In the recent Supreme Court case of Ian Street Developer Pty Ltd v Arrow International Pty Ltd [2018] VSC 14, the Court has paved the way for builders and contractors to enjoy the "pay now, argue later" benefits of the Building and Construction Industry Security of Payments Act when seeking to recover payments from developers who may only have one development in progress.

Summary of the Ian Street case

The plaintiff (Ian Street Developer Pty Ltd, "Ian Street" a developer) sought an order in the nature of certiorari to quash a determination of an adjudicator made under the Building and Construction Industry Security of Payments Act ("Act").

The Act provides a statutory right for builders to recover progress payments due under a construction contract, and establishes a procedure in which disputed claims are referred to an adjudicator for expedited determination.

The dispute arose after the defendant (Arrow International Pty Ltd, "Arrow" the builder), made payment claims pursuant to the Act. Ian Street rejected the claims. Arrow applied for adjudication of the dispute under the Act. The adjudicator determined that Ian Street was liable to pay Arrow $381,446.78.

Ian Street applied to the Supreme Court for an order to set aside the adjudicator’s findings on four grounds:

Ground 1 – The determination was void because it was not made within the time prescribed time.

Ground 2 – Ian Street was not in the business of building residences, therefore the adjudicator wrongly applied the Act.

Grounds 3 & 4 – The payment claim was invalid.

GROUND 1
The determination was void because it was not made within the time prescribed time.

Section 22(4)(a) of the Act provides that an adjudicator is to determine an adjudication application within 10 business days “after the date on which the acceptance by the adjudicator of the application takes effect”; and s 22(4)(b) provides that the time may be extended within any further time “not exceeding 15 business days after that date” if the claimant agrees.

In this case the parties agreed that the adjudicator could have the further 15 days identified in s 22(4)(b) to make his determination, and the adjudicator delivered his award within 25 business days of appointment.

However, Ian Street argued that the reference to the words “that date” in s 22(4)(b) was a reference to the date of appointment, not the date of appointment plus the 10 business days identified in s 22(4)(a): "within 10 business days after the date on which the acceptance by the adjudicator of the application takes effect."

Justice Riordan agreed with Ian Street’s submission and held that the further time available (the 15 business days) runs from the date of acceptance. On this basis the Act only allows for an extension of a further 5 days (not 15 days) and the adjudication in this case was made out of time.

However the Court found that a failure to comply with the time limits for determining an adjudication application does not invalidate the adjudication determination.

The adjudication determination remained binding, even though it was outside the time limits prescribed by the Act.

GROUND 2
Ian Street was not in the business of building residences, therefore the adjudicator wrongly applied the Act.

I want to focus primarily on Ground 2, which failed, because it is the ‘news’ in this case.

‘In the business of building residences’: generally considered

Ian Street is important authority regarding the interpretation of section 7(2)(b) of the Act.

The way that section 7(2)(b) works is by excluding domestic building contracts, but not for “a contract where the building owner is in the business of building residences and the contract is entered into in the course of, or in connection with that business.”

In other words, it was the legislative intention that ‘professional developers’ (my words, not a defined term) were intended to be captured by the provision, but not one-off domestic building projects such as an ordinary residential home builder.

Numerous cases have previously considered the phrase “in the business of building residences”.

Director of Housing v Structx

In Director of Housing of State of Victoria v Structx Pty Ltd [2011] VSC 410, Vickery J at [28] held that the phrase “in the business of building residences” in s 7(2)(b) “connotes the construction of dwelling houses as a commercial enterprise engaged in for the purpose of profit on a continuous and repetitive basis” and at [37] that the section spoke “in terms of the actual business which the building owner undertakes, not whether a party in the position of the building owner [in that case, the Director of Housing] has the power to undertake the activity.”

Promax v PCarol

In the case of Promax Building Developments Pty Ltd v PCarol & Co Pty Ltd [2016] VCC 495 (full disclosure – I appeared in this case) Judge Anderson considered Structx and held:

[27] In my view, the determination of the question of whether a “building owner is in the business of building residences” does not depend on the scale of the business, the success of the business, the number of projects undertaken either in the past or at any one time, or as contemplated for the future.

[28] PCarol [building owner & developer] entered into the building contract with Promax [building contractor] in pursuit of the purpose of the Trust, which was essentially the purchase and redevelopment of land for residences. I am satisfied that PCarol was in December 2016, and thereafter until the termination of the building contract, “in the business of building residences.

Judge Anderson considered that a single project development was caught by the words "in the business of building residences". He ordered judgment for the plaintiff (Promax, the builder) of $106,779.91.

Whether Ian Street ‘in the business of building residences’

Ian Street refers to and progresses the same logic as Judge Anderson in Promax v PCarol regarding s 7(2)(b). It also refers to Golets v Southbourne Homes [2017] VSC 705 per Vickery J ( footnote 90).

At [102] of Ian Street, Justice Riordan held that Ian Street was in the business of building residences for the following reasons:

(a) Ian Street was incorporated for the purpose of completing the construction of the Project, including the entry into the Construction Contract for a sum in excess of $10 million with Arrow, and by its officers and agents ensuring that Arrow performed its obligations under the Construct Contract. The sole purpose of Ian Street was to complete the Project for the purpose of the units in the Project being resold by a related corporation Ian Street Land Pty Ltd for a profit. It undertook the Project for at least many months.

(b) The fact that Ian Street itself was not intending to make a profit does not mean it was not in the business of building residences. Ian Street was a special purpose entity and was an integral part of the business structure established to commercialise the Project. In these circumstances, in my opinion, the submission that Ian Street was not in the business of building residences because it was part of a larger commercial structure where the profits would be directed to other entities, defies the commercial reality of the situation.

(c) Counsel for Ian Street did not produce any authority in support of his contention that, for Ian Street to be in business, it must intend to make a profit itself. Such an interpretation would enable the application of the Act to be avoided by the incorporation of special purpose intermediary entities. Such a narrow interpretation would not advance the object of the Act.

(d) Although the fact that the activities are carried on in a continuous and repetitive basis may be consistent with the conduct of a business, it is well recognised that a single venture may constitute a carrying on of the business. In United Dominions Corporation Ltd v Brian Pty Ltd, Dawson J said as follows:

A single adventure under our law may or may not, depending upon its scope, amount to the carrying on of a business. Whilst the phrase “carrying on a business” contains an element of continuity or repetition in contrast with an isolated transaction which is not to be repeated, the decision of this court in Canny Gabriel Castle Jackson Advertising Pty Ltd v Volume Sales (Finance) Pty Ltd (1974) 131 CLR 321 suggests that the emphasis which will be placed upon continuity may not be heavy.

**Key principles regarding ‘in the business of building residences’**

To distil this down to simple propositions, a one-off special purpose entity or company “in the business of building residences” may include:

An entity incorporated for a single project;
An entity which may not intend to make a profit;
An entity may intend to sell the buildings through another company;
A single venture entity which may not carry out its activities on a continuous and repetitive basis.

This now casts a wider net for builders and contractors to issue a payment claim on developers which may only be completing one development.

GROUNDS 3 & 4
Was the payment claim invalid because:

(a) the works were not properly described in the payment claim: and/or

(b) the adjudicator impermissibly allowed claims outside the statutory 3-month period?

Section 14(2)(c) of the Act requires that a payment claim must identify the construction work or related goods or services to which the progress payment relates.

Section 14(4) provides that a payment claim (other than a final, single or one-off claim) may be served only within the time prescribed by the contract or the period 3 months after the reference date referred to in s 9(2) of the Act, whichever is the later.

Ian Street argued that the payment claim was in breach of s 14(2)(c) of the Act because:

it didn’t identify what work was performed by the relevant reference date; and
some of the claims included in the payment claim (made 31 May 2017), were from work undertaken in November and December 2016, and January 2017. Including these claims in the 31 May 2017 payment claim were outside the 3-month time limit and therefore impermissible.

The Court rejected Ian Street’s contentions:

[110] It is well established that a claim to a progress payment under the Act must be calculated by reference to a reference date under a construction contract. Grounds 3 and 4 raise the issue of whether the payment claim is limited to work performed since the previous reference date. The claimant’s rights to progress payments are set out in s 9(1) of the Act, which relevantly provides that ‘On and from each reference date under the construction contract, a[relevant] person … is entitled to a progress payment under this Act, calculated by reference to that date.’

[111] In my opinion, there is no basis for limiting the entitlement to work performed after the prior reference date. I do not consider there is any basis upon which s 9(1) could be interpreted as if it contained additional words of limitation. Neither do I consider the object of the Act would be advanced by the construction proposed by Ian Street.

The Court also rejected the argument that Arrow had failed to sufficiently identify the construction work the subject of the claim.

Sidebar: the standard required for identification of construction work is that the recipient of a payment claim must be capable of identifying the work for the purpose of eliciting an appropriate response such as accepting or rejecting items, and offering cogent reasons for so doing: PCarol v Promax at [11] and [12]. If so, the payment claim is adequate.

Ground 3 also failed.

How to prepare or oppose a payment claim

On a separate but related note, for tips on how to prepare or oppose a payment claim, see my post here.