Who is in the business of building residences?

In Saath Pty Ltd v Seascape Constructions Pty Ltd¹ (Saath), the Victoria Supreme Court quashed an adjudication decision because the plaintiff was not in the business of building residences for the purpose of section 7(2)(b) of the Building and Construction Industry Security of Payment Act 2002 (Vic) (Act) and, therefore, the Adjudicator did not have jurisdiction to determine the adjudication application.

The Act does not apply to a construction contract, which is a domestic building contract within the meaning of the Domestic Building Contract Act 1995 (Vic) (DBA), other than a contract where the building owner is in the business of building residences and the construction contract is entered into in the course of, or in connection with, that business.²

The decision of Saath identified key principles from other cases that have considered what it means to be “in the business of”. As the plaintiff was not undertaking the project for the purpose of making a profit, and instead was incorporated for the purpose of building four units for the directors’ families, Justice Stynes held that they were not in the business of building residences.

What happened?

The directors of the plaintiff, Mr Zamir and Mr Chempakasseril, and their families are close friends. From around 2011, they had discussed the possibility of building a property together so that their families could live close to one another.

On 9 November 2013, Mr Zamir and Mr Chempakasseril purchased a property together with the idea of building four units or townhouses. After the purchase, Mr Zamir and Mr Chempakasseril were advised by an accountant to set up a single use corporate entity and unit trust for the purpose of carrying out the building project on the property.

On 20 November 2013, the plaintiff was incorporated.

On 20 November 2015, the plaintiff engaged the first defendant under a building contract to construct four new townhouses (the Contract).

A dispute arose between the plaintiff and first defendant involving, amongst other things, defective and/or incomplete works.

On 27 November 2020, the first defendant served an invoice for completion of the works plus variations in the sum of $231,250.00 incl. of GST. It was expressed to be a payment claim under the Act.

On 11 December 2020, the plaintiff served a payment schedule proposing to pay nil to the first defendant (Payment Schedule).

The first defendant applied for an adjudication under the Act.

The plaintiff subsequently provided an adjudication response stating, amongst other things, that the adjudication application was invalid because the plaintiff was not in the business of building residences and, therefore, the Act did not apply.

On 19 January 2021, the Adjudicator delivered the adjudication determination and determined the plaintiff to be liable to the first defendant in the sum of $157,250.00 incl. GST.

What did the Victorian Supreme Court say?

Given the parties had entered into a domestic building contract, it is an essential pre condition to the application of the Act, and therefore the existence of the Adjudicator’s jurisdiction, that the plaintiff was in the business of building residences.

The onus was on the plaintiff to prove they were not “in the business of building residence”.³ The application of the relevant exemption (see section 7(2)(b) of the Act) is to be assessed at the date the contract was entered into.⁴

The phrase ‘in the business of’ is not defined in the Act. A number of cases have considered this phrase both within and outside the construction context and the principles can be summarised as follows:

1. the expression ‘in the business of building residences’ connotes the construction of dwelling houses as a commercial enterprise on the basis of a going concern, that is, an enterprise engaged in for the purpose of profit on a continuous and repetitive basis;⁵
2. section 7(2)(b) of the Act ‘speaks in terms of the actual business which the building owner undertakes, not whether a party in the position of the building owner has the power to undertake the activity’;⁶
3. 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;⁷
4. ‘what constitutes being “in the business of building residences” for the purposes of s 7(2)(b) of the [Act] is in each case an issue of fact to be determined on a case by case basis’;⁸ and
5. a single joint venture may be sufficient to fall within the concept [of carrying on a business], in spite of the apparent absence of the element of a going concern conducted on a continuous and repetitive basis.⁹ In Ian Street Developer Pty Ltd v Arrow International Pty Ltd, Riordan J confirmed that special purpose entities or companies incorporated for a single project may be ‘in the business of building residences’ even where the entity or company intends to sell the residences through another entity or company.¹⁰ It was considered relevant in Ian Street Developer that a special purpose vehicle was incorporated with the sole purpose of constructing the project and the units in the project being resold to a related corporation for profit.¹¹

What did the Court decide?

The Court held that the Act did not apply and, therefore, the Adjudicator did not have jurisdiction to make the adjudication determination because:

1. the purpose of the development was to build four units so that their families could live close to one another. There was no intention on the part of the plaintiff to profit from the project; and
2. the creation of a corporate vehicle, the construction cost of $1,125,000.00, and the registration for GST by the plaintiff did not persuade Her Honour that the plaintiff was in the business of building residences.

As a result, the Adjudication Determination was quashed.

Why is this case important?

Before incurring the costs of applying for an adjudication it is important to check that the Act applies to the construction contract to ensure that the Adjudicator has jurisdiction to determine the dispute.

HWL Ebsworth Lawyers has expertise in dealing with domestic building contract and security of payment disputes. Please contact Tara Nelson or Alan Chiang of our Construction and Infrastructure team with any enquiries.

This article was written by Alan Chiang, Partner, and Tara Nelson, Associate.

¹[2021] VSC 358.
²Section 7(2)(b) of the Act.
³Watpac Constructions Pty Ltd v Collins & Graham Mechanical Pty Ltd [2020] VSC 414.
⁴BWay Group v Pasiopolous [2019] VCC 691, [26]–[29] (Marks J) (Bway).
⁵Director of Housing (Vic) v Structx Pty Ltd [2011] VSC 410, [28] (Vickery J) (Structx), quoted in Vinson v Neerim Properties Developments Pty Ltd [2016] VSC 321, [32] (Vickery J).
⁶Structx [37] (Vickery J).
⁷Promax Building Developments Pty Ltd v PCarol & Co Pty Ltd [2017] VCC 495, [27] (Anderson J), quoted in Golets [40] (Vickery J) (Golets).
⁸Golets (n 7) [33] (Vickery J).
⁹Ibid [37] (Vickery J), quoting United Dominions Corp Ltd v Brian Pty Ltd (1980) 144 CLR 1, 15 (Dawson J) (United Dominions Corp).
¹⁰(2018) 54 VR 721, 749 [102(d)] (Ian Street Developer), quoting United Dominions Corp (n 9) 15 (Dawson J) and Golets (n 7) [37] (Vickery J).
¹¹Ian Street Developer (n 24) [102] (Riordan J), cited in Bway (n 4) [24] (Marks J).