District Court New South Wales Medium Neutral Citation: DJE BUILDING SERVICES PTY LTD v INSURANCE AUSTRALIA LIMITED [2011] NSWDC 95 Hearing dates: 5 August 2011 Decision date: 08 August 2011 Before: MURRELL SC DCJ Decision: Motion granted Catchwords: Residential building work Construction contract Arrangement Recovery of progress payments Legislation Cited: Home Building Act 1989 Home Building Regulation 2004 Civil Liability Act 2002 Uniform Civil Procedure Rules 2005 Building and Construction Industry Security of Payment Act 1999 Cases Cited: Olbourne v Excell Building Corp Pty Limited [2009] NSWSC 349 Okaroo Pty Ltd v Vos Construction Joinery Pty Ltd [2005] NSWSC 45 Re British Basic Slag Ltd's Agreements [1963] 1WLRS 727 Levadetes Pty Ltd v Iberian Artisans Pty Ltd [2009] NSWSC 641 Texts Cited: Building and Construction Industry Security of Payment Bill 1999, Second Reading Speech, Hansard 8 September 1999 Category: Principal judgment Parties: DJE Building Services Pty Ltd Insurance Australia Limited Representation: Mr Cheney Mr Young Herbert Geer William Roberts Lawyers File Number(s): 2011/160576 Judgment Background 1Insurance Australia Ltd (the insurer) insured the owner/occupiers of a residential property (the occupants). In December 2009, a fire at the property caused damage to a granny flat that was part of the premises and had been used by the occupants for residential purposes. The occupants claimed on the insurance policy. The insurer accepted liability and arranged for the preparation of a scope of works. The occupants did not wish to nominate a builder to submit a quotation. The insurer approved a quotation submitted by DJE Building Services Pty Ltd (the builder), one of its panel builders. Pursuant to cl 27.3 of an "Associate Builder Agreement" between the insurer and the builder (Mr Allen's affidavit of 21 June 2011, Annexure, p 1), the approval gave rise to a building services contract between the insurer and the builder (the BSC). In accordance with cl 34.3 of the BSC, the builder obtained from the occupants an authority to provide the building services and entered into a standard form home building contract with the occupants (the HBC). Inter alia, the HBC confirmed that the occupants were entitled to the benefit of statutory warranties under the Home Building Act 1989, provided that the builder was required to rectify omissions and defects, and entitled the occupants to terminate the contract if the builder was at fault. In the event of termination, the occupants were entitled to claim the reasonable cost of completion of work where that cost exceeded the amount that would otherwise have been due under the HBC: cl 25. As the insurer was obliged to pay the builder under the BSC, all references to payment by the occupants to the builder were deleted from the HBC. The builder commenced the work. During the work, the builder's building foreman liaised with the occupiers on a daily basis. The occupants became dissatisfied with the work. They largely ceased dealing with the builder and began to deal with Mr McNamara, a building consultant to the insurer. Ultimately, the builder left the site. 2The insurer paid the first two progress claims that were made by the builder. Thereafter, the insurer made no further payments. Pursuant to s 13 of the Building and Construction Industry Security of Payment Act 1999 (the Act), the builder served the insurer with a payment claim for $97,000.50, comprising the balance outstanding under the quotation and agreed variations. The insurer did not serve a payment schedule in reply. The builder commenced proceedings, seeking to recover the amount of the payment claim as a debt due under s 15(2)(a)(i) of the Act or, alternatively, damages. Pursuant to rule 13.1 of the Uniform Civil Procedure Rules 2005 , the builder claimed summary judgement. The insurer resisted the claim, asserting that the web of agreements between the builder, the insurer and/ or the customers constituted an "arrangement" which was a "construction contract" of a type that was excluded from the operation of the Act by s 7(2)(b) of the Act. The Issues 1. Has the builder established that it is not reasonably arguable that the agreements between the builder, the insurer and/or the occupants constituted an "arrangement" under the Act, and that, consequently, the builder cannot proceed under the Act on the basis of the arrangement because the arrangment is caught by s 7(2)(b) of the Act? 2. In any event, has the builder established that there is no reasonable argument precluding it from proceeding under the Act on the basis of one part of any such "arrangement", namely the "construction contract" constituted by the BSC between the insurer and the builder? The Act 3Section 3 of the Act sets out the sole object of the Act and articulates the scheme by which the object is to be achieved: "(1) The object of this Act is to ensure that any person who undertakes to carry out construction work (or who undertakes to supply related goods and services) under a construction contract is entitled to receive, and is able to recover, progress payments in relation to the carrying out of that work and the supplying of those goods and services. (2) The means by which this Act ensures that a person is entitled to receive a progress payment is by granting a statutory entitlement to such a payment regardless of whether the relevant construction contract makes provision for progress payments. (3) The means by which this Act ensures that a person is able to recover a progress payment is by establishing a procedure that involves: (a) the making of a payment claim by the person claiming payment, and (b) the provision of a payment schedule by the person by whom the payment is payable, and (c) the referral of any disputed claim to an adjudicator for determination, and (d) the payment of the progress payment so determined. (4) It is intended that this Act does not limit: (a) any other entitlement that a claimant may have under a construction contract, or (b) any other remedy that a claimant may have for recovering any such other entitlement." "Construction contract" is defined in section 4(b) as follows: " construction contract " means 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." "Construction work" is defined in section 5 of the Act. "Arrangement" is not defined. 4Part 3 of the Act sets out the procedure for recovering progress payments. Section 13 describes the process for making a payment claim. Section 14 provides: "( 1) A person on whom a payment claim is served (the " respondent " ) may reply to the claim by providing a payment schedule to the claimant. ... (4) If: (a) a claimant serves a payment claim on a respondent, and (b) the respondent does not provide a payment schedule to the claimant: (i) within the time required by the relevant construction contract, or (ii) within 10 business days after the payment claim is served, whichever time expires earlier, the respondent becomes liable to pay the claimed amount to the claimant on the due date for the progress payment to which the payment claim relates." Section 15 applies where a respondent to a payment claim becomes liable and fails to pay. In those circumstances, the claimant may elect to recover the unpaid amount as a debt due to the claimant, in any court of competent jurisdiction, or make an adjudication application under s 17(1)(b) of the Act in relation to the payment claim, and may suspend the work. As to the application of the Act, s 7 provides: "(1) Subject to this section, this Act applies to any construction contract, whether written or oral, or partly written and partly oral, and so applies even if the contract is expressed to be governed by the law of a jurisdiction other than New South Wales. (2) This Act does not apply to: (a) a construction contract that forms part of a loan agreement, a contract of guarantee or a contract of insurance under which a recognised financial institution undertakes: (i) to lend money or to repay money lent, or (ii) to guarantee payment of money owing or repayment of money lent, or (iii) to provide an indemnity with respect to construction work carried out, or related goods and services supplied, under the construction contract, or (b) a construction contract for the carrying out of residential building work (within the meaning of the Home Building Act 1989) on such part of any premises as the party for whom the work is carried out resides in or proposes to reside in, or (c) ...." In a Second Reading Speech in the Legislative Assembly on 8 September 1999, which introduced a minor amendment to s 7(2)(b), by adding the words "such part of any", the Minister said: "The Government deliberately decided to exempt (home buyers and home owners) from the effects of the proposed legislation as they were not seen as being part of the construction industry. Also, contractors working for homeowners and homebuyers have access to other security of payment mechanisms established under the Home Building Act." Is it reasonably arguable that there was an arrangement? 5The insurer submitted that it was, at least, reasonably arguable that the "tripartite web of interwoven obligations" between the insurer, the builder and the occupants constituted an "arrangement" that was a "construction contract for the carrying out of residential building work...on such part of any premises as the party for whom the work is carried out resides ..." 6The insurer argued that, in the course of the work, the occupants were engaged with the builder (they paid a $200 insurance excess to the builder, authorised the builder to proceed and had frequent dealings with the builder's foreman) and they were directly impacted by the provisions of the Act (ie being involved in any response to the payment claim or adjudication and being prejudiced by any suspension of work under s 15 of the Act). 7In Olbourne v Excell Building Corp Pty Limited [2009] NSWSC 349, a company had loaned money to a developer for the construction of residential units. When the developer was unable to pay the builder, a director of the lender company indicated that he would fund the project shortfall. At [49] Rein J noted that, during the proceedings, it had not been suggested that an existing contract between A and B must preclude there being a s 4 arrangement between A and C. At [57], his Honour found that the intentional creation of an expectation that the director would fund the project shortfall constituted an "arrangement" between the director and the builder. At [26], his Honour summarised and cited with approval the judgement of Nicholas J in Okaroo Pty Ltd v Vos Construction Joinery Pty Ltd [2005] NSWSC 45 at [39]-[42], where (as summarised by Rein J) Nicholas J made the following points concerning "arrangement": "(1) 'arrangement' is apt to describe something less than a building contract or agreement; (2) an expectation that a party will act in a certain way is not sufficient; (3) 'arrangement' is a wide term which includes transactions or relationships which are not legally enforceable; (4) there is no requirement imported by the legislation other than that the arrangement be one under which one party undertakes to carry out construction work, or to supply related goods and services, for another party." At [27], Rein J went on to refer with approval to a statement of Wilmer J in Re British Basic Slag Ltd's Agreements [1963] 1WLRS 727 at 746, where Wilmer J said: "An arrangement as so defined is therefore something 'whereby the parties accept mutual rights and obligations'." 8It has been held that the definition of "construction contract" is apt to include not merely bilateral but also multilateral contracts or arrangements: Levadetes Pty Ltd v Iberian Artisans Pty Ltd [2009] NSWSC 641 per McDougall J at [59] - [60]. In Levadetes , his Honour held that an arrangement pursuant to which a builder would perform work for individual occupants on the basis that the builder would be paid by the occupants' company at least constituted a s 4 "arrangement" between the builder, the occupants and their company, if not a contract. 9There are at least two difficulties with the insurer's argument: (1) The relationship/s between the insurer, the builder and the occupants did not involve "mutual rights and obligations" in the sense of substantial common or shared rights and obligations. The occupants were not obliged to pay the builder. The builder had no obligation to insure the occupants against the events covered by the insurance policy. The occupants had no knowledge of the terms of the agreement between the insurer and the builder, and the builder had no knowledge of the terms of the insurance policy held by the occupants. (2) Despite the statement made by Nicholas J in Okaroo at [42] and endorsed by Rein J in Olbourne at [26], that the only requirement imported by the legislation in relation to "construction contract" is that one party has undertaken to carry out construction work, it is arguable that, in order for a contract or arrangement to be a "construction contract" under s 4, each party to the contract must be obliged to make payment for construction work or entitled to receive payment. The sole purpose of the Act is to facilitate the recovery of progress payments. There would be no purpose in extending the concept of "arrangement" to those who were neither entitled to receive nor obliged to make payment for construction work. In this case, the obligation to pay the builder fell solely on the insurer. 10However, on an application for summary judgment these arguments cannot be resolved in favour of the builder. I proceed on the basis that it is reasonably arguable that the "tripartite web of interwoven obligations" between the insurer, the builder and the occupants constituted an "arrangement" that was a "construction contract" within the meaning of the Act to which the occupants were parties. Is there a reasonable argument that would limit the builder to claiming on the arrangement and preclude the builder from claiming on the BSC alone? 11In the proceedings, the only "construction contract" invoked by the builder was the construction contract between the builder and the insurer. 12As noted in par [7], in Olbourne at [49] Rein J referred to the apparent agreement between the parties in that case that an existing contract between A and B does not preclude the existence of a s 4 arrangement between A and C (and, impliedly, vice versa). 13Pursuant to s 7(1), prima facie, the payment scheme created by the Act "applies to any construction contract" unless the construction contract is excluded by s 7(2). By its terms, s 7(2) contemplates that a construction contract may form part of larger agreement while retaining its identity as a "construction contract": see s 7(2)(a). 14The argument for limiting the builder to a claim on the arrangement and precluding a claim on the BSC alone finds no support in the terms of the Act. Further, it is inconsistent with the object of the Act, which is to provide a universal progress payment scheme governing most commercial entities that operate within the construction industry. 15As there is no reasonable argument disentitling the builder from proceeding on the BSC alone, there is no arguable defence to the claim and the builder is entitled to summary judgement on the claim under the Act. DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 12 August 2011