In the recent case of Seabreeze v Topsou, a developer learned that it ain’t a breeze to avoid the application of the Building and Construction Industry Security for Payment Act 1999 (NSW) (SOPA).

Seabreeze was developing land at Manly and sailed into a contract with a builder named Castle to perform construction work under an amended AS4000-1997 construction contract.

One of the amendments to the contract required that Castle not engage subcontractors on the job without Seabreeze’s prior agreement.  A further amendment required that Seabreeze was to pay subcontractors their bounty directly.  This is not an uncommon arrangement which permitted Seabreeze to have a higher level of control over the risk under the contract arising from subcontractor selection and pricing than otherwise may have been the case.  The directors of Seabreeze also may have believed this arrangement would protect them from mutinous SOPA claims by subcontractors, with Castle bearing this risk.

Castle was the builder licensed to perform the residential building work on the project, providing statutory warranties to Seabreeze (and subsequent purchasers) relating to quality of construction under the Home Building Act. In reality Castle was acting in a role more akin to a project manager rather than a builder taking responsibility to deliver the project and Castle’s builder’s license was being ‘used’ for the project, with almost all work subcontracted.

Topsou was a provider of steel that was engaged by Castle, and issued payment claims to Castle, but who was paid directly by Seabreeze, in accordance with the terms of the contract between Seabreeze and Castle.

An issue arose concerning the withholding of retention sums by Seabreeze from payments otherwise due to Topsou under their subcontract with Castle.  No amount of parlay could resolve the dispute and Topsou sought adjudication of a payment claim brought against Seabreeze directly.  Seabreeze took the position that they were only in a contract with Castle. The adjudicator disagreed and found that Seabreeze was in an ‘arrangement’ with Topsou for the purpose of section 4 of SOPA and that Seabreeze was required to pay the adjudicated sum to Topsou directly.

Seabreeze quickly set sail for the Supreme Court to appeal the decision, and after paying the adjudicated sum into court to comply with s.25(4) of SOPA and rejecting a calderbank offer from Topsou, ran into the tempest of uncertainty that surrounds challenging SOPA adjudications.

The case turned on whether Seabreeze was in an ‘arrangement’ under s.4 of SOPA, which states:

“construction contract” means a contract or other arrangement under which one party undertakes to carry out construction work, or to supply related goods and services, for another party.

Justice McDougall found that the adjudicator’s determination that the trilateral arrangement between Seabreeze, Castle and Topsou fell squarely within the requirements of s.4 of SOPA on any rational analysis.

No amount of clever tacking by Seabreeze’s legal counsel could avoid the wind being taken from their sails as the court concluded this kind of structuring could not avoid Seabreeze being exposed to the effects of a SOPA claim.

Seabreeze foundered further in then being ordered to pay indemnity costs from the date that Topsou offered to resolve the appeal against the adjudication.

This decision flags the importance of obtaining expert legal advice to structure construction projects sensibly from the start, having a plan in place to deal with or issue SOPA claims and charting a path at the beginning any SOPA dispute.