Mind your business: Application of Victorian Security of Payment Act to contracts for mixed-use developments

The decision in Piastrino v Seascape Constructions Pty Ltd [2022] VSC 202 provides guidance on the interaction of the Building and Construction Industry Security of Payment Act 2002 (SOP Act) and the Domestic Building Contracts Act 1995 (DBC Act), and the characterisation of construction contracts that include both domestic building work and other work. It highlights the need for builders to distinguish their domestic building work from other work or risk the construction contract being excluded from the operation of the SOP Act.

Mixed-use development: a domestic building contract?

Seascape Constructions (Builder) and Mr and Mrs Piastrino (Owners) entered into a construction contract to build:

• four apartments;
• modifications to a hair salon; and
• a car stacker.

A dispute arose and the Builder made an adjudication application under the SOP Act. The Owners disputed that the adjudicator had jurisdiction to determine the matter due to section 7(2)(b) of the SOP Act which excludes domestic building contracts. Section 7(2)(b) provides that the SOP 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 adjudicator found that he had jurisdiction, concluding that the Owners were in the business of building residences, and that therefore the contract was a construction contract to which the SOP Act applied. He made a determination in favour of the Builder.

The Owners applied to the Court for certiorari quashing the adjudicator's determination.

How the Court interpreted the SOP Act exclusion

The Court found that applicability of the section 7(2)(b) exclusion rested on three questions:

• Whether the exception at section 7(2)(b) applied to mixed-use developments (where there was both domestic building work and work of another kind);
• Whether the Owners were in the business of building residences; and
• If the answer to the second question is yes, whether the construction contract was entered into in the course of, or in connection with, that business.

Domestic building work within a mixed-use development

In respect of the first question, the Court found that a construction contract for a mixed-use development which involved both domestic building work and work of another kind could be a domestic building contract under the DBC Act, despite section 12 of that Act.

Section 12(2) of the DBC Act relevantly provides that a builder must not enter into a contract that entitles the builder to be paid for carrying out domestic building work and other work, unless the contract clearly identifies and distinguishes:

• the domestic building work from the other work; and
• 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.

Where a construction contract distinguishes between domestic building work and other work as required by section 12 of the DBC Act, the domestic building work component of the construction contract may be excluded under section 7(2)(b) of the SOP Act, while other work may still have provisions of the SOP Act apply to it.

The construction contract in this matter failed to comply with section 12 of the DBC Act, as it did not distinguish the domestic building work from any other kind of work to be undertaken.

"Dominant character" test

The court found that, in these circumstances, unless the dominant character of the work the subject of the contract was domestic building work, the SOP Act would apply to the contract as a whole and the section 7(2)(b) exclusion would not apply. The Court noted that the alternative interpretation could render the section 7(2)(b) exclusion ineffectual, or absurd (ie. a single apartment could render a major commercial project outside the operation of the SOP Act).

In this case, where the majority of the work was the construction of the apartments, the Court found the dominant character of the work was domestic building work, which meant the section 7(2)(b) exclusion could potentially be applied to the entirety of the construction contract.

SOP Act exclusion did not apply

Despite their success on Question 1, the Owners failed on Questions 2 and 3.

Although the Court acknowledged that the Owners had not previously been in the business of building residences, it found that the nature of the relevant construction contract and the surrounding circumstances was enough to draw the conclusion that they were in that business. In particular, the Court relied on the fact that the Owners entered into the construction contract with the intention to construct and lease the apartments for profit on completion.

As a result, the exclusion at section 7(2)(b) of the SOP Act did not apply and the Owners’ application for certiorari was refused.