Finding the silver lining in an unfavourable adjudication determination

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By Peter Meades, Partner, Ziv Ben-Arie, Partner, Vlad Vishney, Senior Associate and Anastasia Babi, Law Graduate/Paralegal

In a recent Supreme Court decision it was held that an Adjudicator’s failure to provide adequate reasons in an adjudication determination under the Building and Construction Industry Security of Payments Act 1999 (the Act) constituted a jurisdictional error, rendering the determination invalid.

The Court also reaffirmed the position that an adjudication determination need only have one point of jurisdictional error, even if that error affects only a part of the determination, in order to render the entire determination invalid.

Facts

  1. In 2017 Fulton Hogan Construction (Fulton Hogan) as a head contractor entered into a subcontract with Cockram Construction Pty Ltd (Cockram) for the construction of carparks and associated works on Sydney’s Northern Beaches (Contract).
  2. Cockram served a payment claim on Fulton Hogan under the Act (Payment Claim).
  3. Fulton Hogan served a payment schedule in response to the Payment Claim (Payment Schedule) which was divided into two parts. The first raised jurisdictional errors on part of the Payment Claim itself and the second consisted of a detailed schedule setting out an itemised list of the amounts claimed, the amount Fulton Hogan was willing to pay, with reasons.
  4. Fulton Hogan received an unfavourable determination and challenged the determination on two grounds:
  5. Firstly, the Adjudicator had failed to perform her statutory function, in that she refused to apply what she considered in her reasons stated in her determination to be the correct construction of a clause in the contract (which imposed a condition precedent on the subcontractor to comply with the head contract in respect of obtaining approval for an extension of time claim); and
  6. Secondly, the Adjudicator advanced a reason why she valued a claim on preliminaries on a time basis but did not produce an argument that could rationally support that conclusion.

First Ground

Fulton Hogan claimed various delay costs from Cockram as completion had not been achieved by the relevant date. Cockram made the submission that they were entitled to extensions of time.

In order to receive an extension of time, conditions set out in clause cl 22.1(1)(e) of the subcontract had to be satisfied, which included that Fulton Hogan had, at [15] “received an equivalent extension of time under clause 10.10 of the Head Contract” (with Transport for NSW).

The Adjudicator, in providing her reasons whether section 22.1(1)(e) had been satisfied, at [18] said “I do not consider that this is a legitimate condition precedent as it relies on a contract relationship, and the attendant obligations, to which the Claimant is not a party. Further, there is no information to suggest that the Respondent [Fulton Hogan] even sought an EOT from the Head Contractor’s Principal.”

The Court held that, in reaching a determination, the Adjudicator is “required to give reasons for his or her decision: s 22(3)(b) of the Act (unless both parties request the adjudicator not to include reasons in the determination). In determining what counts as adequate reasons for this purpose, it is necessary to bear in mind the informal nature of the adjudication process and the fact that the adjudicator may be placed under extreme time pressures because of the truncated nature of the process[1].

Fulton Hogan submitted that the adjudicator did not give adequate reasons for refusing to apply clause 22.1(1)(e) of the Subcontract, in circumstances where reliance on this clause was not mentioned in the response submissions or determination, that section 12 of the Act precludes a pay when paid provision in a construction contract.

The Adjudicator gave a brief reason at [26] that the clause is not a legitimate condition precedent because it relies on a “Contract to which the claimant is not a party”.  The Court found that the Adjudicator did not specifically reference clause 12 of the Act in the determination and therefore, it could not be assumed that this interpretation may have been in the Adjudicator’s contemplation.

This therefore leaves to speculation why the Adjudicator thought that cl 22.2(1)(e) did not apply. That conclusion was critical to the Adjudicator’s decision on the issue of extensions of time and consequently liquidated damages. Subsequently,  the Court held that the Adjudicator failed to give reasons for a critical aspect of her decision, that involved a failure to comply with the requirements of s 22(3)(b) of the Act and amounted to a jurisdictional error.

Second Ground

The second ground related to poorly expressed submissions to the Adjudicator in relation to the value of the contract preliminaries. The Court held that an Adjudicator is entitled to make an error on account of poorly expressed submissions, which resulted in a misunderstanding of the facts, as long as an Adjudicator gives sufficient reasoning to their determination on an issue.

Severance of Decision

Cockram submitted that the determination was severable, in effect asking the Court to reduce the adjudicated amount by the amount referable to the jurisdictional error.

The Court held that the Adjudicator is required to make a single decision on the amount that should be recovered with regards to the payment claim, and if that decision is tainted with any kind of jursisdictional error, then the entire decision is void. The Court took the reasoning in Maxcon Constructions Pty Ltd v Vadasz (trading as Australasian Piling Co) [2018] HCA 5 at [235] where “An error of law on the face of the record differs fundamentally from a jurisdictional error. Jurisdictional error renders a decision void and, at least in the case of an administrative decision, it is regarded as no decision at all. A decision affected by error of law on the face of the record is a lawful decision made within jurisdiction: however, it is liable to be set aside in the exercise of the court’s discretion by the grant of certiorari.”

Consequently, on the basis that the Adjudicator failed to apply the appropriate construction of section 22.1(1)(e) of the subcontract, the Court found a jurisdictional error and rendered the determination void.

Take Away

A negative determination may not be the end of the matter and partially void determination may be severed to facilitate natural justice and procedural fairness.

If a determination suffers only in part form jurisdictional error, then that error may infect the entire determination which may, render it potentially void.

 

[1] New South Wales Land and Housing Corporation v Clarendon Homes (NSW) Pty Ltd [2012] NSWSC 333 at [9] per McDougall J; Bauen Constructions v Westwood Interiors [2010] NSWSC 1359 at [23] and [40] per McDougall J; Avopiling (NSW) Pty Ltd v Menard Bachy Pty Ltd [2012] NSWSC 1466 at [34]-[38] per Sackar J.

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