Commercial Law Update - Security of Payment Act may apply to residential developments by single venture companies

Commercial Law
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In a significant decision for builders and developers, the Supreme Court has found that single venture companies may be “in the business of building residences” when building residential developments and hence subject to the Building and Construction Industry Security of Payment Act 2002 (Vic) (“Act”).  

In Ian Street Developer Pty Ltd v Arrow International Pty Ltd [2018] VSC 14, the plaintiff, “Ian Street”, (the developer), sought an order in the nature of certiorari to quash a determination of an adjudicator made under the Act. The Act provides a statutory right for builders to recover progress payments due under a construction contract, and establishes a procedure in which disputed claims are referred to an adjudicator for expedited determination.

The dispute arose after Arrow International Pty Ltd, “Arrow”, (the builder), had made payment claims pursuant to the Act. Ian Street rejected the claims and Arrow then applied for adjudication of the dispute under the Act. The adjudicator determined that Ian Street was liable to pay Arrow $381,446.78. Ian Street applied to the Supreme Court for an order to set aside (quash) the adjudicator’s findings on four grounds:

  • The adjudication determination was made outside of the statutory time limits and was therefore void;
  • The adjudicator wrongly determined that Ian Street was “in the business of building residences” and hence that the Act applied;
  • The work was not properly described by reference to the relevant reference date; and
  • The adjudicator wrongly allowed claims that were outside the three-month period prescribed by s 14(4) of the Act.

The Court’s findings

Justice Riordan rejected the claims made by Ian Street and dismissed the application, as discussed below.

Ground No. 1: Was the adjudication determination void because it was made outside the statutory time limits?

Section 22(4)(a) of the Act provides, in essence, that an adjudicator is to determine an adjudication application as expeditiously as possible and in any case within 10 business days “after the date on which the acceptance by the adjudicator of the application takes effect”; and s 22(4)(b) provides that the time may be extended within any further time “not exceeding 15 business days after that date”, provided the claimant agrees.

In this case the parties agreed that the adjudicator could have the further 15 days identified in s 22(4)(b) to make his determination, and the adjudicator delivered his award within 25 business days of appointment. However, Ian Street argued that the reference to “that date” in s 22(4)(b) was a reference to the date of appointment, not the date of appointment plus the 10 business days identified in s 22(4)(a). Justice Riordan agreed with Ian Street’s submission and held that the further time available (the 15 business days) runs from the date of acceptance. On this basis the Act only allows for an extension of a further 5 days, not 15 days, and the adjudication in this case was made out of time.

Nevertheless, the Court found that a failure to comply with the time limits for determining an adjudication application does not invalidate the adjudication determination. On that basis, the adjudication determination, even though made outside the time limits prescribed by the Act, remained binding.

Ground No. 2: Was Ian Street “in the business of building residences”?

Section 7(2) of the Act carves out from the operation of the Act domestic building contracts “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.” Clearly, the legislative intent is to ensure that an ordinary home builder, building a residential dwelling, is not caught by the legislation.

In this case, Ian Street was a single purpose company, created for the sole purpose of developing the site – it had never before conducted any business and did not intend to do so after the development – it did not own the relevant land, and did not intend to make a profit or loss from the project. On this basis, Ian Street said it was not in the business of building residences. Further, Ian Street relied on Vickery J’s judgment in Director of Housing v Structx Pty Ltd [2011] VSC 410, (Structx), where his Honour said at [28]:

The expression ‘in the business of building residences...’ connotes the construction of dwelling houses as a commercial enterprise on the basis of a going concern, that is, an enterprise engaged in for the purpose of profit on a continuous and repetitive basis.”

However, Riordan J. noted that it is “well recognised” that a single venture may constitute the carrying on of a business (citing: United Dominions Corporation Ltd v Brian Pty Ltd (1985) 157 CLR 1) and found that Ian Street was in fact in the business of building residences for the following reasons:

(a) Ian Street was incorporated for the purpose of completing the construction of a project worth in excess of $10M and to ensure that Arrow performed its obligations under the contract;

(b) the sole purpose of Ian Street was to complete the project so apartments in the project could be resold by a related company for profit;

(c) it undertook the project over many months;

(d) the submission that Ian Street was not in the business of building residences because it was part of a larger commercial structure where the profits would be directed to other entities defies the commercial reality of the situation; and

(e) Ian Street’s submission that it was not in the business of building residences because it did not intend to make a profit would enable the Act to be avoided and would not advance the object of the Act.

On this basis, Ian Street’s argument failed.

Grounds Nos. 3 and 4: Was the payment claim invalid because:

(a) the works were not properly described in the payment claim: and/or

(b) the adjudicator impermissibly allowed claims outside the statutory 3-month period?

Section 14(2)(c) of the Act requires that a payment claim must identify the construction work or related goods or services to which the progress payment relates; and section 14(4) provides that a payment claim (other than a final, single or one-off claim) may be served only within the time prescribed by the contract or the period 3 months after the reference date referred to in s 9(2) of the Act (whichever is the later).

Ian Street argued that the payment claim was in breach of s 14(2)(c) of the Act because it did not identify what work was performed by the relevant reference date. It also said that some of the claims included in the payment claim (made 31 May 2017), were claims in connection with work undertaken in November and December 2016, and January 2017, and that it was impermissible to include these claims in the 31 May 2017 payment claim (because they were outside the 3-month time limit).

The Court rejected Ian Street’s contentions. Justice Riordan said, relevantly:

“[110] It is well established that a claim to a progress payment under the Act must be calculated by reference to a reference date under a construction contract. Grounds 3 and 4 raise the issue of whether the payment claim is limited to work performed since the previous reference date. The claimant’s rights to progress payments are set out in s 9(1) of the Act, which relevantly provides that ‘On and from each reference date under the construction contract, a [relevant] person ... is entitled to a progress payment under this Act, calculated by reference to that date.’

[111] In my opinion, there is no basis for limiting the entitlement to work performed after the prior reference date. I do not consider there is any basis upon which s 9(1) could be interpreted as if it contained additional words of limitation. Neither do I consider the object of the Act would be advanced by the construction proposed by Ian Street.” [Footnote omitted, emphasis added]

The Court also rejected the argument that Arrow had failed to sufficiently identify the construction work the subject of the claim.  Accordingly, these grounds relied on by Ian Street also failed.

Comment

Justice Riordan does not appear to have followed Vickery J’s reasoning in Structx on the meaning of the expression “in the business of building residences” in the Act, particularly on the requirement for there to be an element of “continuity or repetition” in contrast to an isolated transaction. Justice Riordan acknowledged that the fact that the activities are carried on in a continuous and repetitive basis may be consistent with the conduct of a business, but also noted that it is “well recognised that a single venture may constitute a carrying on of the business”, referring to two High Court decisions: United Dominions Corporation Ltd v Brian Pty Ltd (1985) 157 CLR 1 and Canny Gabriel Castle Jackson Advertising Pty Ltd v Volume Sales (Finance) Pty Ltd (1974) 131 CLR 321.

It is also worth noting that the decision contains a convenient summary of the principles of statutory interpretation at [51] – [60].

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Adam Rollnik practises in commercial law

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