Security of payment and project managers

Recently we covered some background in regards to the service of repeat payment claims under the Building and Construction Industry Security of Payment legislation.

Now with this update, we cover the application of this 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”) 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. “Construction work” essentially means construction of structures or related infrastructure (roads, services, etc), including fit out and cleaning of those structures. The phrase “related services” encompasses (a) providing labour to carry out construction work, (b) architectural, design, surveying or quantity surveyor services, and (c) building, engineering, interior or exterior decoration or landscape advisory services, and “related goods” means the materials, plant or equipment to be used in carrying out the construction work.

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?

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.

That case involved a joint venture development between BL Smith and Coastivity, in which BL Smith 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 of land;
  • engaging third parties to carry out work for the development such as prepare drawings or reports;
  • calling for and receiving proposals and tenders and report on the development;
  • 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 NSW equivalent 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-equivalent Act.

In June this year 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. Domus had undertaken to provide project management services to HM Australia in relation to the construction of a warehouse, specifically:

  • coordinating survey and geotechnical investigation
  • finalising the architectural brief
  • coordinating the provision of a building cost estimate by the builder assisting with the selection of finishes
  • coordinating updates of building cost estimates
  • coordinating consultants to finalise the construction contract document
  • 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.

The court applied the Coastivity judgment, and said: “The plaintiff’s [i.e. HM Australia’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 equivalent Act] are “related services” for the purposes of the 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 relevant Act].

The court went on to say “[Domus] had to deal with architects and those providing architectural services, but they did not provide the service themselves. To provide a related service would have required Domus to perform services that could only be performed if an architect was responsible for their provision. The mere coordination of architectural services (without more) does not so require … The same approach should be given to the definition of all the other services listed in [the contract]”.

What does this mean for you?

It is important to note two things:

  • The court in Coastivity clearly stated (and reiterated in HM Australia Holdings) that 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.
  • Neither Coastivity nor Domus agreed to engage any consultants, builders or contractors directly. If their contract had been to supply project management services and also to act as head contractor and supply some or all of the construction work or related goods and services by subcontracting with third parties, then the contract would have been a construction contract within the meaning of the Act and the payment claim would have been valid.

This means that where a project manager subcontracts with third parties to provide construction work or related goods or services, and therefore puts itself in a position where it can have payment claims issued to it, then it has the right to issue payment claims up the line to its principal. This includes issuing payment claims for project management work that would not otherwise be covered by the Act. However, where a project manager’s role is purely co-ordination or management without engaging in any direct contracting, the cases indicate that the payment claim process may not be available.

Although the NSW Supreme Court has limited the application of security of payment legislation in NSW with respect to project managers, it is not clear how the cases will be interpreted by the ACT courts if tested. 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 commercial dispute resolution team can provide both straightforward advice on strategies for securing payment and assistance with responding to payment claims.

For more information or assistance, please contact:

Alisa Taylor — Senior Associate Commercial Dispute Resolution Group
(02) 6279 4388