09 February 2022
10 min read
#Property, Planning & Development, #Construction, Infrastructure & Projects
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Nothing strikes more fear in the hearts of directors than the prospect of the corporate veil being pierced, and one of the most frequently asked questions by owners when the builder is insolvent is “what about the director?”.
The recent decision in Zhang and Mills v JSW Property Projects Pty Ltd and Ors [2021] NSWDC 655 serves as a reminder that directors of incorporated builders do not assume contractual obligations simply because they are the human face of the company or have been personally “on the tools”.
In early 2016, the owners sought the assistance of a building company with the renovation of their residence. Their contact was the director of the building company.
In or about mid-2016, the owners and the director attended a site meeting to discuss the proposed renovation. During the meeting, the owners proposed renovation works that were more substantial than what had previously been discussed.
At a further site meeting, the owners expressed that they did not want to spend more than $500,000, which the director agreed may be possible.
The owners requested a quote for the proposed works, which was issued by the building company. The owners made a request to the director that their related corporate entity be invoiced for the works, which became the practice, the building company issuing invoices and the owners issuing remittances recording payments to the building company totalling $500,000. No written contract was entered into with the owners for the works.
From late March 2017, the parties’ relationship deteriorated. The owners asserted that they had been overcharged. The building company and its subcontractors left the site due to the owners’ refusal to make any further payments. In August 2018, the owners demolished the still incomplete property.
In 2019, the owners commenced proceedings against the building company, the director and the architect, seeking, among other things, the recovery of the amount paid.
In August 2019, the building company was deregistered at the instigation of ASIC. The owners made no attempt to continue the proceedings against the building company, and the proceedings against the architect were resolved. The director was then the last remaining defendant.
The need to establish that the director was a party to any contract with the owners became crucial following the building company’s deregistration.
The owners claimed, among other things, that the director had breached the statutory warranties under section 18B of the Home Building Act 1989 (NSW) (Act).
In considering the question of whether the director was a party to the contract, the Court reinforced that parties to a contract must be identified in accordance with the objective theory of contact, referring to Pethybridge v Stedikas Holdings Pty Ltd[1] and Harold R Finger & Co v Karellas Investments Pty Ltd[2] on this point. Subjective intentions (on which the owners overwhelmingly relied) are generally irrelevant.
The Court of Appeal in Pethybridge had left open the question of whether post-contractual communication may be considered when determining whether a contract had been formed with a particular party.
The Court considered a number of post-contractual inter partes communications to assist with identifying the parties to the contract with the owners. These communications included:
In light of the evidence, the Court found it unlikely that a reasonable observer would infer that the director was a party to the contract and concluded that the parties did not intend that both the building company and the director would be parties to the contract. Ultimately, the Court found that the building company was the contracting party and the claim against the director must fail.
Litigants with claims against insolvent building companies may eventually find a factual vehicle to visit those upon directors (absent a guarantee). Having no written contract would seem to be key and this should serve as a warning to directors of building companies to observe the discipline of entering into a contract in writing. If regulatory compliance (fines and disciplinary action) is not a sufficient reason, then asset protection may provide motivation, particularly having gone to the trouble of incorporating. As it was noted in Zhang, at [125]:
“This, after all, is why companies are incorporated. The raison d’etre of companies is to create a prima facie position whereby a director and shareholder is not personally liable for the liabilities, acts, and omissions of the company, with which they are associated.”
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Authors: Christine Jones & Nicholas Achurch
[1] [2007] NSWCA 154 at [54]–[58].
[2] [2015] NSWSC 354 at [79]–[86].
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The information in this publication is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, we do not guarantee that the information in this article is accurate at the date it is received or that it will continue to be accurate in the future.
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