WHAT IS A “RELATED SERVICE” UNDER THE NSW SECURITY OF PAYMENT ACT?

BuildLaw - Issue No 15 September 2012
1
WHAT IS A “RELATED SERVICE”
UNDER THE NSW SECURITY OF
PAYMENT ACT?
- ANDREW KELLY
Court of Appeal Considers Construction Management and Profit Sharing
Agreements.
The NSW Court of Appeal in Edelbrand Pty Ltd v HM Australia Holdings
Pty Ltd [2012] NSWCA 31 (Edelbrand v HM) recently considered
whether a construction management agreement with risk/reward
payment terms was subject to the Building and Construction Industry
Security of Payment Act 1999 (NSW) (NSW Act).
Following Edelbrand v HM, construction management agreements
which include the provision of building advisory services will be subject
to the NSW Act (and, possibly, its interstate equivalents). The NSW Act
and equivalents may also apply to bonus payments under construction
contracts.
Background
Edelbrand agreed to provide “construction management services” to
HM for a factory redevelopment. Payment was agreed to be a project
management service fee of $130,000 plus a “bonus” calculated as 50%
of all savings below the agreed target cost.
Edelbrand made a payment claim under the NSW Act in the amount of
$214,913 for the bonus. HM responded with a spreadsheet of
adjustments indicating that the bonus payable was only $21,811.
Edelbrand applied for adjudication. The adjudicator determined that the
full amount of Edelbrand’s claim was payable.
Author Profile
Andrew is a Partner
with Thomson Lawyers
in Brisbane, Australia
and has significant
construction and
engineering experience
both in Australia and
the United Kingdom
where he has advised
principals, contractors,
subcontractors,
engineers, architects
and other consultants.
Andrew's expertise
covers both ends of
contracting - from
drafting and advising
on contractual
documentation, to
claims and dispute
resolution.
For more information
or to contact Andrew
visit the Thomson
Lawyers website
http://www.thomsonslawyers.com.au
“Related Services”
The NSW Act applies to a “construction contract”, defined as a contract
or other arrangement under which one party undertakes to carry out
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“construction work”, or to supply “related goods and services” for
another party.
Relevantly, section 6(1)(b) defines “related services” in relation to
“construction work” as:
i. “the provision of labour to carry out construction work,
ii. architectural, design, surveying or quantity surveying services in
relation to construction work,
iii. building, engineering, interior or exterior decoration or landscape
In Coastivity, the
contractor was
obliged to
advisory services in relation to construction work”.
“control,
iv. At first instance, Einstein J held that Edelbrand did not carry out
manage,
“construction work” or supply “related services” as Edelbrand did not
supervise and
provide “architectural services” as found by the adjudicator. His Honour
coordinate”
relied upon the decision in Brian Leigh Smith & Anor v Coastivity Pty
other
Limited [2008] NSWSC 313 (Coastivity).
contractors
In Coastivity, the contractor was obliged to “control, manage, supervise
providing
and coordinate” other contractors providing architectural and building
architectural and
services for a housing development. McDougall J held that this did not
building services
fall within the definition of “related services” under the NSW Act.
On appeal, in Edelbrand v HM, Bathurst CJ (MColl JA and Tobias AJA
for a housing
development.
agreeing) said that in determining whether a contract was a
McDougall J held
“construction contract” the Court must first identify the contractual
that this did not
obligations under the relevant contract and then determine whether
fall within the
those obligations fall within the words of the act. Bathurst CJ held that
definition of
Einstein J was correct in holding that advisory services in relation to
architectural services were not “architectural services” within the
“related
services” under
meaning of s6(1)(b).
the NSW Act.
His Honour found, however, that Edelbrand was obliged under the
contract to manage consultants and contractors and monitor and
administrate the work (including signing off on variation claims).
Bathurst CJ found that those services were “building advisory services”
within the meaning of s 6(1)(b)(iii).
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Calculation of Consideration
HM argued that the contract was excluded by s7(2)(c) of the NSW Act.
Relevantly, s7(2)(c) excludes from the NSW Act construction contracts
which provide that the consideration payable for “related services” will
be calculated other than by reference to the value of the services
supplied.
Security of
payment
legislation exists
In Coastivity, the parties agreed to sell the developed houses and then
in all Australian
divide the profit or loss according to the formula provided in the
jurisdictions.
contract.
McDougall
J
held
that
under
this
arrangement
the
consideration was not calculated according to the value of the
services.
“Related
Services” is
defined in
In Edelbrand v HM, Bathurst CJ considered the provisions of the
Queensland,
contract and found that the date for payment of the bonus and its
South Australia
value could be determined in accordance with the contract as required
by the NSW Act. His Honour said that it was irrelevant that the value of
the bonus could not be calculated until the contract had been
and Victoria in
similar terms as
completed. On this basis Bathurst CJ found that the bonus payment
the NSW Act. In
was calculated by reference to the value of the services supplied.
South Australia
Accordingly the s 7(2)(c) exclusion did not apply.
the regulations
provide that
The Chief Justice set aside Einstein J’s decision that the adjudication
decision was void.
“related
services” also
Security of Payment in Qld, SA & Vic
include project
Security of payment legislation exists in all Australian jurisdictions.
management,
“Related Services” is defined in Queensland, South Australia and
contract
Victoria in similar terms as the NSW Act. In South Australia the
management
regulations provide that “related services” also include project
management, contract management and consultancy services in
relation to construction work.
and consultancy
services in
relation to
Section 7(2)(c) of the NSW Act is also mirrored in the acts in
Queensland, South Australia and Victoria.
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Accordingly it is expected that Edelbrand v HM will be applied in these
jurisdictions. In South Australia “services” are defined more broadly,
such that the services provided in Coastivity may be within the
meaning of “services” under the South Australian Act.
Liberal Interpretation of the NSW Act
Bathurst CJ observed that the NSW Act was “remedial” legislation and
therefore the Courts should give its provisions a liberal interpretation.
The policy behind security of payment legislation (as provided in s3 of
the NSW Act) is to ensure payment to contractors within the
The decision in
Edelbrand v HM
may therefore
indicate that the
construction industry.
Courts will take
The decision in Edelbrand v HM may therefore indicate that the Courts
will take a wide view of the applicability of the NSW Act to work
performed in the building and construction industry.
a wide view of
the applicability
of the NSW Act
to work
Practical Considerations
The differing approaches in Edelbrand v HM and Coastivity illustrate
performed in the
that the Court will pay close attention to the obligations contained in
building and
the contract in assessing whether security of payment legislation
construction
applies, particularly for parties providing “construction management”
industry.
and consultancy services in relation to construction work.
Following Coastivity, the managing of architectural, design, surveying
or quantity surveying services without more is unlikely to be subject to
security of payment legislation in NSW, Victoria or Queensland.
Following Edelbrand v HM however, the management of building
contractors, particularly claims assessment, is likely to be subject to
security of payment legislation.
Following Coastivity, pure profit and loss sharing agreements are likely
to be excluded by s7(2)(c). Section 7(2)(c) is unlikely to exclude bonus
payments calculated pursuant to a contractual formula however
following Edelbrand v HM.
It is therefore important for parties to accurately and completely
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describe the services to be provided and set out the basis for
calculating payment in the contract.
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