Supreme Court New South Wales Medium Neutral Citation: Seabreeze Manly v Toposu [2014] NSWSC 1097 Hearing dates: 08/08/2014 Decision date: 08 August 2014 Jurisdiction: Equity Division - Technology and Construction List Before: McDougall J Decision: Summons dismissed with costs. Money in court to be paid out to first defendant forthwith. Costs to be assessed on the indemnity basis after 28 May 2013. Catchwords: BUILDING AND CONSTRUCTION - payment claims - whether there was a 'construction contract' in accordance with the Building and Construction Industry Security of Payments Act 1999 (NSW), s4 - definition and construction of 'construction contract' - definition and construction of 'arrangement' COSTS - departing from the general rule - where offer of compromise made Legislation Cited: Building and Construction Industry Security of Payment Act 1999 (NSW) Cases Cited: Calderbank v Calderbank [1976] Fam Law 93 Class Electrical Services Pty Ltd v Go Electrical Pty Ltd [2013] NSWSC 363 Machkevitch v Andrew Building Constructions [2012] NSWSC 546 Category: Principal judgment Parties: Seabreeze Manly Pty Ltd (Plaintiff) Toposu Pty Ltd (First Defendant) John Lewer (Second Defendant) Representation: Counsel: D Hand (Plaintiff) D S Weinberger (First Defendant) Solicitors: Bartier Perry (Plaintiff) HWL Ebsworth (First Defendant) File Number(s): 2014/99793 Judgment (ex tempore - revised 8 august 2014) 1HIS HONOUR: The plaintiff (Seabreeze) seeks to restrain enforcement of a determination made by the second defendant (the adjudicator), under the Building and Construction Industry Security of Payment Act 1999 (NSW), in favour of the first defendant (Toposu). The key issue is whether there was, as Toposu contends and the adjudicator concluded, a 'construction contract', as defined in the Security of Payment Act, between Seabreeze and Toposu. The construction contract between Seabreeze and Castle Projects 2Seabreeze was developing lands at Manly for residential purposes. It entered into a contract with Castle Projects Pty Limited as builder. In form, that contract incorporated the general conditions of contract of AS4000-1997, with modifications. 3One modification provided that Castle Projects could only retain subcontractors with the prior consent of Seabreeze. Another provided that, where this had been done, Seabreeze would pay subcontractors direct. 4The evidence suggests that the true nature of the contract or arrangement between Seabreeze and Toposu might have been somewhat more limited. An internal email of Seabreeze, some months before the contract with Castle Projects was made, suggests that Castle Projects was to be retained in effect as a project manager, for an hourly fee up to an agreed maximum. The email, and an attachment, provided that there would be in addition a bonus payable, and a 'fee for use of builder's licence'. 5To the extent that this arrangement is inconsistent with the express terms of the contract apparently made between Seabreeze and Castle Projects, no doubt the latter would prevail. However, again, the evidence suggests that the way in which the construction project was managed was, at least in substance, consistent with the terms of the email. 6One feature of note is that, although the total contract sum was of the order of $7 million or $8 million, it appears to be the case (as Ms Ward of Seabreeze agreed in cross-examination) that the total amount payable to Castle Projects was of the order of $311,000 (part of which was a contingent bonus). That significant disparity between the amounts payable and the total value of the project suggests, again, that the true terms of the arrangement are consistent with the email and its attachment. The arrangements between Seabreeze, Castle Projects and Toposu 7The unchallenged evidence of Mr Cleto, a director of Toposu and the person who appears to have had responsibility for the events giving rise to this dispute, is that he was contacted by Mr Kearney of Castle Projects in about November 2011, and asked to quote for the supply and installation of steel and aluminium. Thereafter, Mr Cleto said, he went to the site, reviewed the drawings and spoke to Mr Kearney. 8According to Mr Cleto, he told Mr Kearney that Toposu could do the work in question. Mr Kearney asked Mr Cleto to come and measure up and start fabricating straight away. Mr Kearney also said words to the effect: "We are only the project managers on the job though. You will need to submit your invoices for payment to me, but you will be paid directly by the principal". 9Mr Cleto said that he agreed to this. 10That, in substance, is what happened. And it is consistent with the substance of the evidence given on this point by Ms Ward. She agreed, in cross-examination, that one of the arrangements made between Seabreeze and Castle Projects was that Seabreeze would pay subcontractors direct. As I have noted, that is consistent with an express term of the (modified) general conditions of contract. 11Further, Ms Ward agreed, she instructed Mr Kearney to ensure that all subcontractors who were engaged would submit for their work tax invoices that were addressed to Seabreeze. It is clear that this happened in some cases. It is equally clear that it did not happen in the case of Toposu: its invoices were submitted to Castle Projects. 12Ms Ward agreed, further, that the position was, and any such contractor engaged on the project would have understood, that the subcontractor was supplying goods and services; it was doing so on the basis that Seabreeze would pay direct; it did in fact do so on that basis; Seabreeze did in fact pay direct; and the subcontractor would know this by checking its bank statements. 13The bank statements of Toposu show, as Mr Cleto pointed out, that Seabreeze did make four direct payments to Toposu. 14Ms Ward agreed, further, that subcontractors on the project had a reasonable expectation in those circumstances, that Seabreeze would pay them for work properly done unless the work was defective, or in some other way outside the specifications. 15In the present case, Ms Ward suggested that the reasons why Seabreeze was disputing this particular payment claimed by Toposu were that the work was defective in part; that the scope of works had been changed other than as authorised by the development approval; and that the original price for the works had been exceeded. The significance of this is, of course, that Ms Ward did not suggest that Seabreeze had no liability to pay if, apart from those concerns, the work had been properly done. 16The process by which Toposu received payments for its work were simple. It invoiced Castle Projects. This was not in accordance with the instructions given by Ms Ward to Mr Kearney, apparently followed by other subcontractors. Nonetheless, the invoices were processed for payment. 17That process involved Castle Projects creating a payment schedule. In form, that was a document addressed by Seabreeze to Toposu. It stated, as the scheduled amount, the claimed amount (presumably if Mr Kearney had thought some other amount was properly payable, he would have included that). 18Mr Kearney submitted the documents, including the payment schedule and, I think, the supporting invoice, to the superintendent Mr Brincat. 19Mr Brincat considered the documents and, in conjunction with a quantity surveyor engaged by the financier, approved payment of the amount of the payment schedule. Again, presumably, if Mr Brincat or the quantity surveyor had thought that some other amount was payable, that other amount would have been certified for payment. 20Those things having been done, Mr Brincat appears to have passed the payment schedule on to Seabreeze. Seabreeze then paid direct to Toposu the amount certified, with one deduction. That was a deduction of 5 per cent for 'retention'. That deduction reflected the contract made between Seabreeze and Castle Projects. It did not reflect the terms of the subcontract made between Castle Projects and Toposu. However, in two cases, or maybe three (the documents are less than clear), it seems that the payment schedule did refer to the retention of 5 per cent of the certified amount. 21In summary, by arrangement between Castle Projects and Toposu and in accordance with the express instructions given by Seabreeze to Castle Projects: 1. Toposu carried out construction work for Seabreeze's projects; 2. that was done under the supervision of Castle Projects; 3. it was, however, done on the basis (again expressly authorised by Seabreeze and communicated in effect to Toposu) that Seabreeze would pay the certified amount for that work direct; 4. Toposu invoiced Castle Projects (not, as Seabreeze wanted, Seabreeze itself); 5. Castle Projects created a payment schedule as if there had been a payment claimed by Toposu direct to Seabreeze and submitted that to the superintendent; and 6. Seabreeze paid the amount of the payment schedule, as certified by the superintendent, direct to Toposu although, in some cases at least, with a deduction of 5 per cent by way of retention. Relevant provisions of the Security of Payment Act 22The key concept is the definition of 'construction contract'. That term is defined in s 4: 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. 23It is not necessary to go to the definition of 'construction work' (s 5) as it was not in dispute that the work done by Toposu in this case was construction work. 24Section 8 of the Act creates a statutory entitlement to progress payments. So far as it is relevant, it provides as follows: (1) On and from each reference date under a construction contract, a person: (a) who has undertaken to carry out construction work under the contract, or (b) who has undertaken to supply related goods and services under the contract, is entitled to a progress payment. 25Section 13 initiates the statutory mechanism for recovering progress payments. It provides for the service of payment claims. Section 14 provides for a response, by way of payment schedule. 13 Payment claims (1) A person referred to in section 8 (1) who is or who claims to be entitled to a progress payment (the claimant) may serve a payment claim on the person who, under the construction contract concerned, is or may be liable to make the payment. (2) A payment claim: (a) must identify the construction work (or related goods and services) to which the progress payment relates, and (b) must indicate the amount of the progress payment that the claimant claims to be due (the claimed amount), and (c) if the construction contract is connected with an exempt residential construction contract, must state that it is made under this Act. (3) The claimed amount may include any amount: (a) that the respondent is liable to pay the claimant under section 27 (2A), or (b) that is held under the construction contract by the respondent and that the claimant claims is due for release. (4) A payment claim may be served only within: (a) the period determined by or in accordance with the terms of the construction contract, or (b) the period of 12 months after the construction work to which the claim relates was last carried out (or the related goods and services to which the claim relates were last supplied), whichever is the later. (5) A claimant cannot serve more than one payment claim in respect of each reference date under the construction contract. (6) However, subsection (5) does not prevent the claimant from including in a payment claim an amount that has been the subject of a previous claim. (7) A head contractor must not serve a payment claim on the principal unless the claim is accompanied by a supporting statement that indicates that it relates to that payment claim. Maximum penalty: 200 penalty units. (8) A head contractor must not serve a payment claim on the principal accompanied by a supporting statement knowing that the statement is false or misleading in a material particular in the particular circumstances. Maximum penalty: 200 penalty units or 3 months imprisonment, or both. (9) In this section: supporting statement means a statement that is in the form prescribed by the regulations and (without limitation) that includes a declaration to the effect that all subcontractors, if any, have been paid all amounts that have become due and payable in relation to the construction work concerned. 14 Payment schedules (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. (2) A payment schedule: (a) must identify the payment claim to which it relates, and (b) must indicate the amount of the payment (if any) that the respondent proposes to make (the scheduled amount). (3) If the scheduled amount is less than the claimed amount, the schedule must indicate why the scheduled amount is less and (if it is less because the respondent is withholding payment for any reason) the respondent's reasons for withholding payment. (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. The authorities 26Counsel referred me to various cases. Since it was one of the cases to which counsel referred, and in any event because I do not think that it was wrongly decided, I refer first to what I said on the question of 'arrangement' in Machkevitch v Andrew Building Constructions [2012] NSWSC 546 at [15] to [28]: [15] One of the central concepts in the Act is that of "construction contract". That expression is defined, in s 4, to mean: ... 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. [16] The expressions "contract" and "arrangement" are not separately defined. [17] As a matter of language, it seems to be clear that the legislature intended that a "construction contract" could include both a "contract" (as that concept is known to and understood in the law) and some "other arrangements" that would not in law be regarded as contracts. [18] It seems to me, as a simple matter of reading the legislative words, that the concept of "other arrangement" is something which goes beyond the concept of "contract". [19] No doubt, the legislature had in mind that, from time to time, work would be done pursuant to arrangements which might not be susceptible to classification as contracts, formal or informal. Clearly, it did not intend that the entitlement to payment should depend on the degree of formality in the arrangements pursuant to which work should be done. In this respect, the legislative intention could be contrasted with the intention underlying s 10 of the Home Building Act 1989 (NSW), under which a builder is not entitled to enforce a contract unless it is licensed, and carries out work pursuant to a written contract. [20] The word "arrangement" may be thought to be a somewhat strange one in the context of the Act. It its primary meaning, it denotes the ordering or disposition of things (see, for example, the online editions of the Macquarie Dictionary and the Oxford English Dictionary). But the same reference sources suggest that a secondary meaning of "arrangement" denotes measures or preparations, or plans for the accomplishment of some purpose. [21] Nicholas J considered the proper construction of the definition of construction contract in Okaroo Pty Ltd v Vos Construction and Joinery Pty Ltd [2005] NSWSC 45. His Honour noted [at 40] that the word "arrangement" lacked precise meaning. His Honour observed that it was a word that appeared in many different statutory contexts, and that it would derive its meaning from its context. His Honour referred to what was said in Newton v FCT (1958) 98 CLR 1 at 7, and in Australian Competition and Consumer Commission v CC (NSW) Pty Ltd (No 8) (1999) 165 ALR 468 at 469. [22] In the former case, the court concluded that an "arrangement" was something less than a binding contract It could be something in the nature of an understanding, or a plan not enforceable at law. [23] In the second of those cases, the court observed that the composite expression of "arrangement or understanding" required something more than a mere expectation. It required some assumption of obligation, or assurance, or undertaking. [24] In Okaroo [at 41], Nicholas J said, in my respectful opinion correctly, that in its context in the definition of "construction contract" in the Act, the word "arrangement" encompasses transactions or relationships which are not legally enforceable. Thus, his Honour said, and again in my respectful opinion correctly, that a construction contract would include both a legally enforceable agreement and other transactions which were not. He therefore concluded: ... that contract is to be given its common law meaning and that "arrangement" means a transaction or relationship which is not enforceable at law as a contract would be. [25] At [42], his Honour observed that the only express limitation on the "arrangement" was that it must be one under which one party to it undertakes to carry out construction work for another party to it. I respectfully agree. [26] Further, his Honour concluded [at 55], there was nothing either in the definition of construction contract or in the Act as a whole which supported the suggestion that an "arrangement" must have the quality of legal enforceability. Again, I respectfully agree. I add only that an "arrangement" enforceable at law, for example through the doctrine of estoppel, would nonetheless be capable of being an arrangement for the purposes of the Act. [27] In my view, what is required is that there be something more than a mere undertaking; or something which can be said to give rise to an engagement, although not a legally enforceable engagement, between two parties; or a state of affairs under which one party undertakes to the other to do something; or an arrangement between parties to like effect. [28] In those circumstances, the court must look for a concluded state of affairs, which is bilateral at least, which can amount to an arrangement under which one party to it undertakes to perform construction work for another party to it. It is not necessary that the arrangement be legally enforceable; but an "arrangement" which is legally enforceable may be, a priori, a construction contract. 27I returned to the topic in (among many other cases) Class Electrical Services v Go Electrical [2013] NSWSC 363. At [28] of those reasons, I qualified what I had said in Machkevitch at [27]: [25] I looked at the question in Machkevitch v Andrew Building Constructions [2012] NSWSC 546 at [14] and following. In that case there was on any view a construction contract, or perhaps two construction contracts, between the builder and the proprietor. The question was whether, in addition, there was a construction contract between the builder and the plaintiff. The plaintiff was a principal of the proprietor. The builder's case was that the plaintiff, Mr Machkevitch, had given an oral undertaking to ensure that the builder was paid if the proprietor did not pay it. [26] I have set out that background because on re-reading my reasons it is apparent to me that there is some lack of clarity in a particular paragraph. [27] I referred at [21] to the reasons of Nicholas J in Okaroo. Building on that, I said at [27] that there should be something more than a mere undertaking; there should be something which could be said to give rise to engagement although perhaps not legally enforceable between two parties; or a state of affairs under which one party undertook to do something for the other; or an arrangement to that effect: [27] In my view, what is required is that there be something more than a mere undertaking; or something which can be said to give rise to an engagement, although not a legally enforceable engagement, between two parties; or a state of affairs under which one party undertakes to the other to do something; or an arrangement between parties to like effect. [28] The first use of the word "undertaking" seems to me now to be somewhat unfortunate, having regard to the definition of "construction contract". It was intended to pick up undertakings of the kind said to have been given by Mr Machkevitch to the builder, as I explained above. It was not intended to be "an undertaking" in a cognate sense to the verb "undertakes" as it is used in the definition of "construction contract". [29] Thus, properly understood, I do not think that anything that I said in Machkevitch focused on what is required to satisfy or demonstrate the concept of undertaking to do construction work or supply related goods and services. It was concerned with the existence of a contract or arrangement. 28Further, in Class Electrical, I dealt at [32] to [35] with the concept of 'undertakes': [32] The verb "undertake" is capable of having numerous meanings. That can be exemplified by looking at the Oxford English Dictionary online, which gives at least six different meanings, themselves having numerous sub-meanings, for the verb in its transitive form, and further meanings and sub-meanings for the verb in its intransitive form. What is intended to be conveyed by the verb will depend on the context in which it is to be found. [33] It seems to me that in the statutory context with which I am concerned, a person undertakes to carry out construction work, or to supply related goods and services, for or to another if the first person agrees, or accepts an obligation, or promises, to do that work or supply those goods and services. [34] In the context of the definition, the agreement or acceptance or promise need not be one having legal effect, so that there may not be a contract as the law understands that term. [35] Nonetheless, what is important is that the undertaking be one under a contract or other arrangement. To put it the other way around, there must be a contract or other arrangement under which an undertaking of the relevant kind is given and accepted. 29I have taken the course of simply referring to what I said in those cases both because I think, on reflection, that they reflect the proper way to approach the relevant provisions of the Security of Payment Act and because the parties appeared to accept that this was so. The parties' submissions 30Mr Hand of counsel, for Seabreeze, stressed the fact that there was one contract between Seabreeze and Castle Projects and another contract (more accurately, subcontract) between Castle Projects and Toposu. He submitted that the invoices that Toposu submitted for the work done by it were addressed, as one might expect, to Castle Projects, not to Seabreeze. 31Further, Mr Hand referred to a final payment claim given by Castle Projects to Seabreeze, in which Castle Projects claimed, among other things, an amount of a little over $30,000 for work done by Toposu. That final payment claim, Mr Hand submitted, was consistent with the contractual state of affairs that he identified, and inconsistent with the existence of an 'arrangement' of the kind to which Mr Weinberger of counsel, for Toposu, drew attention. 32I should note at this stage that the contractual regime for payments set out in the written instrument on which Seabreeze relied provided a quite separate and distinct regime for final payments as compared to progress payments. Thus, I do not see the inclusion of the Toposu claim, in the final payment claim prepared by Castle Projects, as necessarily inconsistent with the existence of an arrangement of the kind on which Mr Weinberger relied. 33Mr Weinberger submitted that, on the facts, there was an arrangement under which Toposu undertook to carry out construction work for Seabreeze. That arose essentially, Mr Weinberger submitted, because Seabreeze had not only authorised, but in fact had instructed, Castle Projects to enter into subcontracts on the basis that the subcontractors would invoice, and be paid directly by, Seabreeze. By implication, at least, and obviously as a matter of practical necessity, Seabreeze must have intended and known that Castle Projects would communicate that to intending subcontractors. Decision 34I hold to the views, as to the definition and construction of the expression 'construction contract', expressed in the cases to which I have referred. As I have said, there was no submission to the contrary. 35It is clear that, for the purposes of the definition of 'construction contract', an 'arrangement' (and, for that matter, a contract) may be multilateral. That follows necessarily from the words 'another party'. 36It is equally clear that the existence of a construction contract between A and B for B to carry out particular work for A will not necessarily negate the parallel existence of an arrangement between A and C, or between A, B and C, for C to carry out for A part only of that construction work. That is so a fortiori in the present case, where it is apparent that the true nature of the contract between Seabreeze and Castle Projects made the latter in effect, among other things, a conduit or medium between Seabreeze and the various subcontractors who did the actual work of building the project. 37Here, in my view, the evidence demonstrates an arrangement under which Toposu undertook to perform construction work for Seabreeze's project and, thus, for the benefit of Seabreeze. The evidence demonstrates, further, that Toposu did this on the express and accepted basis that Seabreeze undertook to pay it, and was liable to pay it, directly for the work done. 38Seabreeze instructed Castle Projects to give the work to subcontractors, including Toposu on that basis. It accepted on four occasions an obligation to pay Toposu direct for work done. 39For the reasons indicated in Class Electrical at [33], the facts in this case show that there was an arrangement, sufficient to amount to a construction contract, under which Toposu agreed to carry out construction work for Seabreeze. That is so because Seabreeze instructed Castle Projects to put in place a system whereby subcontractors would look to Seabreeze for payment. Castle Projects did so. It communicated that system to Toposu. Toposu took the job on that express and authorised basis. 40Leaving aside the final payment claim (which, for the reason I have briefly indicated, does not really bear on the issue), the documents and the course of dealings are entirely consistent with the existence of a trilateral arrangement under which, among other things, Toposu undertook to carry out construction work for Seabreeze. I repeat that Seabreeze has effectively acknowledged this on four occasions by paying Toposu direct, in accordance with the payment schedule created in its name by Castle Projects, addressed to Toposu, and certified by the superintendent. 41For those reasons the challenge to the determination fails. Discretion 42Mr Weinberger submitted that even if I were to come to the contrary view, I should, as a matter of discretion, withhold relief in the nature of prerogative relief. He pointed to the small amount in question, under $37,000.00. On the view I have come to, it is unnecessary to deal with that submission. Orders 43I order that the summons be dismissed with costs and I order that the exhibits be handed out. I order that the money brought into court by the plaintiff be paid out forthwith to the first defendant. [Counsel addressed on costs.] 44Toposu seeks an order that its costs be assessed on the indemnity basis on alternative dates. It relies on "Calderbank" offers made on 30 April 2014 and 4 August 2014. Mr Hand, for Seabreeze, did not put any submissions in relation to the latter document, except to put that because much of the affidavit by Mr Kearney of Castle Projects was not read and most of the documents exhibited to the affidavit were not tendered, his client should not be penalised for the cost of preparation of that affidavit. 45The first of the offers was open for 28 days. That was a period ending about one week after the evidence for Toposu was served. Thus, if Seabreeze had returned to the question, it would have been able to work out for itself the precise nature of the case that Toposu sought to make out. In any event, I think Mr Weinberger is correct in his submission that it was the evidence given for Seabreeze as much as anything which determined the fate of the case in this matter. 46Accordingly, the question is whether it was relevantly unreasonable for Seabreeze to accept the offer of 30 April 2014 within the time for its acceptance. In my view it was relevantly unreasonable. 47The question was always one which was going to turn on the existence of an "arrangement". Any rational analysis of the facts must have suggested there was an arrangement. Indeed, as I said in the reasons just given, Seabreeze's conduct, at least before it fell into dispute with Castle Projects, was entirely consistent with both the acceptance of such an arrangement and its willingness to perform its part of it. 48The evidence of Mr Cleto made it clear that Toposu had undertaken the work on the basis of the arrangement that Seabreeze authorised and instructed Castle Projects to hold out to subcontractors. 49As I have said, I think, a rational analysis must have shown that the case for Seabreeze was doomed to fail. 50It has not been suggested that there was no genuine element of compromise in the Calderbank offer. Had the offer been accepted it would have resulted in a very significant saving of costs. 51In that context, this Court has been required to determine a dispute over an amount of less than $37,000.00. I accept that, where relief in the nature of certiorari is sought this is not just the proper Court but the only Court that can grant the relief. Nonetheless, it seems to me, considerations of proportionality and, equally, considerations of common sense must suggest that the conduct of litigation involving numerous volumes of documents over less than $37,000.00 is unlikely to be a cost-effective process. 52That idea, as well, should have been something on which Seabreeze reflected when it considered the offer in the light of the evidence that was served during the time the offer was held open. 53Accordingly, I conclude that Toposu is entitled to an order that its costs be assessed on the indemnity basis, but that should be so only after the expiry of the offer. I say that because it was the occurrence of events during the pendency of the offer that formed part of the reasons for coming to the conclusion I have just expressed. 54I order that the costs payable by the plaintiff to the first defendant be assessed on the indemnity basis after 28 May 2015. ********** 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: 14 August 2014