Challenging Adjudication Determinations – some recent guidance

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Parties to a commercial building dispute may utilise Security of Payment (SOP) legislation in their jurisdiction to resolve payment claims and recover money owing under a construction contract.

Disputes are resolved quickly by an adjudicator and any amount determined as owing must be paid within the statutory timeframe. The determination is enforceable but without prejudice to the common law rights of either party. Due to the limited time in which an adjudicator must determine a payment dispute, it is not surprising that a determination may come before the Court for judicial review.

The grounds for review have been visited by various Courts with the following cases providing insight as to what might (and might not) justify having an adjudication determination quashed.

No review avenues for non-jurisdictional error

The High Court in Probuild Constructions (Aust) Pty Ltd v Shade Systems Pty Ltd [2018] HCA 4 confirmed that parties to an adjudication determination under the Building and Construction Security of Payment Act 1999 (NSW) may not seek judicial review for non-jurisdictional error of law.

The Court reiterated the nature of the (NSW) Act which, amongst other things, was intended to ‘reform payment behaviour in the construction industry’ by ensuring prompt recovery of payment for work carried out under a construction contract. The legislation is ‘coherent, expeditious and self-contained’ and ‘not concerned with finally and conclusively determining the entitlements of parties to a construction contract’.

Accordingly, an adjudicator is sanctioned to make a determination and a Court is not empowered to quash that decision for non-jurisdictional error, even if based on an incorrect interpretation of the subject contract.

An adjudication determination may only be set aside on grounds of jurisdictional error – an error going to the authority or power of the adjudicator, such as non-compliance with procedural requirements under SOP legislation.

Minimum standards required when assessing an adjudication determination

Nuance Group (Australia) Pty Limited (Nuance) v Shape Australia Pty Limited (Shape)[2018] VSC 362 provides guidance as to when a Court might quash an adjudication determination.

Shape served a payment claim on Nuance for over $3.5 million for demolition and associated works at Melbourne International Airport. Nuance responded with a payment schedule stating the amount payable as nil. Shape applied for adjudication for the sum of $2,243,105.55. An amount of $1,400,007.12 was determined payable, which after an adjudication review instigated by Nuance, was reduced to $1,216,715.72.

Nuance challenged the validity of both the original and reviewed determination in the Supreme Court of Victoria.

Nuance submitted that the adjudicator had not determined the amount of the progress claim as required by SOP legislation, which as a minimum necessitated a finding of whether the work identified in the relevant claim had in fact been performed and the value of that work. Rather, the adjudicator had deducted what he considered were excluded amounts from Shape’s claim to arrive at the revised figure and, in doing so, failed to comply with ‘basic and essential requirements’ of the Act.

Nuance was successful, and the adjudication determination was quashed.

Whilst acknowledging the tight timeframes under which adjudicators are required to operate, Justice Digby nonetheless conceded that the adjudicator had:

‘…failed to undertake the required task of addressing the payment claim and payment schedule and, consider those parameters of the dispute between the claimant and the respondent as to what claimed work … had been carried out under the Contract and what the value of that work … was.’

The adjudicator had merely worked back from the original claim in a manner that did not constitute a ‘fair and reasonable consideration’ of the determination providing ‘no sufficiently comprehensible reasons and basis for the amount determined’.

An adjudicator’s reasons must be considered in context

Southern Cross Electrical Engineering (Southern Cross) v Steve Magill Earthmoving (Magill) [2018] NSWSC 1027 considered another appeal of an adjudication decision.

Essentially, Southern Cross disputed Magill’s payment claim, which comprised additional amounts for excavation work based on trenching some areas of the subject site that were wider than stipulated in the contract. Southern Cross submitted that the adjudicator had erred by requiring it to prove that there had been no variation to the contract and that the earthmoving works had been over-claimed.

Relying on Justice Vickery’s lengthy series of matters to consider in Plenty Road Pty Ltd v Construction Engineering (Aust) Pty Ltd [2015] VSC 631, Southern Cross claimed that the adjudicator was required to ‘examine all the material for himself, and to come to a conclusion, based on that material as to what amount (if any) is payable.’

Justice McDougall acknowledged the processes set out by Justice Vickery were applicableto a determination however rejected any requirement for them to be ‘applied serially and mechanically in every case.’ Rather, the adjudicator’s reasons must be considered in context which included ‘the content of the dispute as established by the payment claim and the payment schedule, and the parties’ elaboration of that dispute.’

Further, the reasoning must be assessed considering the interim nature of an adjudicator’s determination under SOP legislation, the voluminous material to be dealt with, the strict timeframe and the fact that adjudicators are not usually lawyers.

Cross Engineering’s appeal was dismissed, Justice McDougall concluding that:

‘Factually, the adjudicator’s approach may have been (and probably was) incorrect. It is no doubt something that could have been improved upon if the adjudicator had “world enough and time”. But looking at his approach … I am far from persuaded that it was unreasonable to the extent that it must be taken to invalidate his determination’.

Conclusion

An adjudication determination is not subject to judicial review for non-jurisdictional error.

An adjudicator must apply certain minimum standards when assessing an adjudication application, however his or her reasoning will be considered in the context of the purpose and intent of the legislation, that being for the timely resolution of payment disputes under a construction contract. A decision that emanates from an error of law not associated with a jurisdictional error, will generally not entitle the Court to intervene.

Security of Payments legislation across Australia has been the subject of review and proposed reform. The recent release of the Murray Report recommends the national harmonisation of SOP laws and the implementation of review rights for parties (by a review adjudicator) for determinations concerning amounts of $100,000 or more.

If implemented, construction industry participants should have greater clarity regarding the circumstances under which an aggrieved party can challenge an adjudication determination.

If you or someone you know wants more information or needs help or advice, please contact us on +612 9248 3450 or email [email protected].

Implied conditions & warranties for home building contracts

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Following changes to the Home Building Act 1989 (NSW) in early 2015, the statutory insurance scheme that was established to provide compensation for certain defined losses if a builder dies, becomes insolvent, disappears during a build or fails to comply with a money order from a Court or Tribunal was re-named and is now referred to as the Home Building Compensation Fund.

Along with the re-naming of the scheme a number of other changes were made in respect of warranty insurance and implied warranties and conditions in building contracts entered into in NSW. These changes and the issue of implied conditions are discussed in further detail below.

What is covered by warranty insurance under a building insurance contract?

From 15 January 2016 an insurance contract issued in respect of building work in NSW must provide coverage and indemnity for losses or damage sustained by a beneficiary in respect of residential building work which has arisen because of the suspension of a contractor’s licence as a result of non-compliance by the contractor with an order.

Contracts entered into after 15 January 2016 in NSW only cover residential building work that is required under the Act to be covered by a certificate of insurance. This means that work such as built-in furniture and cabinetry which is done as standalone work and not part of a broader residential building contract is now exempt from the mandatory insurance scheme. For many would be renovators and home owners it is relevant to note that this category of work includes kitchen cabinets.

Statutory warranties

Builders must now provide a 2 year post completion warranty for their work. This period rises to 6 years in the case of ‘major defects’. Major defects are defined as being something that is a major element in a building AND which prevents all or part of the building form being either lived in or used for its intended purpose OR which threaten the collapse or destruction of the building as a whole of part of it. The concept of ‘major defects’ replaces the previous 6 year statutory warranty for ‘structural defects’.

Rectification orders may be issued by NSW Fair Trading Inspectors which require completion of rectification work in specified stages and by certain dates. These orders can also include an order for the payment of any money that is due under the contract.

Under the current legislation rectification work is specified as the preferred outcome of any proceedings before a Court or Tribunal for building claims.

Implied conditions and warranties

Section 18B of the Home Building Act 1989 (NSW) provides that all contracts for residential building work in NSW entered into by the holder of a contractor licence or a person required to hold a contractor licence before entering into a contract, will contain the following implied conditions and warranties:

  • All work will be done with due care and skill and in accordance with plans and specifications as set out in the contract;
  • All materials supplied will be good and suitable for the purpose for which they are being used and, unless otherwise specified in the contract, those goods will be new;
  • Work will be done in accordance with the legislation or any other law;
  • Work will be done with due diligence and within the time specified in the contract. If no time period is specified then work will be done ‘within a reasonable time’ ;
  • Where the work under the contract relates to the construction, alteration or additions to a dwelling the work will result in a dwelling that is reasonably fit for occupation as a dwelling (to the extent of the work conducted);
  • Materials used in doing the work will be reasonably fit for the specified purpose or the result being sought, provided the owner for whom the work is done expressly makes known the particular purpose for which the work is required or the result that the owner desires the work to achieve, so as to show that the owner relies on the holder’s or person’s skill and judgment.

These statutory warranties cover both a principal contractor in respect of their relationship with the owner of land on which work is being carried out and are also implied into contracts where the principal contractor has contracted any part of the work to a subcontractor.

What if there has been a breach of a statutory warranty?

Previously the defence available to a builder or contractor to a claim of breach of statutory warranty was that any defective work was carried out on the instructions of the consumer and was done so contrary to the builder or tradesperson’s written advice.

Post 15 January 2016, a builder or tradesperson can also defend this type of claim on the basis that any defective work was carried out as a result of the builder or tradesperson acting on written instructions from a professional engaged by the consumer before the builder or tradesperson commenced work.

The professional in question can be an engineer, surveyor or architect or some other person with appropriate specialist or expert knowledge that was relevant to the building work in question. Critically that expert must be someone who is independent from the builder or tradesperson about whom the claim has been made.

In an ideal world construction projects would progress smoothly and the need to consider issues of insurance and implied conditions would not arise. Unfortunately this is not always the case and knowing where you stand with respect to warranty insurance as well as implied contractual conditions is likely to be an important part of successfully managing any build. It is always a good idea to seek legal advice before a situation becomes problematic as this can avoid costly unpleasant surprises down the track.

If you or someone you know wants more information or needs help or advice, please contact us on +612 9248 3450 or email [email protected].

Early release of retention money

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Most construction contracts allow for a principal or head contractor to require the other contractor or subcontractor to provide a form of security. The purpose is to protect the principal or head contractor from loss should the other party breach the contact or fail to perform its obligations.

The simplest form of security constitutes the principal withholding a specified sum of money from a contractor / subcontractor’s progress payments. This is known as a retention amount or cash security.

The timing of release of the retention amount after work is completed by the subcontractor is sometimes contentious. Many contracts do not allow release of retention monies until certain events under the head contract are achieved. In this respect, security of payment legislation across all jurisdictions of Australia prohibit ‘pay when paid’ provisions.

In its simplest form, a ‘pay when paid’ provision is a contract term that makes payment to a contractor / subcontractor contingent upon the head contractor or principal being paid. However, the legislation goes further to catch certain other provisions which by their nature, will constitute a ‘pay when paid’ provision.

In Maxcon Constructions Pty Ltd v Vadasz [2018] HCA 5 the High Court took a broad approach in defining a ‘pay when paid’ provision and determined that certain terms tying the release of retention monies to an event under the head contract will constitute a ‘pay when paid’ provision and be void.

The facts

Maxcon Constructions Pty Ltd (Maxcon) (as head contractor) entered into a contract with Mr Vadasz (as subcontractor) for the design and construction of piling for an apartment building.

The contract provided for security in the form of a cash retention of 5% of the contract sum which was to be released to Mr Vadasz once the certificate of occupancy for the building issued.

Mr Vadasz completed the work under the contract and served a payment schedule on Maxcon from which Maxcon deducted retention monies. Mr Vadasz subsequently applied for the matter to be adjudicated and the adjudicator determined that the retention constituted a ‘pay when paid’ provision and was therefore void.

Maxcon appealed, asserting that the adjudicator had made an error.

‘Pay when paid’ provisions void

A ‘pay when paid’ provision is generally defined as a contract term that:

  1. makes the liability of one party to pay money owing to the other contingent upon some payment to the first party by a third party; or
  2. makes the due date for payment from one party to the other party, the due date for payment by the third party to the first party; or
  3. otherwise makes the liability to pay money owing, or the date for payment of that money, contingent or dependent on the operation of another contract.

The Court found that the clause making release of the retention money contingent upon issue of the occupation certificate fell within the third category of ‘pay when paid’ provisions and was therefore void.

In its reasoning the Court considered issue of the occupancy certificate was:

‘…dependent upon certification by the builder, Maxcon, that the building work had been performed in accordance with the issued documents, including the head contract between Maxcon and the owner of the land [and] issue of the certificate depended on completion of the whole project in accordance with the provisions of the head contract.’

In other words, release of the retention monies was essentially contingent upon completion of building work under another contract (i.e. between Maxcon and the landowner).

As a consequence:

‘…the due dates for payment of the retention sum were dependent on something unrelated to Mr Vadasz’s performance.  They were dependent on the operation of another contract – namely, the completion of the head contract, which in turn would have enabled a certificate of occupancy to be issued.’

Conclusion

Clauses in construction contracts that tie the release of retention monies to an event under the head contract and not to the subcontractor’s performance (and other obligations under the contract) will likely constitute a ‘pay when paid’ clause, and be void.

Subcontractors may now be able recover retention monies earlier than once thought.

Principals and head contractors should review contracts to ensure that they are not relying on terms that breach security of payment legislation.

If you or someone you know wants more information or needs help or advice, please contact us on +612 9248 3450 or email [email protected].