Security of payment and project managers

Development property lawyers

This update covers the application of Security of Payment legislation to project management services and how it can affect you.

Can project managers use payment claims to recover their fees?

The Building and Construction Industry (Security of Payment) Act 2009 (ACT) (the “ACT Act”) entitles a person who has undertaken under a “construction contract” to carry out “construction work” or supply “related goods or services” to issue a payment claim under the ACT Act. “Construction work” essentially means construction of structures or related infrastructure (roads, services, etc.), including fit-out and cleaning of those structures. The term “related goods” means the materials, plant or equipment to be used in carrying out the construction work. The term “related services” encompasses:

  • Providing labour to carry out construction work;
  • Architectural, design, surveying or quantity surveyor services; and
  • Building, engineering, interior or exterior decoration or landscape advisory services.

Project management services are clearly not “construction work” nor “related goods”—but do they fall within the definition of “related services”?

What do the courts say?

Brian Leigh Smith & Anor v Coastivity Pty Ltd [2008] NSWSC 313

The first time the issue was examined was in April 2008 by the NSW Supreme Court in Brian Leigh Smith & Anor v Coastivity Pty Ltd [2008] NSWSC 313. That case involved a joint venture development between Brian Leigh Smith (“BLS”) and Coastivity Pty Ltd (“Coastivity”), in which BLS agreed to contribute the land and Coastivity agreed to contribute its skills as a developer. The joint venture deed named the director of Coastivity as the registered builder.

Coastivity issued a payment claim to the joint venture for work carried out in providing developer services which included obtaining valuations, engaging third parties to carry out work for the development, calling for and receiving proposals and tenders, providing instructions, seeking finance and undertaking works to clear boundary corners.

The Court found that “Coastivity’s obligations under [the joint venture agreement] would have required it to coordinate, or control, manage, supervise and coordinate, the provision of services falling within [the definition of “construction work” and/or “related goods and services” under the Building and Construction Industry Security of Payment Act 1999 (NSW) (the “NSW Act”)]. But it did not thereby undertake itself to provide those services; and, on the evidence, it did not do so.” The Court, therefore, found that Coastivity was not entitled to issue a payment claim under the NSW Act.

Edelbrand Pty Ltd v HM Australia Holdings Pty Ltd [2012] NSWCA 31

The reach of the Coastivity judgment was tested in the NSW Supreme Court in HM Australia Holdings Pty Limited v Edelbrand Pty Limited t/as Domus Homes & Anor [2011] NSWSC 604 in June 2011 and then again on appeal to the Court of Appeal in Edelbrand Pty Ltd v HM Australia Holdings Pty Ltd [2012] NSWCA 31 in March 2012.

Edelbrand Pty Limited (“Edelbrand”) had undertaken to provide project management services to HM Australia Holdings Pty Limited (“HM”) in relation to the redevelopment of a factory, including:

  • Finalising the architectural brief;
  • Coordinating the provision of, and updates to, building cost estimates;
  • Coordinating consultants to finalise the construction contract;
  • Managing consultants and the builder to deliver the project in accordance with the building contract (including attending site meetings/carrying out inspections to monitor and administer the works);
  • Coordinating the rectification of defects; and
  • Providing instructions to the builder and consultants.

Payment was agreed to be a fixed price project management service fee plus a bonus payment calculated by reference to savings affected. Edelbrand made a payment claim under the NSW Act and HM responded with a number of adjustments to significantly decrease the bonus payable. Edelbrand applied for adjudication and the adjudicator determined that the full amount of the claim was payable.

At first instance, the Court relied on the Coastivity decision and said: “[HM’s] submission that project management services are not by definition “related goods or services” is correct. Only those items listed in [the definition of “related services” in the NSW Act] are “related services” for the purposes of the NSW Act. However, it does not automatically follow that such services are never “related goods or services”. The determination of this issue depends on a proper construction of the terms of the agreement. In other words, the Court must determine if the contracted project management obligations encompass any of the matters listed in [the definition of “related services” in the NSW Act].”

Edelbrand appealed to the Court of Appeal arguing that it had provided “building advisory services” which are covered by the NSW Act. The Court of Appeal agreed with the primary judge that Edelbrand had not provided architectural services but found that Edelbrand had provided “building advisory services” and therefore the contract was covered by the NSW Act. The Court’s reasoning drew particular attention to Edelbrand’s contractual obligation to instruct and manage the builder, contractors and consultants and to monitor and administer the work, which would imply an obligation to consult with and ‘advise’ HM in relation to the work and any variations.

What does this mean for you?

For project managers, and others who manage and administer construction contracts, it is important to note two things:

  1. As long as some part of the work to be undertaken is construction work or related goods or services then the contract is a “construction contract”. Payment claims can then be issued for any of the work under the contract, regardless of whether the specific items of work that are being claimed for are construction work or related goods or services.
  2. The NSW Act will apply to contracts for project management services provided that the contract extends beyond an agreement to simply manage and coordinate “related services”. Project managers will generally be able to use payment claims to recover their fees where the contract contains an obligation to manage and instruct the builder, contractors and consultants and monitor and administer the contract.

The Edelbrand decision has set precedent for project managers, and others who manage and administer construction contracts, to recover their fees by issuing payment claims up the line to their principals. This includes issuing payment claims for project management work that would not otherwise be covered by the NSW Act.

How can MV Assist?

Although the Court of Appeal has set aside some of the limitations on the application of the NSW Act in respect to project managers, it is not clear how the cases will be interpreted by the ACT courts if tested. Parties should consider early on whether any proposed agreement to provide project management services will be captured by the Security of Payment legislation.

It is always worthwhile investigating your rights if you are having cash flow issues, and it is vitally important to promptly respond as extensively as possible to any document given to you that purports to be a payment claim, even if you think it may not be valid.

Our Construction Dispute Resolution Team can provide both straightforward advice on strategies for securing payment and assistance with responding to payment claims.

For more information contact the Construction Dispute Resolution Team:

 

Alisa Taylor                                       Partner                          Construction Dispute Resolution

(02) 6279 4388                                 Alisa.Taylor@MVLawyers.com.au

 

John Nikolic                                      Senior Associate         Construction Dispute Resolution

(02) 6279 4317                                 John.Nikolic@MVLawyers.com.au

 

Kate Phillips                                      Lawyer                           Construction Dispute Resolution

(02) 6279 4407                                 Kate.Phillips@MVLawyers.com.au