Case highlights dangers of umbrella agreements for security of payment regimes in Australia

Out-Law Analysis | 19 Apr 2021 | 11:07 am | 3 min. read

A New South Wales (NSW) Supreme Court judgment has provided rare concrete guidance to contractors about how to modify their behaviour if they want to maintain the protection of the security of payments act (SOPA) regimes in Australia.

The judgment shows that without careful contract administration it will be impossible to take advantage of the SOPA regime in relation to a goods supply agreement that operates as an ‘umbrella’ agreement where each purchase order submitted creates a new contract. That is because protection under the SOPA regimes is afforded to parties to a construction contract.  Parties negotiating such agreements for specific, large scale, projects where purchase orders are gathered together in monthly payment claims should be alive to this risk and ideally avoid such a term if they want to have SOPA protection.

Background to the case

The case arose out of the Sydney Light Rail (SLR) project. In 2016, Acciona entered into a goods supply agreement (GSA) with Holcim for the supply and delivery of ready mixed concrete for the SLR project.

According to the judgment, the GSA followed a reasonably conventional form and included terms to the effect that Acciona would order concrete from Holcim by way of purchase order; upon issuance of a purchase order, a separate contract would come into existence between Acciona and Holcim; Holcim was entitled to deliver payment claims to Acciona on the 25th day of the month; and Acciona's representative would assess the payment claims in the usual way within two weeks of being delivered by Holcim.

Throughout the course of the project, Acciona lodged approximately 12,500 purchase orders; Holcim submitted just 36 claims for payment.

After completion of the substantive project works, Acciona continued to submit purchase orders for limited quantities of concrete as it attended to defect rectification works. Accordingly, Holcim continued to submit payment claims. However, Acciona ceased payment of Holcim's payment claims from July 2019 onwards on the basis of alleged set-offs for, among other things, delays, late deliveries and wrongly charged fees.

In May 2020 Holcim submitted a payment claim for over A$2.7 million ($2.1m) for concrete allegedly supplied, but not paid for, under numerous purchase orders. In response, Acciona certified A$0 for the payment claim in its June 2020 payment schedule on the basis of alleged set-offs and counterclaims amounting to A$38.2m ($29.7m).

An adjudication process followed and the adjudicator found Acciona should pay Holcim nearly A$3m ($2.3m) including tax.

Acciona responded with an application for judicial review, raising six grounds of "attack". Among these, it successfully argued that the adjudicator had no jurisdiction because Holcim’s payment claim impermissibly claimed for work done under two or more contracts.

The court found that due to clause 2 of the terms of the GSA, each time a purchase order was issued by Acciona, a separate contract came into force between Acciona and Holcim. On that basis, Holcim's payment claim which incorporated claims for payment under numerous purchase orders – each of which was a separate contract – was not a valid payment claim.

The concrete guidance

Disputes concerning supply agreements often give rise to "battle of the forms" type debates. However, no such dispute arose here, with the crisp and articulate determination that clause 2 of the GSA was effective in doing precisely what the language of the clause suggested, that is bringing into existence some 12,500 separate contracts.

Had the contracts been administered in accordance with their terms, Holcim would have been obliged to issue 12,500 individual payment claims and Acciona would have been obliged to issue an equivalent number of payment schedules, which would have been commercially unworkable.

There are several lessons to be learnt from this case. Firstly, the court will give effect to clear language in a contract, however absurd that result may seem.

Secondly, while it might make sense to enter a supply agreement that operates as an umbrella agreement where the materials are to be supplied to several different projects, such an arrangement does not make sense if the agreement only relates to one project, unless the parties are prepared to administer each individual contract or forego the protection that SOPA affords by administering several contracts in one payment claim.

Thirdly, a practical result where the supply agreement is made in respect of a single project would be to delete the clause creating the umbrella situation. Where orders are being placed daily in relation to a single site or project, the commercial justification for having individual contracts per purchase order probably falls away.

Conclusion

The case of Acciona v Holcim seems like it follows the usual pattern. However, on closer inspection it is not the usual sterile analysis of the statutory language or erratic behaviour of the adjudicator; indeed some real-world guidance can be gleaned from between its lines. Be careful of "multiple contract" clauses on major projects. 

Co-written by Nicola Macrow of Pinsent Masons.