Supreme Court New South Wales

• Medium Neutral Citation: IWD No 2 Pty Ltd v Level Orange Pty Ltd [2012] NSWSC 1439
• Hearing dates: 6 & 15 November 2012
• Decision date: 27 November 2012
• Jurisdiction: Equity Division - Commercial List
• Before: Stevenson J

Decision

Determination affirmed

• Catchwords: BUILDING AND CONSTRUCTION - adjudication - jurisdictional error - construction contract - guarantee - indemnity
• Legislation Cited: Building and Construction Industry Security of Payment Act 1999; Uniform Civil Procedure Rules
• Cases Cited: Brodyn Pty Ltd v Davenport [2004] NSWCA 394; (2004) 61 NSWLR 421; Fifty Property Investments Pty Ltd v O'Mara [2006] NSWSC 428; IWD No 2 Pty Ltd v Level Orange Pty Ltd [2012] NSWSC 1394; Machkevitch v Andrew Building Constructions [2012] NSWSC 546; Okaroo Pty Ltd v Vos Construction and Joinery Pty Ltd [2005] NSWSC 45; Olbourne v Excell Building Corp Pty Ltd [2009] NSWSC 349; Sunbird Plaza Pty Ltd v Maloney [1988] HCA 11; (1988) 166 CLR 245; Walton Construction (Qld) Pty Ltd v Salce [2008] QSC 235; Woolworths Ltd v Pallas Newco Pty Ltd [2004] NSWCA 422; (2004) 61 NSWLR 707
• Texts Cited: O'Donovan, Modern Contract of Guarantee
• Category: Principal judgment
• Parties: IWD No 2 Pty Limited (ACN 109 910 358) (plaintiff); Level Orange Pty Limited (ACN 133 786 437) (first defendant); Philip Martin (second defendant); Adjudicate Today Pty Limited (ACN 109 605 021) (third defendant); Registrar General of New South Wales (fourth defendant)
• Representation: Counsel: I G B Roberts SC (plaintiff); M Christie SC with A R R Vincent (first defendant); Solicitors: Sparke Helmore (plaintiff); Salim Rutherford Lawyers (first defendant)
• File Number(s): SC 2012/313669
• Publication restriction: Nil

Judgment

Introduction

1 These proceedings relate to a dispute under the Building and Construction Industry Security of Payment Act 1999 ("the Act").

2 The plaintiff, IWD No 2 Pty Limited ("IWD") seeks a declaration that a determination ("the Determination") made on 27 September 2012 by Mr Philip Martin, an adjudicator appointed under Division 2 of the Act ("the Adjudicator"), was:-

(a) made without jurisdiction;

(b) contains jurisdictional errors; and

(c) is void and of no effect.

3 The Adjudicator determined that there existed between IWD and the first defendant, Level Orange Pty Limited ("Level Orange") a "construction contract" within the meaning of s 4 of the Act, and that IWD was liable to pay Level Orange a "progress payment" for the purpose of s 8 of the Act of $142,449.00.

4 On 9 October 2012 the relevant authorised nominating authority issued an adjudication certificate pursuant to s 24 of the Act. On the same date, the adjudication certificate was filed as a judgment in the District Court of New South Wales pursuant to s 25 of the Act.

5 On 10 October 2012 IWD commenced these proceedings. On the same day, McDougall J made various interlocutory orders, including an order that IWD pay into court $153,317 on account of the Determination and interest.

6 IWD contends that there was no "construction contract" between IWD and Level Orange of the kind found by the Adjudicator; and indeed that there was no "construction contract" at all.

7 Alternatively IWD contends that any "construction contract" contained undertakings whereby IWD guaranteed payment of money owing to Level Orange, or agreed to provide an indemnity to Level Orange and that accordingly the Act did not apply: s 7(3)(c) of the Act.

8 At one point, IWD also contended that, by determining the matter on a basis not advocated by either party, the Adjudicator denied IWD procedural fairness, and thus natural justice. After the conclusion of oral argument on 6 November 2012, IWD sought leave to amend its Summons and List Statement to include this claim. For the reasons given in my judgment of 20 November 2012 (IWD No 2 Pty Ltd v Level Orange Pty Ltd [2012] NSWSC 1394), I granted that leave, and listed the matter for further argument on 22 November 2012. On 21 November 2012, IWD's solicitor informed my Associate that IWD did "not propose to pursue the Amended Summons and List Statement" and that IWD wished the matter to proceed "as originally pleaded". The further hearing was vacated. The natural justice issue thus disappeared from the case.

9 It is common ground that: -

(a) the existence of a "construction contract" between IWD and Level Orange was a condition precedent to the Adjudicator's exercise of jurisdiction: Fifty Property Investments Pty Ltd v O'Mara [2006] NSWSC 428 at [18]-[21];

(b) if there was no such "construction contract", the Adjudicator had no jurisdiction to deal with the matter, and the Determination is void; and

(c) it is for the Court to determine whether or not the relevant jurisdictional fact (here: the existence of a "construction contract") exists "on the evidence before the court" and "not on the evidence before the primary decision-maker" (i.e. the Adjudicator); Woolworths Ltd v Pallas Newco Pty Ltd [2004] NSWCA 422; (2004) 61 NSWLR 707 at [88] and [105] per Spigelman CJ.

10 Further, in my opinion, it does not matter whether the Adjudicator erred in his conclusion as to what comprised the "construction contract".

11 The question is one of jurisdiction. If there was a "construction contract" (that is, any "construction contract" of the kind described in the Act) between IWD and Level Orange pursuant to which the relevant "progress payment" under s 8 of the Act is payable, then the "basic and essential" requirement (per Hodgson JA in Brodyn Pty Ltd v Davenport [2004] NSWCA 394; (2004) 61 NSWLR 421 at [53]) specified by the Act exists to enliven the Adjudicator's jurisdiction to make the Determination.

Issues

12 The issues which arise are: -

(a) was there a "construction contract" between IWD and Level Orange within the meaning of s 4 of the Act?

(b) if so, did it contain provisions by which IWD undertook to guarantee payment of money owing to Level Orange or to provide an indemnity to Level Orange within the meaning of s 7(3)(c), so that the Act does not apply?

Decision

13 In my opinion, for the reasons that follow, there was a "construction contract" to which the Act applies between IWD and Level Orange. That construction contract did not contain a provision by which IWD undertook to guarantee payment of money owing to Level Orange or to provide an indemnity. Accordingly, the Adjudicator did not fall into jurisdictional error.

Background

14 IWD is the owner and the developer of a property in Randwick.

15 By a contract called "Design and Construct Contract" ("the D&C Contract") dated 21 September 2010 IWD engaged a builder, Link Constructions (NSW) Pty Limited ("Link"), to design and construct premises on the property.

16 Level Orange is an architectural practice that did work in relation to the development.

17 In or around November and December 2011, a dispute arose between IWD and Link.

18 Level Orange did not perform any work on the project after this time.

19 By a Deed of Termination and Transition made on 8 February 2012, IWD and Link agreed to terminate the D&C Contract. IWD then took over the project.

20 On 7 March 2012, Link entered into external administration.

The Adjudicator's Jurisdiction

21 The Adjudicator's jurisdiction depended on the existence of a "construction contract" between IWD and Level Orange.

Construction Contract

22 The expression "construction contract" is defined in s 4 of the Act as follows: -

"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."

23 Level Orange did not contend that a "contract" existed between it and IWD. Rather, it submitted that, by reason of a conversation that took place in January 2011, an "arrangement" was made between it and IWD.

24 "Arrangement" is not defined in the Act. But it is clear from the definition of "construction contract" that an "arrangement" must involve, at the least, one party "undertaking" to carry out construction work or (relevantly to this case) to supply services related to construction work.

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].

26 The Act does not apply, however, to a "construction contract" to the extent it contains provisions under which a party undertakes: -

(a) to guarantee payment of money owing; or

(b) to provide an indemnity with respect to construction work carried out, or (relevantly to this case) services supplied under the construction contract: s 7(3)(c)(i) and (ii) of the Act.

27 Relevantly to this case, the question is thus whether there was an "arrangement" between IWD and Level Orange: -

(a) under which Level Orange "undertook" to supply architectural services "related" to the project "for" IWD;

(b) which did not contain provisions of the kind set out in the preceding paragraph.

The Construction Contract found by the Adjudicator

28 I have mentioned that the Adjudicator determined that there existed between IWD and Level Orange a "construction contract". The Adjudicator's reasons for coming to this conclusion were: -

"I am satisfied that in taking over the completion of the project an arrangement was made between [Level Orange] and [IWD] for [IWD] to take over responsibility for the whole of the work including the payment of outstanding amounts to [Level Orange]. I determine that there is an arrangement between [Level Orange] and [IWD] which is a construction contract as defined in the Act."

29 In my opinion, the Adjudicator erred in concluding there to be a "construction contract" on this basis. Any "arrangement" made between IWD and Level Orange at the time that IWD took over the project (in February 2012) was not one under which Level Orange undertook to supply architectural services related to the project for IWD. The architectural services in respect of which Level Orange sought payment had already been provided by then. Level Orange had not provided any architectural services in respect of the property since December 2011. Indeed, the Adjudicator concluded that, pursuant to the "arrangement" that he found, IWD agreed to take over responsibility for the "payment of outstanding amounts" to Level Orange.

30 Before me, Level Orange did not seek to justify the Adjudicator's finding.

31 Rather, Level Orange submitted that the relevant "arrangement" was made in a conversation that occurred in January 2011; some 13 months before IWD took over the project.

32 Mr Christie SC, who appeared with Mr Vincent for Level Orange, submitted that (as follows from the matters set out at [10] and [11] above) the relevant question was whether the arrangement for which Level Orange contended had occurred, and that it was irrelevant, so far as concerns the Adjudicator's jurisdiction, whether the Adjudicator erred in coming to the conclusion referred to at [28]. I agree.

The "arrangement" for which Level Orange contended

33 Mr Christie submitted that the relevant arrangement occurred in a conversation that took place in January 2011 between Mr Steven Christofidellis (a director of IWD), Mr George Symon (the general manager of Link) and, by telephone, Mr Carlo Salim (a director of Level Orange).

34 According to Mr Salim, the conversation took place in the following terms: -

"[Mr Symon]: Carl [Salim], I'm here with Steve [Christofidellis] and you're on speaker.

[Mr Salim]: OK.

[Mr Symon]: Steve [Christofidellis] really wants you to do the architecturals on the Stewart.

[Mr Salim]: I've already told you that I'm not interested. I'm still owed a lot of money from him from [a previous development].

[Mr Christofidellis]: Tell him that I'll make sure he gets paid. I'll give him a deposit, and he'll be paid fortnightly payments so that he has a cashflow.

[Mr Symon]: Steve [Christofidellis]'s saying that he'll make sure that you're paid. You'll get a deposit and fortnightly payments for cashflow.

[Mr Salim]: Yeah, I heard him. As long as Steve [Christofidellis]'s assuring me that I'll be paid, I'll do the job.

[Mr Symon]: Yes he is.

[Mr Salim]: Alright then, I'll do it."

35 Mr Symon, who was called as a witness by Level Orange, gave a similar account of the conversation.

36 IWD did not call Mr Christofidellis as a witness. Mr Roberts SC, who appeared for IWD, did not challenge Mr Salim about the terms of this conversation during cross-examination. Mr Roberts did not cross-examine Mr Symon at all.

37 I find the conversation took place.

38 As is obvious from the terms of the January 2011 conversation, at that time there was no contract or arrangement between Level Orange and Link.

Was there an "arrangement" made in January 2011?

39 In my opinion, in the January 2011 conversation, Mr Christofidellis made the following promises or representations to Mr Salim: -

(a) that he would "make sure" that Level Orange was paid for architectural services provided for the project;

(b) that IWD would pay Level Orange a deposit;

(c) that IWD would pay Level Orange, or ensure that Level Orange was paid fortnightly payments; and

(d) that IWD would ensure that Level Orange was paid.

40 In return, Mr Salim said that, in consideration for those promises, Level Orange would "do the job"; that is provide architectural services in respect of the project.

41 In my opinion, what passed between Mr Christofidellis and Mr Salim amounted to a "construction contract". It was, at the very least, an "arrangement" between IWD and Level Orange under which Level Orange undertook to supply architectural services related to the project for IWD. It was probably more than that; a legally binding contract between the two companies.

Events after January 2011

42 Mr Nick Halatsis was the Project and Design Manager of Exceland Property Group (NSW) Pty Limited ("Exceland"). Exceland was the Administration Manager under the D&C Contract. Pursuant to clause 5.9 of the D&C Contract, Exceland, as Administration Manager, was agreed by IWD to be IWD's agent. Correspondence from Mr Halatsis shows that he acted as IWD's agent from time to time.

43 Consistently with the arrangement made in the January 2011 conversation, on 4 January 2011 and 12 February 2011 Mr Halatsis asked Mr Salim to "forward a fee proposal". Mr Halatsis wrote as representative of Exceland and thus as agent of IWD.

44 On 14 February 2011 Mr Salim caused Level Orange to send Link a fee proposal. Mr Salim gave unchallenged evidence that he would not have done so, but for the assurances given by Mr Christofidellis in the January 2011 conversation.

45 Mr Salim's letter of 14 February 2011 referred to a $20,000 deposit "to be paid prior to commencement" and provided for four further payments to be made on the achievement of various stages of the project.

46 The fee proposal did not call for fortnightly payments. Mr Roberts relied upon this fact to submit that the terms of the 14 February 2011 fee proposal letter showed that the arrangements made in the January 2011 conversation had been superseded, or overtaken by that fee proposal letter.

47 Sometime after 14 February 2011 Level Orange sent an invoice to Link for payment of its deposit. There is no direct evidence as to who paid the deposit.

48 However, on 21 February 2011 the following conversation took place between Mr Paul Metlege, a Project Manager engaged by Link, Mr Halatsis and Mr Salim: -

"[Mr Metlege]: Carl [Salim] needs his deposit paid. How are you going to do that?

[Mr Halatsis]: First of all I need Carl [Salim]'s fee proposal so you'll have to send that through.

[Mr Salim]: It's been sent.

[Mr Metlege]: Carl [Salim], just send me another copy so I can forward it on.

[Mr Halatsis]: We have the money so we can pay you Carl [Salim]. Don't worry we have the money to pay all consultants. It's all been approved. I'll just check with Steve [Christofidellis] whether he wants Carl [Salim] to invoice IWD directly or just send it to Link."

49 Mr Metlege gave a similar account of the conversation, although the words he attributed to Mr Halatsis were: -

"Don't worry. We have the money to pay Carl [Salim]. There's a pool of money there all ready for the consultants. Just give me an invoice and we will pay."

50 Neither Mr Salim nor Mr Metlege were challenged about their accounts of this conversation. I find it occurred.

51 After that conversation Mr Metlege sent an email to Mr Halatsis confirming that: -

"...you advised you would give direction as to how to deal with Level Orange's deposit."

52 I infer from this evidence that IWD paid the deposit.

53 In the course of the project, Mr Halatsis, as Administration Manager, issued documents and directions directly to Level Orange. Mr Metlege said: -

"This was not what typically occurs in carrying out works under a typical lump sum contract. Usually, the developer would not provide direct instructions to subcontractors or consultants with respect to the works to be performed under a typical lump sum contract."

54 As owner and developer, IWD maintained control over the site, and the project at all material times (and not only after Link was placed into external administration). Mr Symon gave evidence that each month he met with Mr Dany Ghalie, Financial Controller of Link, and Mr Christofidellis to go through the invoices that Link had received from consultants on the project. Mr Symon said that at most of these meetings, when payments to be made to Level Orange were being discussed, Mr Christofidellis said words to the effect: -

"Don't worry about paying them at the moment, I will take care of it."

55 In July 2011, Mr Symon sought to arrange a meeting with Mr Salim to discuss the project. The following conversation took place: -

"[Mr Salim]: I don't want to go to this meeting. I'm not getting paid like I was assured.

[Mr Symon]: Turn up to the meeting so you can get paid some of your money."

56 On 30 July 2011 Mr Salim attended a meeting with Mr Christofidellis, Mr Halatsis, Mr Symon and other representatives of Link. At that meeting Mr Christofidellis handed Mr Salim a cheque for $20,000 and said words to the effect: -

"Here's a cheque buddy. I know it isn't what you were hoping. It should be enough to keep you going."

57 The cheque was drawn on IWD's account.

58 On about 10 August 2011, Mr Salim attended a further meeting with Mr Christofidellis. At the meeting Mr Christofidellis gave Mr Salim a cheque for $10,000 (again drawn on IWD's account) and said: -

"Don't bank this cheque until I let you know you can."

59 A short time later, Mr Salim had a conversation with Mr Halatsis as follows:-

"[Mr Salim]: Nick [Halatsis] I need to be paid. What's happening? Also when can I bank that last cheque that Steve [Christofidellis] gave me.

[Mr Halatsis]: I'll have to speak to Steve [Christofidellis]. Can you let me know how much you have been paid to date including variations?

[Mr Salim]: OK. You need to let me know as soon as possible."

60 These amounts were lump sum payments that were not referrable to any invoice which Level Orange had issued to Link. I accept Level Orange's submission that these payments comprise evidence of IWD performing its obligations under the arrangement which had been reached with Level Orange in the conversation with Mr Christofidellis in early January 2011.

61 By November 2011 Link was in dispute with IWD in respect of the project. Mr Salim had the following conversation with Mr Symon: -

"[Mr Salim]: George [Symon], can you talk to Steve [Christofidellis]? We have a lot of money owing to us. We aren't getting paid like we were assured.

[Mr Symon]: I'll call Steve [Christofidellis] now. I'll call you back."

62 Shortly thereafter Mr Christofidellis met with Mr Salim and said words to the effect: -

"You know that we're in dispute with Link at the moment and I'm thinking about getting rid of them, but irrespective of what happens to Link, we will pay you."

63 In the light of this evidence, I do not accept Mr Roberts's submission that Level Orange's fee proposal letter of 14 February 2011 somehow superseded or overtook the arrangements made between Mr Salim and Mr Christofidellis in January 2011. It is true that the payment terms in the 14 February 2011 letter are different from and inconsistent with those offered by Mr Christofidellis in the January 2011 conversation.

64 However, the subsequent dealings between Mr Salim and Mr Christofidellis, which I have set out above, lead me to the conclusion that Level Orange was a party to, and entitled to the benefit of two separate contracts or arrangements; namely between it and IWD on the one hand (as evidenced by the January 2011 conversation), and between it and Link on the other (as evidenced by the 14 February 2011 fee proposal letter and the provision of services by Level Orange to the project thereafter).

65 In my opinion, nothing that occurred after January 2011 altered the nature and content of the arrangement or contract between IWD and Level Orange arising from the January 2011 conversation.

Guarantee or Indemnity?

66 The effect of s 7(3)(c)(i) and (ii) of the Act, is that the Act does not apply to a construction contract to the extent to which it contains provisions by which a party undertakes to guarantee payment of monies owing or to provide an indemnity in respect of (relevantly) services supplied in relation to construction work.

67 A guarantee is a: -

"collateral contract to answer for the debt, default or miscarriage of another who is or is contemplated to be or to become liable to the person to whom the guarantee is given." (per Mason CJ in Sunbird Plaza Pty Ltd v Maloney [1988] HCA 11; (1988) 166 CLR 245 at 247)

68 Under a contract of guarantee, a surety assumes a secondary liability to a creditor for the default of another person who remains primarily liable to the creditor. On the other hand, a contract of indemnity is one where a party assumes primary liability for another's obligations, and agrees to hold the creditor harmless, whether or not that other person makes default (O'Donovan, Modern Contract of Guarantee, Online Edition at [1.1100] and the authorities cited therein).

69 The contract or arrangement made between IWD and Level Orange in January 2011 was not subject to IWD or Level Orange entering into any contract or arrangement with Link. It was not contingent on Link, or any other party, failing to make payments to Level Orange. It was not an agreement by IWD to save Level Orange from harm or loss it might suffer were it to "do the job". It was an independent promise by IWD that Level Orange would be paid for the work it did.

70 In my opinion the obligation (whether legally enforceable or not) that IWD undertook in the January 2011 conversation was not a secondary liability; it was not a liability contingent upon any default by Link.

71 Nor, in my opinion, was the effect of what Mr Christofidellis said in the January 2011 conversation that IWD undertook to provide Level Orange with an indemnity in relation to services that Level Orange might supply the project. Mr Christofidellis was not merely offering to keep Level Orange harmless from any loss it might suffer if Link did not pay its fees. Indeed, Link was not referred to at all in the conversation. Mr Christofidellis was accepting an independent obligation to pay Level Orange's fees.

72 I was not directed to any cases decided by this Court in which the issue has arisen directly. In the two cases to which my attention was drawn where the facts resemble those in the present case (Olbourne v Excell Building Corp Pty Ltd [2009] NSWSC 349 and Machkevitch), the question does not seem to have been argued; see Olbourne at [58] per Rein J and Machkevitch at [51] per McDougall J).

73 The circumstances before me are quite different from those considered by McMurdo J in Walton Construction (Qld) Pty Ltd v Salce [2008] QSC 235. In that case, after the relevant subcontractor had done work on the site, and after the builder had failed to pay invoices sent to it by the subcontractor, a representative of the developer said: -

"Don't worry - [the developer] will make sure you get paid. If [the builder] does not pay you then [the developer] will pay you direct and hold back payment from [the builder]".

74 McMurdo J held that this promise amounted to an undertaking to guarantee payment of money, falling within the Queensland equivalent of s 7(3)(c)(ii) of the Act. The promise in Walton was quite different from that in this case.

Conclusion

75 IWD has failed to established jurisdictional error.

76 For that reason, it is not necessary to deal with Mr Christie's submission, made at the close of IWD's case in chief, that IWD's case should be dismissed pursuant to Uniform Civil Procedure Rules r 29.9.

77 I invite the parties to bring in short minutes to give effect to these reasons.

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Decision last updated: 27 November 2012