Construction Contracts

Pursuant to the Building and Construction Industry Payments Act 2004 (Qld): “other arrangement”

The phrase ‘construction contract’ is an important one within the Building and Construction Industry Payments Act 2004 (Qld) (“the Act”) 1. The objects clause of the Act states that it is: “An Act to imply terms in construction contracts, to provide for adjudication of payment disputes under construction contracts, and for other purposes”.

In Queensland statutorily ‘implied terms in contracts’ are not new. The Sale of Goods Act 1896 (Qld), the now repealed Trade Practices Act 1974 (Cth) and the Fair Trading Act 1989 (Qld) all implied terms into contracts potentially. The Australian Consumer Law as included as a Schedule to the Competition and Consumer Act 2010 (Cth) continues the historical statutory implication of terms.

Although the Act states that it is an Act to imply terms in construction contracts, it ‘goes beyond’ the traditional notion of a contract at common law by defining a construction contract as “a contract, agreement of other arrangement under which one party undertakes to carry out construction work for, or to supply related goods and services to, another party”.

Adjudication Decision

Section 26(2)(b) of the Act states that an adjudicator in deciding an adjudication application is to consider the provisions of the construction contract from which the application arose. One of the ‘steps’ that an adjudicator will need to determine is whether a construction contract as defined by the Act existed between the claimant and the respondent. Section 17(1) of the Act, which itself refers to section 12 of the Act, is as to payment claims and uses the phrase “construction contract”. Subsection 17(4) of the Act also states that a claimant cannot serve more than one payment claim for each reference state under the construction contract.

Section 12 of the Act states that from each reference state under a construction contract a person is entitled to a progress payment if the person has undertaken to carry out construction work. Section 13 of the Act refers to the amount of a progress payment to which a person is entitled in relation to a construction contract. Sub-section 13(a) refers to the amount calculated under the contract. In that the commencement of section 13 refers to the phrase “construction contract” the later use of the word “contract” alone in sub-paragraphs (a) and (b) of that section is intended to refer in short form to the phrase “construction contract” 2 . Section 14 is similar in drafting to section 13 in that it also uses “construction contract” and then in the sub-paragraphs uses the word “contract” by itself. Sections 15 and 16 also refer to a “construction contract”.

Construction contract

Subsection 3(1)(a) of the Act states that a construction contract can be written or oral or partly written and partly oral.

Schedule 2 of the Act defines a construction contract as “a contract, agreement or other arrangement under which one party undertakes to carry out construction work for, or to supply related goods and services to, another party”.

Section 11 of the Act defines the ‘supply of related goods and services to another party’, as that phrase is used in the Schedule 2 dictionary definition of a ‘construction contract’.

The phrase “other arrangement”

Therefore, it is important to be cognisant of the ‘broad’ definition of a construction contract within the Act. The phrase “other arrangement” is worthy, therefore, of careful consideration.

An early analysis of the phrase “other arrangement” in the context of the equivalent New South Wales Act was made by Nicholas J in Okaroo Pty Ltd v Vos Construction & Joinery Pty Ltd [2005] NSWSC 45. Nicholas J at [40] stated the following as to the word ‘arrangement’:

“ … the word ‘arrangement’ is apt to describe something less than a binding contract or agreement, something in the nature of an understanding between two or more persons — a plan arranged between them which may not be enforceable at law (Newton v Federal Commissioner of Taxation (1958) 98 CLR 1 at p 7).

The expression ‘arrangement or understanding’ in ss 45(2) and 45A requires that at least one party assume an obligation or give an assurance or undertaking that it will act in a certain way. A mere expectation that as a matter of fact a party will act in a certain way is not enough (Australian Competition and Consumer Commission v CC (New South Wales) Pty Ltd (No 8) (1999) 165 ALR 468 per Lindgren J at p 469).”

Nicholas J further stated at [49]:

“ … the legislature intends 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 … in deciding whether a contract or other arrangement is within the definition of construction contract the only matter for consideration is one under which one party undertakes to carry out construction work, or to supply related goods and services, for another party”.

Relevantly, Nicholas J also stated at [51] that:

“The statutory scheme therefore operates, as intended by s 3(2), regardless of the existence or absence in contracts or arrangements for construction work of provisions which govern entitlement to, and liability for, payments.”

Further, Nicholas J ruled that such transactions or relationships were not legally binding and did not require provisions governing payments.

In Kell & Rigby Pty Ltd v Flurrie Pty Ltd (2006) 67 NSWLR 113, Brereton J was not required to analyse the question of the phrase “other arrangement” in as much ‘depth’ as Nicholas J in Okaroo, but followed Nicholas J’s reasoning that an arrangement need not contain payment rights or obligations at [50]:

“ … the Act operates … regardless of whether or not the relevant construction contract contains such a right.”

In Vis Constructions Ltd and Anor v Cockburn and Anor [2006] QSC 416, Jones J stated at [27]:

“It is well established that payment claims made pursuant to the BCIPA lead to a statutory remedy which is independent of, and unrelated, to any contractual obligations existing between the parties.”

Further, at [49] 3  :

“With regards to the authorities and to its context in that Act, in my opinion the term ‘ arrangement ’ in the definition is a wide one and encompasses transactions or relationships which are not legally enforceable agreements. The distinction in the definition between ‘ a contract ’ and ‘ other arrangement ’ is intended by the legislature to be one of substance so that under the Act construction contracts include agreements which are legally enforceable and transactions which are not. Thus in distinguishing between these relationships I understand the legislature intends 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 … in deciding whether a contract or other arrangement is within the definition of construction contract the only matter for consideration is one under which one party undertakes to carry out construction work, or to supply related goods and services, for another party. ”

Within the reasons in that matter, Jones J did not disapprove of the definition in Okaroo, though did distinguish that case on the grounds of dissimilar facts.

In Bezzina Developers P/L v Deemah Stone (Qld) P/L [2007] QSC 286, Douglas J agreed with the definition of “other arrangement” provided in Okaroo by Nicholas J at [49].

In Berem Interiors Pty Ltd v Shaya Constructions (NSW) Pty Ltd [2007] NSWSC 1340,

Bergin J approved of the definition of “other arrangement” in Okaroo.

In Olbourne v Excell Building Corp Pty Ltd [2009] NSWSC 349, Rein J impliedly agreed with the definition articulated in the earlier NSW cases but formulated a summary of the definition at [26]:

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.”

Rein J in that case also relevantly cited the definition of “arrangement” articulated by Lord Justice the Right Honourable Sir Henry Gordon Willmer OBE, TD in Re British Basic Slag Ltd’s Agreements [1963] 1 WLR 727:

“An arrangement as so defined is therefore something ‘whereby the parties accept mutual rights and obligations’.”

This is a development of the definition in Okaroo and potentially constitutes a reconfiguration of the definition in the previous NSW cases.

In Levadetes Pty Ltd v Iberian Artesans Pty Ltd [2009] NSWSC 641, McDougall J considered whether the relationship between the two parties was a contract or an arrangement, due to further rights and obligations that would exist under a common law contract and may ‘impact’ the outcome. That distinction was considered and McDougall J concluded that the relationship between the parties was an arrangement under the Act, in that it was not contractual yet was contained within the definition of a “construction contract”.

Relevantly, McDougall J ruled that the term “arrangements” applied to both bilateral and multilateral arrangements at [59]:

“In this context, I note that the definition of “construction contract”, when it refers to one party undertaking to carry out construction work or to supply related goods and services to another party, is clearly apt to include not merely bilateral but also multilateral contracts or arrangements.”

In Parkview Qld Pty Ltd v Fortia Funds Management Ltd [2009] NSWSC 1065, McDougall J agreed with the ‘wide’ definition of arrangement provided in Okaroo and Olbourne at [15]:

“As to the width of the expression “arrangement”: see the judgments of Nicholas J in Okaroo Pty Ltd v Vos Construction and Joinery Pty Ltd [2005] NSWSC 45 and Rein J in Olbourne v Excell Building Corp Pty Ltd [2009] NSWSC 349 …

I accept that the approach to the concept of ‘arrangement’ is as discussed by their Honours in the cases to which I have referred, and that in substance it is a wide term, capable of extending to transactions or relationships which are not enforceable at law. That construction is consistent both with the wording of the definition, in which contract or arrangement are opposed, and with the beneficial construction to be given to remedial legislation of this kind.”

McDougall J considered, in obiter, the scope of the term arrangements in the situation where such arrangements have been supervened by written agreements at [17]:

“Nonetheless, it seems to me, when negotiations that of themselves might have given rise to an arrangement capable of being a construction contract are formalised in written agreements that do not of themselves amount to a construction contract (as between Parkview and Fortia), there is a triable question as to whether there is any continuing or supervening arrangement.”

In DJE Building Services Pty Ltd v Insurance Australia Ltd (2011) 13 DCLR (NSW) 30 the definition of “other arrangement” was considered analytically by Murrel S.C. DCJ at [9]:

“Despite the statement made by Nicholas J in Okaroo at [42] and endorsed by Rein J in Olbourne 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.”

In Machkevitch v Andrew Building Constructions [2012] NSWSC 546, McDougall J followed the definition in Okaroo and ‘expanded’ it to include arrangements that are legally enforceable, for example those that are enforceable estoppel. At [21] McDougall J stated:

“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.

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.

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.”

Further, at [27] His Honour stated relevantly:

“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.”

His Honour was identifying the statutory difference between the phrase ‘undertakes to carry out construction work’, as distinct from an ‘undertaking’.

In the subsequent case of Class Electrical Services Pty Ltd v Go Electrical Pty Ltd [2013] NSWSC 363, McDougall J clarified that the term “mere undertaking” was not intended to narrow the definition of “arrangement”.

In IWD No 2 Pty Ltd v Level Orange Pty Ltd [2012] NSWSC 1439, Stevenson J relevantly stated at [25]:

“It has been held that “arrangement”: —

(a) extends to something which goes beyond the concept of a “contract”: per McDougall J in Machkevitch v Andrew Building Constructions [2012] NSWSC 546 at [18];

(b) encompasses transactions or relationships which are not legally enforceable: per Nicholas J in Okaroo Pty Ltd v Vos Construction and Joinery Pty Ltd [2005] NSWSC 45 at [41]; cited with approval in Machkevitch at [24];

(c) includes an arrangement enforceable by reason of the doctrine of estoppel; Machkevitch at [26];

(d) requires something more than a “mere undertaking” and which “can be said to give rise to an engagement”; although not necessarily a legally enforceable engagement: Machkevitch at [27];

(e) requires “a concluded state of affairs, which is bilateral at least” under which one party, relevantly to this case, agrees to supply services related to construction work: Machkevitch at [28].”

In Class Electrical Services v Go Electrical [2013] NSWSC 363, McDougall J clarified the ambiguous use of the term “mere undertaking” at [27] in Machkevitch. At [26] in that case McDougall J stated:

“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 [of Machkevitch v Andrew Building Constructions [2012] NSWSC 546].

… I said at [27] that there should be something more than a mere undertaking…

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”.

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.”

This clarified that a construction contract (and thus an arrangement), is marked by an relationship in which one party undertakes construction work for another and that no further requirements need be satisfied.

In Cranbrook School v JA Bradshaw Civil Contracting [2013] NSWSC 430, McDougall J stated relevantly at [38]:

“ … the words ‘or other arrangement’ denote something falling short of a contract as that term is known to the law. To the extent that it might not have been common ground, that proposition is in my view clearly established by the decision of Nicholas J in Okaroo Pty Ltd v Vos Construction and Joinery Pty Ltd [2005] NSWSC 45. I refer, in addition, to the decision of Rein J in Olbourne v Excell Building Corp Pty Ltd [2009] NSWSC 349 at [25]—[28], and at [44]—[57], where his Honour considered the factual situation. I refer, further, to my own decision in Machkevitch v Andrew Building Constructions [2012] NSWSC 546 at [14]—[30].

[39] For the reasons that I gave in Machkevitch at [28], for there to be an arrangement for the purposes of the definition of construction contract, one party to whatever the arrangement is must undertake to perform construction work for another party to that arrangement. That view is I think consistent with what Rein J had said in Olbourne.”

In Steel Contracts Pty Ltd v Simons [2014] ACTSC 146, Refshauge J stated at [15]:

“From Okaroo Pty Ltd v Vos Construction & Joinery Pty Ltd [2005] NSWSC 45 at [40]—[41], it seems that an “other arrangement“ means something less than a binding contract and includes transactions or relationships that are not legally enforceable arrangements.”

Conclusion

The Act does more than just imply terms into a construction contract, it defines a contract for the purposes of the Act ‘broadly’ to include a non-contractual relationship, where one party undertakes to carry out construction work for or to supply related goods and services to another party. Therefore, an arrangement extends beyond the concept of a contract at common law. The arrangement encompasses transactions or relationships which are not legally enforceable. It includes an arrangement enforceable by reason of the doctrine of estoppel4 . There is, however, a requirement that there be a concluded state of affairs, which is bilateral at least, where at least one party undertakes to carry out construction work for, or to supply related goods or services, to another party 5 .

Dominic Katter

Footnotes 

1. The Act is current as at 16 June 2015.
2. See section 32A of the Acts Interpretation Act 1954 (Qld) which states: Definitions in or applicable to an Act apply except so far as the context or subject matter otherwise indicates or requires.
3.  His Honour was quoting the decision Okaroo Pty Ltd v Vos Constructions and Joinery Pty Ltd [2005] NSWSC 45 at [41] per Nicholls J.
4. Machkevitch v Andrew Building Constructions [2012] NSWSC 546 at [26] per McDougall J.
5. 5  Machkevitch v Andrew Building Constructions [2012] NSWSC 546 at [28] per McDougall J.