Beware of Oral Promises that May Bind You

March, 2013

IWD No 2 Pty Ltd v Level Orange Pty Ltd [2012] NSWSC 1439.

Introduction:

The Supreme Court of New South Wales has again considered the question of ‘what constitutes a construction contract’ for the purposes of the Building and Construction Industry Security of Payment Act 1999 (NSW) (Act) and given it a very wide ambit.

In this case, the Court also examined the issue of the “guarantee or indemnity exceptions” to the jurisdiction of the Act pursuant to the provisions of section 7(3)(c).

Facts:

In IWD his Honour Stevenson J considered similar facts to those in Machkevitch v Andrew Building Constructions [2012] NSWSC 546 whereby here, IWD (the developer) was alleged to have verbally assured Level Orange Pty Ltd (a consultant architect) that it would “make sure” that Level Orange would get paid if it carried out the architectural design work for IWD’s residential development project in Randwick New South Wales.

Level Orange Pty Ltd was then contracted by the builder on the project, Link Pty Ltd. The contract between Link and IWD was subsequently terminated and when not paid, Level Orange submitted a payment claim under the Act against IWD relying on IWD’s earlier promise.

IWD refused payment to Level Orange which then lodged an adjudication application. The adjudicator found in favour of Level Orange. IWD applied to the Court seeking to set aside or quash the adjudicator’s determination.

Findings:

In dismissing the application the Court held that statements made by the director of IWD to the director of Level Orange amounted to a promise to “make sure” that Level Orange would get paid for their work. His Honour found that this promise was sufficient to create a construction contract for the purposes of the Act.

The Court then turned to the question of whether the construction contract between these parties was one which should be characterised as a guarantee or indemnity, which would then fall outside of the jurisdiction of the Act pursuant to the exceptions arising from s7(3)(c). The Court found that this was not the case because;

1. A contract of guarantee or indemnity is a secondary liability and is reliant on a third party performing or failing to perform some specified obligations.

2. In the present case, the undertaking was given prior to a third party (the builder) being involved and was a simple undertaking to “make sure” that Level Orange would get paid for their work.

His Honour found [at 70-71]:

“…..the obligation…that IWD undertook in the January 2011 conversation was not a secondary liability; it was not a liability contingent upon any default by Link……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.”

Impact:

This case shows that Principals seeking to provide comfort to subcontractors (or consultants as in this case) should be careful with the words used as there is a risk that those words may bind them to payment and allow the subcontractor to lodge a payment claim under the Act.

Subcontractors, consultants or suppliers who wish to rely upon undertakings made to them by a principal should seek advice as to the terms of the undertaking to ensure that the undertaking qualifies as a construction contract which is actionable under the Act.

Contact Mills Oakley

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Ziv Ben-Arie| Partner
T: +61 2 8289 5854
E: zbenarie@millsoakley.com.au

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