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Developers get Caught!
The recent case of Machkevitch v Andrew Building Constructions[2012] NSWSC 546 illustrates how a developer can be made to keep oral promises to a builder to pay the builder himself if the development vehicle with which the builder was contracting failed to do so. This may have consequences for builders in future.
The developer, Mr Machkevitch, was seeking orders from the Court to restrain the builder from enforcing an adjudicator's award of $453,000 against him personally.
From what McDougall J had to say, Mr Machkevitch was pretty typical of a certain type of developer:
34. In the case of Mr Machkevitch, his evidence in cross-examination reveals a pattern of behavior that does not in my view demonstrate any conspicuously high standard of commercial morality. Mr Machkevitch has been associated with a number of development companies, each apparently being formed or acquired to carry out a single development project. The proprietor is not the only one of those companies to have suffered the unfortunate fate of liquidation with a substantial deficiency of liability over assets. In each case, there is an observable pattern that an asset of the company (a unit in the particular development for the purpose of which the company was incorporated or acquired) has been transferred, to Mr Machkevitch or his associates, either for a nominal consideration or for a consideration which very much understates the value of the asset. In each case, the effect has been to diminish the assets available to satisfy the claims of creditors.
McDougall J found that Mr Machkevitch has assured the builder that he would pay the builder if his development company did not and that the builder accepted and acted on that assurance.
51. In those circumstances, I find that there was an "arrangement" between Mr Machkevitch, both on his own behalf and on behalf of the proprietor, the proprietor and the builder, substantially in the terms pleaded (set out at [11] above). For the reasons that I have given, I conclude that this conversation amounted to an engagement, or agreement (not legally enforceable), under which Mr Machkevitch assured the builder that he had sufficient personal resources to pay it if the proprietor did not; that he would do so; and that the builder accepted and acted on this assurance by executing the building contract and the bonus deed.
52. In my view this amounts to an "arrangement" for the purposes of the definition of "construction contract". It follows, in my view, that there was a construction contract between, among others, Mr Machkevitch and the builder. As I have said, the proprietor was also a party to that arrangement. The essence of the arrangement, and thus of the construction contract, was that the builder undertook to carry out construction work for the proprietor; the proprietor bound itself through the building contract and deed to pay; and Mr Machkevitch undertook or engaged personally to pay if the proprietor did not.
McDougall held that the 'arrangement" was not legally enforceable but was enough to enable the builder to serve Mr Machkevitch with a payment claim under the Building and Construction Security of Payment Act 1999 and persist with the recovery action then under way.
Although not specifically dealt with by the court, it was fairly obvious that if Mr Machkevitch commenced section 32 "claw back" proceedings they could be met with a claim for an estoppel by the builder based on the above judicially established facts.
The question arises, could an action have been commenced against Mr Machkevitch based on equitable estoppel as applied in Waltons Stores (Interstate) Ltd v Maher (1988) 164 CLR 387 The facts of this case are not unusual and perhaps builders may now find relief against this kind of developer more easy to achieve than in the past.
Regards
Peter Merity
The developer, Mr Machkevitch, was seeking orders from the Court to restrain the builder from enforcing an adjudicator's award of $453,000 against him personally.
From what McDougall J had to say, Mr Machkevitch was pretty typical of a certain type of developer:
34. In the case of Mr Machkevitch, his evidence in cross-examination reveals a pattern of behavior that does not in my view demonstrate any conspicuously high standard of commercial morality. Mr Machkevitch has been associated with a number of development companies, each apparently being formed or acquired to carry out a single development project. The proprietor is not the only one of those companies to have suffered the unfortunate fate of liquidation with a substantial deficiency of liability over assets. In each case, there is an observable pattern that an asset of the company (a unit in the particular development for the purpose of which the company was incorporated or acquired) has been transferred, to Mr Machkevitch or his associates, either for a nominal consideration or for a consideration which very much understates the value of the asset. In each case, the effect has been to diminish the assets available to satisfy the claims of creditors.
McDougall J found that Mr Machkevitch has assured the builder that he would pay the builder if his development company did not and that the builder accepted and acted on that assurance.
51. In those circumstances, I find that there was an "arrangement" between Mr Machkevitch, both on his own behalf and on behalf of the proprietor, the proprietor and the builder, substantially in the terms pleaded (set out at [11] above). For the reasons that I have given, I conclude that this conversation amounted to an engagement, or agreement (not legally enforceable), under which Mr Machkevitch assured the builder that he had sufficient personal resources to pay it if the proprietor did not; that he would do so; and that the builder accepted and acted on this assurance by executing the building contract and the bonus deed.
52. In my view this amounts to an "arrangement" for the purposes of the definition of "construction contract". It follows, in my view, that there was a construction contract between, among others, Mr Machkevitch and the builder. As I have said, the proprietor was also a party to that arrangement. The essence of the arrangement, and thus of the construction contract, was that the builder undertook to carry out construction work for the proprietor; the proprietor bound itself through the building contract and deed to pay; and Mr Machkevitch undertook or engaged personally to pay if the proprietor did not.
McDougall held that the 'arrangement" was not legally enforceable but was enough to enable the builder to serve Mr Machkevitch with a payment claim under the Building and Construction Security of Payment Act 1999 and persist with the recovery action then under way.
Although not specifically dealt with by the court, it was fairly obvious that if Mr Machkevitch commenced section 32 "claw back" proceedings they could be met with a claim for an estoppel by the builder based on the above judicially established facts.
The question arises, could an action have been commenced against Mr Machkevitch based on equitable estoppel as applied in Waltons Stores (Interstate) Ltd v Maher (1988) 164 CLR 387 The facts of this case are not unusual and perhaps builders may now find relief against this kind of developer more easy to achieve than in the past.
Regards
Peter Merity
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