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The Importance of Distinguishing Domestic Works in Construction Contracts- Applying the Victorian Security of Payment Act to Contracts for Mixed-Use Developments

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Overview

The application of the Building and Construction Industry Security of Payment Act 2002 (SOP Act) and the Domestic Building Contracts Act 1995 (DBC Act) were considered in the recent decision in Piastrino v Seascape Constructions Pty Ltd [2022] VSC 20, which emphasises the importance of avoiding ambiguity when drafting contracts, particularly when it involves domestic building work or mixed-use development projects. Clear drafting can protect builders under the SOP Act and limit the likelihood of the contract being excluded under the Act as “domestic building” works.

The Facts

A construction contract was entered into between Seascape Constructions (Builder) and Mr and Mrs Piastrino (Owners). It was agreed that the following works were to be completed:

  1. The construction of four apartments;
  2. Modifications to be made to a hair salon; and
  • The installation of a car stacker.

Following a dispute between the Builder and the Owners, the Builder issued an Adjudication Application under the SOP Act.

The Owners disputed this application on the basis that the SOP Act excludes domestic building contracts as per section 7(2)(b) which provides that the Act does not apply to:

a construction contract which is a domestic building contract within the meaning of the Domestic Building Contracts Act 1995 between a builder and a building owner (within the meaning of that Act), for the carrying out of domestic building work (within the meaning of that Act), other than a contract where the building owner is in the business of building residences and the contract is entered into in the course of, or in connection with, that business.

The determination concluded that the SOP Act did in fact apply and that the adjudicator therefore had jurisdiction to issue a determination under the SOP Act.  The adjudicator’s reasoning included consideration that the Owners were in the business of building residences and that the above exception applied.  The Owners applied to the Court for a certiorari to override the adjudicator’s determination.

Proceedings

Three questions arose when the Court considered whether the exclusion in section 7(2)(b) applied in the above-mentioned circumstances.

Mixed-Used Developments and Domestic Building Work

The first question was whether the exception under section 7(2)(b) regarding mixed-use developments applied. Namely, if there was domestic building work in addition to work of a different nature that had been distinguished in the contract.

Under section 12(2) of the DBC Act, a builder is only entitled to payment for carrying out domestic building work if the builder clearly identifies and distinguishes:

(a) the domestic building work from the other work or reason; and

(b) the amount of money the builder is to receive under the contract as a result of carrying out the     domestic building work from the amount of money the builder is to receive under the contract as a result of carrying out the other work or for the other reason.

It was found that the Contract did not distinguish the domestic building work from any other kind of work.

As a result, the Court applied the “dominant character” test in determining whether the construction works under the Contract were considered domestic building work, upon which the SOP Act would apply to the entirety of the contract. As the Contract involved the construction of apartments, the Court held that the dominant character of work was that of domestic building work, meaning that the exclusion under section 7(2)(b) could potentially be applicable to the contract as a whole.

The Business of Building Residences

Although the Owners had a minor victory in relation to the first question with the Court concluding that the building works were not considered “mixed-use developments”, it was held that despite this, the Owners were in the business of building residences and that the construction contract was entered into in connection with that business. Though the Owners had not previously engaged in the business of building residences, their initial intention of entering into the Contract for the purposes of contracting and leasing the apartments for profit in the future was found to be in the course of business. It was further found that the commercial scale and nature of the project to redevelop the property and the long-term objective of holding the property as an investment aligned with the scope in relation of business of building residences.

Accordingly, the section 7(2)(b) exclusion of the SOP Act did not operate in the favour of the Owners and the application for certiorari to quash the adjudication determination was denied.

 

To Consider

As highlighted in this matter, it is crucial that builders distinguish “domestic building work” as required under the DBC Act. This is to avoid a potential fine under the act, in addition to preventing pecuniary losses in circumstances where the “dominant character” of the work is found to be domestic building work, the consequences of which would potentially lead to the construction contract, as a whole, being excluded from section 7(2)(b) of the SOP Act. Likewise, even when carrying out domestic building work, it is important for principals to consider the nature of the construction contract at hand and be aware that the SOP Act could potentially apply to the project.

Letter of Demand 101

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Given the current economic climate, it is important more than ever for a business to ensure that they are able to receive payment for work carried out. This is particularly important for businesses in the construction industry as cashflow is the lifeblood of many construction companies, particularly subcontractors.

If an invoice remains unpaid past the due date for payment, one of the first steps would be to issue a letter of demand.

A letter of demand is a demand to get a third party to do a specific thing, or to cease doing a certain thing. However, in most instances, it is used to seek payment for debts due and payable.

A comprehensive letter of demand for an outstanding debt should include the following:

  1. Details of the arrangement/contract between the parties regarding the debt that is due and payable;

 

  1. Set out the amount owed and why it is owed;

 

  1. Provide a breakdown of the amount owed with any relevant supporting information;

 

  1. Provide a timeframe for the payment to be made, but in most instances should be a minimum of seven days; and

 

  1. The letter should clearly state what could happen if no response and no payment is received e.g. legal proceedings will be commenced.

The letter of demand should provide sufficient detail for the recipient to understand the claim that you have and why you have issued the letter of demand.

It is advisable to include a copy of the outstanding invoice, though it is not necessary. However, the added benefit of including the unpaid invoice is that issuing a letter of demand with the outstanding invoice will also start time ticking pursuant to the Security of Payment Act, in the event that you are entitled to issue a payment claim.

The courts generally do not require a letter of demand to be sent prior to commencing proceedings, however failing to issue a letter of demand prior to commencing proceedings may reduce the amount of legal costs you can claim should you be successful in the proceedings.

Whilst you do not need a lawyer to write a letter of demand, there are a number of benefits in having a lawyer draft and issue a letter of demand on their letterhead. In particular, it gives an indication to the recipient of the letter of demand that you are serious about pursuing the matter, and that you are willing to spend money in legal costs to obtain the item sought in the letter of demand. Further, seeking legal advice prior to issuing a letter of demand may assist you to understand your legal rights, and based on the legal advice, you might find that there are other potential actions or claims that could be pursued against the recipient of the letter of demand.

Bradbury Legal has issued many successful letters of demand in which our clients have obtained payment in full, even for claims exceeding $100,000.00. Though, each response will depend on the position of the recipient.

Once the letter of demand is issued, the recipient can:

  1. pay the money sought in the letter of demand in full;

 

  1. start a dialogue between the parties that could assist in reaching a settlement of the dispute; or

 

  1. not respond or dispute the claim.

 

Should you wish to pursue the matter further if there is no response and no payment received, you could:

  1. commence proceedings in a court or a tribunal; or

 

  1. prepare an adjudication application in accordance with the Security of Payment Act,

depending on your legal rights to do so.

If you require any assistance with any issues regarding debt recovery, or any other disputes which require a letter of demand, feel free to get in contact with Bradbury Legal on 02 9248 3450.