Privity of Contract in Queensland Construction
- John Merlo
- 4 minutes ago
- 13 min read
A skilled subcontractor completes a major plumbing installation for a new commercial building in Brisbane. The work is flawless, delivered on time, and signed off. The invoice is sent.
Then, silence. The head contractor, facing financial issues, fails to pay. The subcontractor knows the developer—the principal who owns the project—has deep pockets and wants to sue them directly to get paid for the value they've added to the property.
This is where they hit a legal wall, a foundational principle of contract law that can feel deeply unfair: the doctrine of privity of contract. This rule is simple, but understanding the powerful exceptions built into Queensland law is where the power lies for every industry professional.
Key Takeaways
The Core Rule: Privity of contract means you can only sue or be sued by a party you have a direct contract with. A subcontractor generally cannot sue a property owner for non-payment.
The BIF Act is Your Key: The Building Industry Fairness (Security of Payment) Act 2017 is the most powerful exception, creating statutory rights for subcontractors to claim payment from the principal, bypassing privity.
Contracts are Critical: Your rights and obligations are defined by your contract. Never start work without a clear, written agreement that outlines payment terms and dispute resolution processes.
Don't Delay Action: Strict timeframes apply to payment claims and adjudications under the BIF Act. Seeking expert legal advice early is crucial to protecting your position.
What is Privity of Contract? A Foundational Rule
The doctrine of privity of contract is a cornerstone of commercial law, but its application in the multi-layered world of construction can be complex and, at times, frustrating. Understanding this foundational rule is the first step to navigating around it.
The Core Principle: Who Can You Sue?
At its heart, privity of contract is a long-standing legal doctrine that states only the parties who actually signed a contract can enforce its terms or sue for its breach. Think of it like a manufacturer's warranty for a new power tool; the warranty is a promise made to the original purchaser. If that person sells the tool to a friend and it breaks, the friend generally has no legal standing to make a warranty claim against the manufacturer because they don't have a direct contractual relationship.
This principle means that a third party, even if they stand to benefit from the contract (like a subcontractor benefiting from a project's existence), has no common law right to sue if something goes wrong.
Why This Rule Exists
The historical rationale behind the doctrine is rooted in the need for commercial certainty. Privity prevents a potential flood of lawsuits from an unknown number of third parties who might be indirectly affected by a contractual promise or failure. It allows the original parties to a contract to amend, vary, or even cancel their agreement without needing to consult or worry about the legal rights of countless outsiders.
Without this rule, a simple contract between two parties could create a web of potential liabilities to an indeterminate number of people, making business unpredictable and risky.
The Limits of the Doctrine
While privity provides certainty, it can also create significant unfairness, particularly in complex, multi-layered industries like construction. Subcontractors and suppliers perform work and provide materials that directly benefit the property owner (the principal), adding tangible value to their asset.
Yet, the doctrine can leave them unpaid and without common law recourse against that owner if the middle party—the head contractor—defaults, becomes insolvent, or simply refuses to pay.
This inherent unfairness and the instability it creates is precisely why the Queensland government has created powerful statutory exceptions to protect the rights of everyone in the construction chain.
Why Privity Matters in the Queensland Construction Chain
In the construction industry, projects are rarely a simple two-party affair. They involve a long chain of contracts, with each link representing a potential point of failure. This is where the theory of privity has its most significant real-world impact.
Visualising the Contractual Chain
A typical construction project follows a clear flow of contracts. It begins with the Principal (a developer or property owner) who engages a Head Contractor to manage and execute the project.
The Head Contractor then enters into separate subcontractor agreements with various specialists—plumbers, electricians, concreters, and carpenters. These subcontractors may, in turn, have their own contracts with Suppliers for materials. Each of these agreements is a distinct legal relationship.
The Principal has a contract with the Head Contractor, but not with the Subcontractor. The Head Contractor has a contract with the Subcontractor, but not with the Supplier. Each link in this chain represents a separate instance of privity, creating legal firewalls between each party.
A Subcontractor's Dilemma: A Common Scenario
Consider 'Dave the Electrician', a subcontractor who has a signed contract with 'BildeCo', the head contractor for a new apartment block on the Gold Coast. BildeCo, in turn, has a multi-million dollar contract with 'Metro Developments', the principal. Dave completes all his electrical work to Australian Standards, and the certifier signs off. He submits his invoice to BildeCo, but weeks turn into months with no payment.
Soon, news breaks that BildeCo has gone into liquidation. Dave is owed $80,000. His lawyer explains that under the common law, the doctrine of privity of contract prevents him from directly suing Metro Developments for the money he is owed.
His contract was with BildeCo, and BildeCo alone. This frustrating lesson forces Dave to look beyond traditional contract law and towards statutory exceptions for a solution.
The Risk of a Broken Link
Warning: Any single insolvency or significant payment dispute in the construction chain can have a catastrophic domino effect. Under the traditional rules of privity, a subcontractor's financial health is entirely dependent on the solvency and integrity of the contractor directly above them in the chain.
This concentration of risk is a major source of instability in the construction industry. It is this very problem that legislation like the Building Industry Fairness (Security of Payment) Act 2017 (BIF Act) was specifically designed to mitigate, ensuring money can flow down the chain even when a link is broken.
Cracks in the Wall: Major Statutory Exceptions to Privity
While privity remains a default principle of contract law, its rigid application caused so many problems in the construction industry that the Queensland Parliament intervened. Today, powerful legislation provides pathways around the doctrine to ensure contractors and subcontractors get paid for the work they perform.
The Game Changer: The BIF Act
The BIF Act is the single most important exception to privity in the Queensland construction landscape. It's crucial to understand that the Act doesn't abolish the doctrine of privity; instead, it creates a powerful statutory pathway around it specifically for the purpose of securing progress payments.
Its core function is to give subcontractors a legal right to make a payment claim and, if that claim is disputed or ignored, seek a rapid adjudication decision to enforce payment. This legislation is a cornerstone of Queensland’s building and construction law and is designed to protect cash flow for all parties down the contracting chain.
How the BIF Act Creates New Payment Rights
The BIF Act establishes a clear, step-by-step process. A subcontractor who is owed money by a head contractor can serve a formal 'payment claim'. The head contractor must then respond within a strict timeframe with a 'payment schedule', either agreeing to pay the full amount or detailing why they are withholding payment. If payment is not made or the schedule is unsatisfactory, the subcontractor can apply for adjudication.
This is where the Act's power to bypass privity becomes clear. An adjudicator's decision can, in certain circumstances (like a head contractor's insolvency), compel a party higher up the chain, such as the principal, to pay the subcontractor directly.
This mechanism allows the subcontractor to effectively "leapfrog" the broken link in the contractual chain to secure payment from the party who is ultimately benefiting from their work. This is a key feature of our guide to the BIF Act.
The Other Key Exception: Section 55 of the Property Law Act
A broader, but less commonly used, exception is found in Section 55 of the Property Law Act 1974. This provision allows a third-party beneficiary to enforce a promise made in a contract, provided the contract was intended to create a direct duty to that third party and they have accepted the benefit. In a construction context, this is rare but possible.
For example, if a principal’s contract with a head contractor explicitly named a specialist subcontractor for a critical component and included a clause stating the principal guaranteed that specific subcontractor's payment, Section 55 might give that subcontractor a direct right to sue the principal if the head contractor defaulted.
Navigating Payment Disputes When Privity is a Barrier
When a payment dispute arises, the statutory exceptions to privity provide clear pathways for resolution. However, these pathways have strict rules and procedures that must be followed precisely. Understanding the roles of adjudication, QCAT, and the courts is essential for any contractor in Queensland.
Adjudication: Your Primary Tool
Adjudication under the BIF Act is the primary tool for resolving payment disputes. It is specifically designed to be a fast and cost-effective alternative to traditional court litigation. The core purpose of this dispute resolution process is to ensure cash flow—or as it's often said in the industry, "to keep the money moving." An adjudicator's decision is interim and binding, meaning it must be complied with unless it is later overturned by a court.
The high volume of payment disputes highlights the critical role of this mechanism; the Queensland Building and Construction Commission (QBCC) Adjudication Registry recorded 1,946 enquiries in the 2024-2025 period, underscoring just how vital this process is to the financial health of the industry.
When Does a Dispute Go to QCAT or the Courts?
While adjudication is the first port of call for payment claims, some disputes must be escalated. An adjudicator's decision is legally binding, but it can be challenged in the courts on very limited grounds, such as a jurisdictional error (for example, if the BIF Act did not apply to the contract).
Other types of disputes that fall outside the scope of the BIF Act, such as complex claims about defective work, breaches of warranty, or disputes over contract termination, may need to be resolved through the Queensland Civil and Administrative Tribunal (QCAT) for domestic building work, or the Queensland Courts for commercial matters.
In these forums, the traditional rules of privity of contract will be strictly applied, making it a critical area for a construction litigation lawyer to navigate.
The Importance of Correctly Issued Payment Claims
Warning: The powerful protections of the BIF Act are only available if your paperwork is flawless. A payment claim must meet strict legislative requirements to be considered valid.
These mandatory requirements include:
· Identifying the construction work or related goods and services to which the claim relates
· Stating the amount claimed as a progress or final payment
· Including the express statement that the claim is "made under the Building Industry Fairness (Security of Payment) Act 2017"
· Being served within the timeframes prescribed by the Act
· Clearly identifying the parties to the contract
· Setting out the contractual basis for the claim
Any error, such as failing to identify the construction work correctly or not stating it is made under the Act, can render the entire claim unenforceable. This is not a mere technicality; it is a jurisdictional prerequisite. Getting it wrong can mean losing your statutory rights to adjudication entirely, forcing you back into a position where the doctrine of privity prevents you from getting paid by anyone other than the insolvent contractor you dealt with.
For a comprehensive breakdown of what makes a valid payment claim and how to avoid common pitfalls that can cost you your statutory rights, see our detailed guide to payment claims under the BIF Act.
Are There Other Pathways Around Privity?
Beyond the major statutory exceptions, the common law has developed several complex doctrines that can, in specific circumstances, create a workaround to the privity rule. These are not straightforward and almost always require expert legal argument.
Understanding Common Law Workarounds
In certain situations, it may be possible to circumvent privity using established legal concepts. These include assignment, where contractual rights (like the right to be paid) are formally transferred from one party to a third party. Another is agency, where it can be argued that a head contractor entered into a subcontract not just for themselves, but also as an agent for the principal.
A further concept is that of a trust, where a court might find that a head contractor was holding funds received from the principal 'in trust' for the subcontractors who were due to be paid. These are highly technical arguments and are applied cautiously by the courts.
Using Deeds of Covenant and Collateral Warranties
A more proactive and certain method to bypass privity is to create direct contractual links where they wouldn't normally exist. This is often done on large, complex projects through a Deed of Covenant or a Collateral Warranty.
This is a separate, new contract created directly between the principal and a key subcontractor or consultant. This document gives the principal a direct right of action against the subcontractor if, for example, their work is defective, and vice-versa. It effectively builds a contractual bridge over the privity gap to manage risk and provide direct legal recourse for specific parties.
When to Seek Legal Counsel on Complex Claims
Expert Insight: Attempting to argue complex common law exceptions like agency or trust without expert guidance is a significant financial risk. These doctrines are highly nuanced, fact-dependent, and vigorously defended in court. A failed attempt to argue around privity can be an incredibly costly exercise in legal fees, with little chance of success.
In contrast, seeking expert legal advice on construction disputes from a specialist building and construction lawyer provides a clear, cost-effective strategy from the outset, focusing on the most viable pathways to recovery, which almost always begins with the BIF Act.
Protecting Your Business: Practical Steps for Contractors
While the law provides powerful tools, the best protection against payment disputes and the problems of privity is proactive risk management. Simple, disciplined business practices can save you from costly and stressful legal battles down the line.
The Primacy of a Written Contract
The single most important step any contractor or subcontractor can take is to have a clear, comprehensive, and written contract for every single job. This document is the foundation of all your rights and obligations. Handshake deals, verbal agreements, or ambiguous quotes exchanged over email become nearly impossible to enforce when a dispute arises.
A well-drafted contract clearly defines the scope of work, the price, the payment schedule, and the process for handling variations and disputes, providing certainty for all parties. For guidance on ensuring your contracts are robust, leveraging Merlo Law’s expertise can provide a significant advantage.
Key Clauses to Look for in Your Contracts
Before signing any contract, a thorough review is essential. Start by scrutinising the payment clauses: When are you entitled to claim payment? What is the exact process for submitting a claim? How long does the other party have to pay? Next, understand the clauses related to variations, extensions of time, and dispute resolution.
Crucially, you must check for any clauses that attempt to "contract out" of your rights under the BIF Act, as such clauses are generally void and unenforceable in Queensland. Knowing your contractual rights and obligations is particularly important when it comes to terminating construction contracts, as wrongful termination can have severe financial consequences.
Know Your Rights Under the BIF Act
Ignorance of the BIF Act is a critical business vulnerability. The Act provides powerful rights to secure payment, but it also imposes strict, unforgiving deadlines. Failing to serve a payment claim within the required timeframe, or failing to lodge an adjudication application on time, means losing those statutory rights permanently for that particular claim.
You should not view the BIF Act as a legal burden; you should see it as an essential commercial tool for financial survival and success in the demanding Queensland construction industry.
Conclusion
Privity of contract remains a fundamental rule of law, creating separate and distinct legal relationships within the complex construction chain. The traditional harshness of this doctrine, which could leave a hardworking subcontractor unpaid and without recourse, has been significantly softened in Queensland by powerful statutory interventions.
The Building Industry Fairness (Security of Payment) Act 2017 stands as the primary and most effective tool for subcontractors to bypass privity and enforce their right to be paid by parties higher up the chain. While common law exceptions exist, they are complex and uncertain.
Ultimately, the best defence is a good offence: proactive measures, including insisting on strong written contracts, understanding your statutory rights, and seeking expert legal advice, are the surest ways to protect your business and prevent disputes before they begin.
For more information and detailed guides, please visit our publications hub.
FAQs
What is privity of contract in simple terms?
Privity of contract is a legal rule that says you can only sue or be sued by someone with whom you have a direct contract. For example, a subcontractor has a contract with the head contractor, not the property owner. Therefore, under this rule, the subcontractor cannot sue the owner for non-payment, even though their work benefits the owner.
How does the BIF Act help a subcontractor get paid by a property owner?
The Building Industry Fairness (Security of Payment) Act 2017 (BIF Act) creates a statutory right to payment that can bypass privity. If a head contractor fails to pay a subcontractor, the subcontractor can use the Act's adjudication process. In certain situations, such as the head contractor's insolvency, an adjudicator's decision can require the property owner (principal) to pay the subcontractor directly from funds that would have otherwise been owed to the head contractor.
Can I use the BIF Act if I only had a verbal agreement for the work?
Yes, the BIF Act applies to construction contracts whether they are in writing, oral, or a combination of both. However, proving the terms of a verbal agreement can be very difficult. Having a written contract is always the best practice as it provides clear evidence of the agreed scope of work, price, and payment terms, making it much easier to enforce your rights.
What is the difference between an adjudicator's decision and a court judgment?
An adjudicator's decision under the BIF Act is a rapid, interim determination designed to resolve payment disputes quickly and keep cash flowing in the industry. It is legally binding and must be complied with. A court judgment is a final determination of all legal issues between the parties. While an adjudicator's decision can be challenged in court on limited grounds, it remains enforceable until a court orders otherwise.
What is a "payment claim" under the BIF Act?
A payment claim is a specific type of invoice or progress claim that must meet the requirements of the BIF Act. It must identify the construction work performed, state the amount claimed, and include a statement that it is "made under the Building Industry Fairness (Security of Payment) Act 2017". Using this exact wording is critical, as a non-compliant invoice does not trigger the protections and strict timelines of the Act.
Are there time limits for making a payment claim under the BIF Act?
Yes, there are strict time limits. A payment claim must be served on the other party on or before the latest of the date calculated under the contract, or 6 months after the completion of the construction work (or supply of related goods and services) to which the claim relates. For a final payment claim, this is extended to the later of 28 days after the end of the last defects liability period or 6 months after completion of all work. These deadlines are unforgiving.
This guide is for informational purposes only and does not constitute legal advice. For advice tailored to your specific circumstances, please contact Merlo Law
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