Australia: Construction Bulletin

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.

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.

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.

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.

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 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?

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.

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.

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 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.

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.

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’.

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.

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.

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.

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.