the deal or at least keep negotiations going was largely why it did not get the result it wanted. Do not let the agreement or understanding lapse and make it binding as soon as possible.

Further, Timecon should have documented everything. Numerous times, Ball J preferred LLBJV’s version of events thanks to other evidence corroborating their account. In other cases, where claimants have written records of their meetings with respondents, or contemporaneous emails that are consistent with their story, they have been able to convince judges that representations had been made to them about payment.

Being scrupulous about these will ensure that builders and contractors avoid the expensive and difficult-to-predict process of litigation.

If you or someone you know wants more information or needs help or advice, please contact us on +61 (2) 9248 3450 or email [email protected].