The recent NSW Supreme Court decision in Seabreeze Manly v Toposu  NSWSC 1097 illustrates that arrangements to make direct payments to subcontractors on a construction project may be caught by the relevant security of payment (SOP) legislation.
Seabreeze was the principal on the project. Castle Projects was the main contractor. Seabreeze entered into a construction contract with Castle Projects on the terms of an amended form of AS4000-1997, which provided that Castle Projects could retain subcontractors with the prior consent of Seabreeze, and where this had been done, Seabreeze would pay subcontractors direct. Castle Projects entered into a separate subcontract with Toposu. There was no formal contract between Seabreeze and Toposu.
The court found that Toposu had submitted its payment claims to Castle Projects, who produced payment schedules on behalf of Seabreeze. Castle Projects created a payment schedule as if there had been a payment claimed by Toposu direct to Seabreeze and submitted that to the superintendent. Seabreeze paid the amount of the payment schedule, as certified by the superintendent, direct to Toposu.
A dispute arose over Toposu’s entitlement to a progress payment, which Toposu took to adjudication. Seabreeze applied to set the resulting adjudication decision aside on the basis that there was no construction contract between Seabreeze and Toposu.
Section 4 of the NSW SOP Act provides that a 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.
The court held that the concept of ‘other arrangement’ is something which goes beyond the concept of a ‘contract’. An ‘arrangement’ is something less than a binding contract and could be something in the nature of an understanding or a plan and encompasses transactions or relationships which are not legally enforceable.
For the NSW SOP Act to apply there must be a contract or other arrangement under which an undertaking to carry out construction work is given and accepted. A person undertakes to carry out construction work, or to supply related goods and services, for or to another if the first person agrees, or accepts an obligation, or promises, to do that work or supply those goods and services.
The court found that the arrangements between Seabreeze and Toposu were enough to constitute an ‘other arrangement’ within the meaning of the NSW SOP Act. This was so notwithstanding that a formal head contract and subcontract arrangement existed and that there was no formal contract between Seabreeze and Toposu. The court described the situation as a trilateral arrangement under which, among other things, Toposu undertook to carry out construction work for Seabreeze.
Parties drafting contract documents need to be aware that provisions for direct payment of subcontractors could result in those subcontractors having rights under the relevant SOP legislation.