Standing trade credit agreements

Do you have a standing trade credit agreement to supply construction services or materials?

A new NSW Supreme Court decision has confirmed that you cannot use the security of payment regime to enforce multiple invoices under a standing order contract in the same payment claim or same adjudication. The decision is also relevant to claims made under the ACT security of payment legislation.

The case

On 11 April 2013, the NSW Supreme Court handed down its decision in Class Electrical Services v Go Electrical. [1]

Go Electrical (“Go”) and Class Electrical (“Class”) had a standing contract under which Class would issue purchase orders to Go, and Go would then supply construction goods to Class. Go issued a single $1.8m payment claim to Class under the Building and Construction Industry Security of Payment Act 1999 (NSW) (“Act”) seeking payment of several outstanding invoices for separate purchase orders. The claim went to adjudication and Go was awarded the full amount of its claim. Class appealed to the NSW Supreme Court. Class’s key argument was that because the payment claim referred to multiple separate contracts in the one claim it was invalid. Class argued that as a result the Adjudicator’s determination was void and Go was not entitled to recover payment.

The law

Under the Act (and equivalent ACT legislation) an Adjudicator cannot make a decision unless all of the technical requirements of the Act have been met. One such requirement is that the right to claim payment under the Act must come from a single construction contract. This has been confirmed in a number of cases, including:

  • Rail Corporation of NSW v Nebax Constructions [2] in which Nebax (the contractor) served 5 payment claims simultaneously for construction of platform resurfacing works at different train stations, all dated the same date. Nebax then made a separate adjudication application for each payment claim. The Court decided that “there can only be one adjudication application for any particular payment claim for any particular contract”.
  • Matrix Projects (QLD) Pty Ltd v Luscombe & Ors [3] in which Luscombe (the builder) had a “period subcontract” with Matrix Homes for undetermined building work, the scope and locations of which would be agreed at a later date. Luscombe ultimately completed building work on instruction from Matrix Homes at a range of locations over a 9 month period. Some work was completed under the terms of the period subcontract, with individual purchase orders made as required by Matrix, and some on a “do and charge” basis after verbal requests. Luscombe issued one payment claim for all of the work, and specifically referred in the payment claim to the fact that there were multiple contracts. Citing Rail Corporation, the QLD Supreme Court decided that the fact that the payment claim covered multiple contracts was “fatal to its validity”.

In Class Electrical Services, Go argued that there was a single credit agreement that covered all of the purchase orders, and this meant that there was just one construction contract. Class, on the other hand, argued that the credit agreement was not a construction contract for the provision of construction work or related goods and services (as required by the Act), but simply an overarching agreement to provide credit. The court agreed with Class, finding that, although the individual purchase orders were each a separate construction contract under the Act, and the credit agreement setting out the broad terms was not a construction contract. The court therefore held that the adjudicator’s decision was void and unenforceable.

What does Class Electrical Services mean when I’m trying to get paid?

If you have a standing contract where:

  • your clients sign up to broad terms for the supply of construction-related goods or services not referring to a particular project, quantity or price; and
  • once signed, your client submits purchase orders from time to time as required, with the terms of the credit arrangement applying to all purchases,

then it is likely that each purchase order will be a separate “construction contract” for the purposes of the Act. If you issue a payment claim for multiple purchase orders, it will be invalid. Each purchase order must be dealt with as if it is a separate contract, which means a separate payment claim and a separate adjudication application.

However the terms of each contract need to be looked at separately. It is possible that if your overarching terms of credit actually specify details such as timing, quantity, quality and cost for the items to be supplied, it might be a construction contract under the Act. If this is the case, then you can only issue one payment claim per reference date and any others will be invalid. If you are in doubt, it is important to check with a lawyer — particularly if you are on the receiving end of a payment claim.

Want to know more?

Our Building and Construction Dispute Resolution team can provide straightforward advice on strategies for structuring your order and payment arrangements, securing payment, making or responding to payment claims, or preparing adjudication applications or responses.

For more information or assistance, please contact:

Alisa Taylor | Partner
(02) 6279 4444