Beware the Other Arrangement under the BIFA
The objective of the Building Industry Fairness (Security of Payment) Act 2017 (‘BIFA’) is to ‘entitle certain persons who carry out construction work…to a timely payment for the work they carry out…’[1] Its purpose is to ensure money is flowing down the contractual chain. If you think you may need a Brisbane building contract solicitors do not hesitate to call the Becker Watt team on 07 3269 4888 or contact us at info@beckerwatt.com.au
Our political representatives recognised that the industry of building and construction is particularly vulnerable to security of payment issues. It operates under a hierarchical chain of contracts with inherent imbalances in bargaining power. Failure to honour such obligations involving the contractual chain can have a domino effect on the other parties, resulting in restricted cash flow and, in some cases, insolvency.
13 years ago when it was first introduced, it was the intention of the act to benefit the building and construction industry, particularly subcontractors, by ensuring that money flowed down the contracting chain.[2]
For the most part, BIFA fulfils this intention. The act allows for parties to a construction contract to refer payment disputes, or rather a failure to make payment, to an adjudication process. This process on the whole works however if you are the principal in the contractual relationship – beware the ‘other arrangement’.
The act makes 52 references to the term ‘construction contract’. For example, the act outlines in what circumstances it does not apply, including a construction contract for domestic building work where the residential owner is a party to the contract.[3] However, within the definition of a construction contract the words ‘other arrangement’ seem incongruent.[4]
What is an ‘Other Arrangement’?
His Honour Nicholas J attempted to define an ‘other arrangement’ within Okaroo Pty Ltd v Vos Construction and Joinery Pty Ltd & Anor[5] at [42] as:
‘In deciding whether a contract or other arrangement is within the definition of construction contract the only matter for consideration is whether it is one under which one party undertakes to carry out construction work, or to supply related goods and services, for another party. There is no other requirement or qualification which is expressly or by implication included in the definition which must be satisfied. It may be safely assumed that had the legislature intended any additional requirement or qualification it would have included it in the definition.’
An ‘other arrangement’ therefore appears to be an undertaking in which one party commits to payment for the construction work completed by the other party, something similar to a construction contract. This was confirmed by His Honour McDougall J in Machkevitch v Andrews Building Constructions.[6] But His Honour may have only added to the confusion when he stated:[7]
From a Brisbane building contract solicitors point of view, what is required is that there be something more than a mere undertaking; or something which can be said to give rise to an engagement, although not a legally enforceable engagement, between two parties; or a state of affairs under which one party undertakes to the other to do something; or an arrangement between parties to like effect.
So exactly what is an ‘other arrangement’, and how do you ensure that your construction contract is not subject to a finding that an ‘other arrangement’ has been attached to it? This seems to be more difficult that it would appear. During the negotiation period of a construction contract, the parties can often make commitments to each other, which on the face of them do not appear to have a binding nature.
In Machkevitch, the principal the contract’s director gave what he believed to be a temporary guarantee to cover the difference between what the bank was prepared to lend and the quote provided by the builder, whilst further negotiation were undertaken with the bank to cover the short fall. Did the director ever intend that this would amount to an ‘other arrangement’? Probably not.
If it was an ‘other arrangement’, what part of the construction works did it cover? This is not relevant interestingly enough. What is relevant is that one party gave an undertaking to make payment for contraction works and the other party agreed to perform construction works. But how is this something more than a ‘mere undertaking’ as described by His Honour McDougall J?
In the recent adjudication decision between Construction Management and Development Pty Ltd and Legeyt Holdings Pty Ltd[8], the adjudicator found that both a payment from an entity other than the principal of the contract who was in controlled by the sole director of the principal and a telephone conversation outlined in an affidavit amounted to an ‘other arrangement’. No documentation formalised the ‘other arrangement’ at the time it was formed. But it was found that this other arrangement did exist and that the respondent potentially had a liability as a result.[9]
So how do you protect yourself?
Simply, enter into a properly negotiated construction contract which outlines the responsibilities of both the principal and the contractor. Administer the contract in accordance with the provisions of that contract during the course of the construction project, make any required payments from the correct entity and ensure that under no circumstances do you make any side deals.
Finally, you should always consult a lawyer to help you negotiate and execute your construction contract.
Becker Watt Lawyers Pty Ltd can be contacted on 07 3269 4888 or beckerwatt.com.au to assist with all your construction law requirements.
[1] Explanatory Notes Building and Construction Industry Payments Bill 2003.
[2] Second reading speech of the BCIPA by the Hon. R. E. Schwarten.
[3] BCIPA s3(2)(b).
[4] The definition of construction contract in Schedule 2 of the BCIPA ‘construction contract means a contract, agreement or other arrangement under which one party undertakes to carry out construction work for, or to supply related goods and services to, another party’.
[5] [2005] NSWSC 45
[6] [2012] NSWSC 546, 25
[7] [2012] NSWSC 546, 27
[8] Adjudication Decision No 218050
[9] The adjudicator ultimately found that she did not have jurisdiction as she determined that no work had been undertaken by the Claimant in the six months prior to the payment claim.
