Okaroo v Vos Construction and Joinery [2005] NSWSC 45

What the court decided

The proceedings challenged an adjudicator's determination under the Building and Construction Industry Security of Payment Act 1999 (NSW) [1].

On about 19 March 2002 Okaroo, as developer, contracted with Consolidated Constructions Pty Limited for all construction works on the project, including the joinery [6]. Vos's manager declared that at a meeting on 14 November 2002, when he raised Consolidated's poor payment record, Okaroo's director replied "well, we will pay you direct" [9]. By letter dated 14 March 2003 Okaroo sent Vos a $55,000 deposit and confirmed that future drawdowns would be paid direct by Okaroo upon the recommendations of Consolidated, the superintendent and the quantity surveyors [10]. The architect's letter of 23 April 2003 told Vos that it would contractually become a subcontractor to Consolidated, but that the principal would pay it directly [11]. Consolidated entered into the subcontract with Vos on about 21 May 2003 [12]. Its contract information made progress payments "Direct from Okaroo Pty Ltd" [13].

On about 19 May 2004 Vos served Okaroo with a payment claim under the Act for $390,045.33 [18]. Okaroo denied being party to a construction contract and, alternatively, sought to protect its position by providing a payment schedule proposing to pay nothing [19]. On 7 July 2004 the adjudicator determined that Okaroo pay Vos $275,267.27 with interest [2]. Vos did not defend the adjudicator's primary finding that Okaroo was bound by the subcontract [24], [25]. The issue was his alternative finding of an arrangement meeting the definition of construction contract [26]. Following Brodyn Pty Limited v Davenport and Transgrid v Siemens Limited, Okaroo amended its summons to seek a declaration that the determination was void instead of certiorari [3]. Both parties accepted that if there was no construction contract the determination was void for jurisdictional error, and otherwise the summons should be dismissed [5].

Okaroo relied on the words "is or may be liable" in section 13(1) [31]. It argued that an arrangement must therefore be one under which the person for whom the work is done incurs an enforceable liability to pay [32]. It said it paid Vos on behalf of Consolidated under clause 10.5, and that Consolidated was the party liable to Vos [34]. His Honour held that the term "arrangement" is a wide one which encompasses transactions or relationships that are not legally enforceable agreements, and rejected Okaroo's submission that it means an agreement tantamount to an enforceable contract [41]. The only question under the definition is whether one party undertakes to carry out construction work, or to supply related goods and services, for another party [42]. His Honour found that from about 14 March 2003 there was an arrangement under which Vos undertook that work for Okaroo, which would and did pay Vos direct, and that it predated the subcontract [43].

His Honour agreed with Macready AJ in Beckhaus v Brewarrina Council that the Act creates a statutory system alongside any contractual regime [46], [47]. Section 13(1) is to be construed consistently with section 8(1), so that entitlement and liability stem from the statute and not from the contract or arrangement [53]. The terms on which any liability to pay arises are irrelevant to the definition, and his Honour rejected the submission that the liability must be legally enforceable [55].

To the extent that the adjudicator held there was an arrangement meeting the definition, he was correct, so the essential pre-condition for his determination identified in Brodyn was satisfied [56]. The issues of liability to make the statutory progress payment were for the adjudicator, and his Honour expressed no view on his finding on liability or any other matter [57]. For these reasons his Honour held that the amended summons should be dismissed [58].

Why it matters

The decision turned on a finding that Vos undertook the work for Okaroo under an arrangement which predated the subcontract, so a principal dealing directly with a nominated subcontractor may be party to a construction contract with it. As the parties accepted, and the court held applying Brodyn, the existence of a construction contract went to the validity of the determination, and Okaroo also provided a payment schedule to protect its position [5], [19], [56].

In Chase Oyster Bar Pty Ltd v Hamo Industries Pty Ltd (2010) NSWCA 190 at paragraph 108 the Court of Appeal, adopting Basten JA's answers, held that certiorari may set aside a determination made without an adjudication application complying with section 17(2)(a), and that Brodyn was to that extent in error. In Probuild Constructions (Aust) Pty Ltd v Shade Systems Pty Ltd (2018) HCA 4 at paragraph 38 the joint reasons of Kiefel CJ, Bell, Keane, Nettle and Gordon JJ said that the statutory entitlement "is predicated upon the existence of a construction contract" but stands apart from contractual rights, consistently with this reasoning. In Southern Han Breakfast Point Pty Ltd (in liq) v Lewence Construction Pty Ltd (2016) HCA 52 the High Court noted the broad definition (paragraph 7) and at paragraph 66, in excluding damages and restitution claims, said the Act secures payment under an obligation "imposed by the contractual force of a construction contract", without referring to this decision or saying how that applies to an arrangement that is not legally enforceable. Readers should check the current text of the Act.

Numbers in square brackets are paragraph numbers of the judgment. This note summarises a decided case for education and is not legal advice. See how the notes are written.