SOP clarified: meaning of "arrangement" and the risk of claiming payment for work under multiple construction contracts

Recent judgments of the NSW Supreme Court have clarified the meanings of the term "arrangement" and the "one contract rule" under the Building and Construction Industry Security of Payment Act 1999 (SOP Act).

Meaning of "arrangement" in SOP Act

Under the SOP Act, a "construction contract" is defined as:

"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."

The term "arrangement" in this definition has led to uncertainty because there is no clear prescription of its characteristics or requirements in the SOP Act or the authorities (as opposed to the well understood requirements for a "contract").

Earlier decisions such as Machkevitch v Andrew Building Constructions Pty Ltd [2012] NSWSC 546 suggested that there need not be a "legally enforceable engagement" but instead:

"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."

However, the later decision of Lendlease Engineering Pty Ltd v Timecon Pty Ltd [2019] NSWSC 685 took a different position, finding that:

"the relevant arrangement must give rise to a legally binding obligation, although, of course, that obligation need not be contractual in nature"

As a result of these (and other) conflicting judgments, the question of whether an "arrangement" must be legally binding has remained a source of confusion for practitioners. 

The recent judgment of Justice Henry in Crown Green Square Pty Ltd v Transport for NSW [2021] NSWSC 1557 has helped to clarify the issue.

In Green Square, the plaintiffs had entered into a development agreement with the defendants to upgrade a connection between a railway station and their nearby development.

While it was not in dispute that the development agreement was a construction contract, the plaintiffs claimed they had performed additional work outside the scope of the development agreement and, as a result, under a separate "arrangement" for which they were entitled to make a payment claim under the SOP Act.

On this basis, the plaintiffs issued a payment claim for work performed under the purported "arrangement".  When the defendants did not issue a payment schedule in time, the plaintiffs sought to recover the unpaid amount as a debt.

In rejecting the plaintiffs' claim, the defendants argued that there was not a separate "arrangement" for some or all of the alleged additional work because, among other things, the defendants had explicitly advised the plaintiffs that they would not receive any additional money than the sum agreed in the development agreement.

The Court ultimately found for the defendants, determining there was no "arrangement" for the additional works and, as a consequence, the payment claim was not a valid payment claim under the SOP Act.

The key reason for the Court's decision was that the plaintiffs could not demonstrate that the defendants had agreed to any kind of reciprocity or consideration for the alleged additional work. In particular, while not fully endorsing the position in Timecon that an "arrangement" must be legally binding, the Court found that:

"an arrangement under the SoP Act requires something more than a party undertaking to carry out construction work for another. There must be a concluded state of affairs between two or more parties involving some element of reciprocity or acceptance of mutual rights and obligations relating to payment or price for the works (which may or may not be legally binding obligations) under which one party undertakes to carry out construction work for another party to the arrangement." [emphasis added]

This decision greatly assists to clarify the definition of “arrangement” under the SOP Act. While not requiring a legally enforceable agreement, it makes plain that there must be an acceptance by the respondent of an obligation to provide consideration to the claimant for work carried out. This can be determined without the need for adjudicators and Courts to carry out a complicated analysis of whether a legally binding obligation has been created or not (which would be antithetical to the key aim of SOP Act in ensuring cash flow in the building industry).

Unlikely to be "arrangement" if contractual regime in place

In Ventia Australia Pty Ltd v BSA Advanced Property Solutions (Fire) Pty Ltd [2021] NSWSC 1534 (decided before the Green Square judgment) the respondent had argued that a subcontract and work orders issued under it constituted an overarching "arrangement" under the SOP Act, rather than multiple construction contracts. This was argued so that the respondent's payment claim did not fall foul of the "one contract rule" (which is further discussed below).

In its judgment, the Court held that, while the concept of an "arrangement" is intended to capture dealings between parties which fail to achieve that level of precision which the law of contract would not ordinarily recognise, if there exists a contractual regime in place, the Court will not overlook the contractual regime to try and identify an "arrangement" in its place.

One contract rule

A payment claim will not be valid under the security of payment legislation if it purports to claim payment in respect of more than one construction contract. This is known as the "one contract rule". That said, it is not clear whether this issue can be determined by an adjudicator, or whether it is a jurisdictional matter such that an adjudicators determination on that matter can be tested by a court.

In Ausipile Pty Ltd v Bothar Boring and Tunnelling (Australia) Pty Ltd [2021] QCA 223, the Queensland Court of Appeal found that it is sufficient that a payment claim "on its face" relates to one construction contract, with the respondent to raise any issue in the payment schedule and the adjudicator to consider the matter. That is, even if the claim under one construction contract truly falls under a different contract, the payment claim will be valid under the Queensland's Security of Payment Act as long as it is “a claim, on its face, for amounts due under the one contract”.

Justice Rees in Ventia Australia Pty Ltd v BSA Advanced Property Solutions (Fire) Pty Ltd [2021] NSWSC 1534 disagreed with Queensland Court of Appeal on this point. 

Ventia Australia Pty Ltd subcontracted BSA Advanced Property Solutions (Fire) Pty Ltd (BSA) to carry out fire services via a subcontract. The subcontract provided, amongst others, that a separate agreement would come into existence each time Ventia issued a work order under the aubcontract. Following the execution of the subcontract, some 8,600 work orders were created each year for BSA.

In February 2021, BSA served a payment claim in respect of the subcontract the Building and Construction Industry Security of Payment Act 1999 (NSW) in force at the time, which is broadly equivalent to the current Queensland security of payment Act, as considered in Ausipile. In particular, the payment claim included a claim for works that related to 1,860 work orders that had been issued under the subcontract. Ventia subsequently served a payment schedule which denied payment on the basis that the payment claim was made with respect to multiple construction contracts. The disputes were taken to adjudication, resulting in a determination in BSA's favour in the sum of approximately $2.6 million.

Ventia challenged the adjudication determination. The main issue before the Court was whether the payment claim that was served under the Act was in respect of more than one construction contract, and if so, whether that was an issue that could be finally resolved by an adjudicator, or whether it was a jurisdictional matter capable of being determined by the court.

After confirming the “one contract rule”, her Honour held that this issue was a jurisdictional issue which was incapable of final resolution by the adjudicator. Her Honour also found that each of the work orders formed a separate contract to the subcontract, and it followed that that the payment claim was invalid and the determination was void. In reaching her decision, her Honour concluded that she was not bound by Ausipile because it was obiter on this point and in any case "plainly wrong".

The Ventia judgment is supported by the obiter discussion of the "one contract rule" in Green Square. Although the matter was ultimately decided on the "arrangement" issue discussed above, a subsidiary argument of the defendants in Green Square was that the plaintiffs' payment claim was in respect of work performed under more than one construction contract.  In considering the issue, the Court in Green Square stated:

"It is difficult to see why the form of a payment claim that asserts or appears to relate to work under one construction contract could be a valid claim and engage the SoP Act if, in substance, the payment claim related to work done under two contracts, and the consequence of such a finding would mean that the payment claim could not be the foundation of a valid adjudication application."

Interestingly however, the Court also suggested that the identity of parties to the payment claim and construction contracts was relevant, and that the "one contract rule" may not apply if the party issuing the payment claim did not share the common identity with the party or parties in each of the relevant construction contracts.

In any event, these decisions clarify the operation of the one contract rule in NSW, and in particular that a payment claim that in-fact relates to multiple construction contracts will not avoid the operation of the one contract rule simply because it relates to a single construction contract on its face.