Court sheds light on the meaning of 'Principal' in the Security of Payment Act

In early 2022, the County Court of Victoria handed down its decision in the case of?Landmark Building Services Qld Pty Ltd v D & M Carakitsos?[2022] VCC 41.

In that case, the County Court of Victoria (Court) had to determine whether the subject land owners were the ‘principal’ for the purposes of section 31 of the?Building and Construction Industry Security of Payment Act 2002?(Vic) (the Act).

His Honour Judge Woodward ultimately held that the land owners were the ‘principals’ within the meaning of section 31 of the Act and, as a result, the land owners were liable to pay the builder.

Background

The defendants in this case, Demetrios Charalambe Carakitsos and Moabe Franco Pereira Carakitsos (Defendants), were (and may still be) the registered proprietors of the land situated at 350 Ascot Vale Road, Moonee Ponds (Site).

The Defendants appointed DM Belo Developments Pty Ltd (Belo) to engage a builder to construct a multi-storey building on the Site (Development Agreement).

Belo engaged the plaintiff, Landmark Building Services QLD Pty Ltd (Landmark), to construct 13 apartments, two commercial spaces and a basement at the Site for consideration of $4.8 million plus GST (Contract).

An adjudicator determined that the sum of $329,898.29 plus interest and fees was due by Belo to Landmark in respect of a payment claim made by Landmark under the Act. Belo failed to pay any part of the amount owed. Subsequently, the Court entered judgement in favour of Landmark requiring Belo to pay the sum of $348,481.08 (judgement amount). The Court subsequently issued a debt certificate in respect of the judgement amount.

In the Proceeding, Landmark sued the defendants pursuant to section 31 of the Act to recover the amount owing under the debt certificate (i.e., the judgement amount).

Section 31 of the Act

Subsection 31(1) of the Act provides, amongst other things, as follows:

If the circumstances set out in section 30 apply [which they did in this case], the claimant may obtain payment of the adjudicated amount or part of that amount in accordance with Division 4 of the Act out of money that is payable or becomes payable to the respondent by some other person (the principal) for construction work or goods and services that the principal engaged the respondent to carry out or supply under a contract.

Were the Defendants ‘principals’ within the meaning of section 31 of the Act?

The Defendants submitted that they were not ‘principals’, and were therefore not liable to Landmark under section 31 of the Act, for reasons including:

• ‘principal’ is a term of art in the construction industry used to refer to the counter-party to a builder in a construction contract;
• Belo is in fact the ‘principal’, being the party that engaged Landmark to perform construction work under the contract;
• the Development Agreement does no more than permit Belo to have access to the Site and to enter into a construction contract with Landmark;
• Belo is not a registered builder. It did not and could not perform the construction work on the Site, which is why it engaged Landmark;

In response, Landmark submitted, amongst other things:

• the argument that ‘principal’ is a term of art in the construction industry was lacking any support, “convenient, facile and wrong”;
• there is no requirement in the Act that the head contractor be physically capable of carrying out the work itself;
• a head contractor will rarely be able to carry out all parts of the head contract work. It will instead engage a host of specialist subcontractors who are qualified.
• it is irrelevant whether Belo held the necessary qualifications; and
• Belo was engaged by the owners to do all of the work under the Contract. Belo then engaged someone else to do the work and sent its claims up the chain to the principal.

The Court agreed with Landmark, stating:

• (at [40]): “… there is no basis for the suggestion that “principal” is a term of art in the building and construction industry … it does not have a technical meaning … it merely reflects the fact that hierarchies of engagement … are a common feature of the industry”;
• (at [41]): “… the suggestion that the use of the defined term “Principal” in [the Contract] can in any way inform the meaning of the term in the Act is, indeed, facile”;
• (at [50]): “… the liability of the principal under s 31 [of the] Act does not depend on the respondent being either qualified or equipped to carry out any of the construction work that the principal has engaged it to carry out”;
• (at [51]): “… it is more commonly the case that an owner contracts directly with a qualified construction company as head contractor to undertake the construction work, and the construction company sub-contracts parts of the work to specialist sub-contractors …”; and
• (at [52]): “… the recitals and operative provisions of the Development Agreement … make clear that the [Defendants] engaged Belo to in turn engage Landmark under the [Contract], to undertake all of the development and construction on the Site. Thus there was a complete pass through (or correlation) of the work contracted for under the relevant head contract (here, the Development Agreement) with that contracted for under the sub-contract (here, the [Contract])”.

Take home points

Developers need to pay their debts when they fall due.

If the developer is not the true land owner, and the developer is unable or unwilling to pay an adjudicated amount owed to a builder, the true land owners may be at risk of the builder ‘leap frogging’ the developer and bringing a statutory claim against the land owners.

More information

For information about this case or for advice, please contact me on (03) 8600 8851 or?djbrown@kcllaw.com.au.

Note:?This?article contains general information only and is a guide which is not intended to constitute, and is not a substitute for obtaining, legal advice.