SECURITY OF PAYMENT SECURITY OF PAYMENT THE PENDULUM HAS SWUNG TOO FAR. Philip Davenport

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1 SECURITY OF PAYMENT SECURITY OF PAYMENT THE PENDULUM HAS SWUNG TOO FAR Philip Davenport In [2004] #94 ACLN pp.22 to 28 I criticised decisions of the NSW Supreme Court on the Building and Construction Industry Security of Payment Act 1999 NSW, in particular, Musico v Davenport [2003] NSWSC 977 and cases which followed it. In conclusion I said: The basic error which the various judges have made when entertaining certiorari is to overlook that the adjudicator is determining the progress payment due. The adjudicator is deciding an amount of money, not a dispute. The judges have made the mistake of considering the adjudicator as a decider of the issues between the parties, just like a judge or tribunal, rather than as a certifier. Certiorari is not appropriate for dealing with errors of a certifier. It remains for the court to properly categorise the role of the adjudicator. Eventually the issue reached the Court of Appeal. In Brodyn v Davenport [2004] NSWCA 394, the Court of Appeal held that Musico v Davenport and the cases which followed were incorrectly decided to the extent that they decided that a judge could give the respondent relief in the nature of certiorari and set aside an adjudicator s determination. Meanwhile, many claimants had been denied justice by the Court or had abandoned or compromised claims. The problem now is that the Court is still making the mistake of considering the adjudicator as a decider of issues between the parties, just like a judge or tribunal, rather than as a certifier. The difference is that now it is respondents, not claimants, who are being disadvantaged. The pendulum has swung too far in the opposite direction. The problem is best illustrated by Coordinated Construction v Hargreaves [2005] NSWSC 77, decided by McDougall J on 22 February The case involved two separate adjudications and two separate adjudicators. The plaintiff (the respondent in the adjudication) contended that it was not open to the adjudicators to include delay damages and interest in the calculation of the amount of the progress payment and, since the adjudicators did so, their determinations were void. For the purpose of deciding whether or not the adjudicators determinations were void, McDougall J made the decision [at para 40] to assume that the delay damages and interest claimed did not have sufficient connection with the construction work to form part of a payment claim that may be enforced by the mechanism for which the Act provides. But then, having assumed that the claims did not have sufficient connection with the construction work to form part of a payment claim that may be enforced by the mechanism for which the Act provides, he nevertheless decided that the claims could be enforced by the mechanism which the Act provides. McDougall J [at para 40] assumed that the claims were not for amounts payable for construction work done or to be done, or related goods or services provided or to be provided, pursuant to a construction construction contract. But he decided that, notwithstanding that the adjudicators included in the calculation of the amount of progress payments amounts which should not have been included, the adjudicators determinations were not void. At para 49 he said: It must follow that there can be a payment claim for the purposes of the Act... even if the payment claim is comprised entirely of, or includes, an amount that is 36 AUSTRALIAN CONSTRUCTION LAW NEWSLETTER #101 MARCH/APRIL 2005

2 not for construction work.... I cannot see how a claim that is invalid because the amount claimed is not for construction work is different in principle to a claim that is invalid because it is grossly overvalued. In each case... the adjudicator may determine the validity of the claim. The expression claim for construction work coined by McDougall J is not used in the Act. With respect, this is a most amazing conclusion. If it is correct, then adjudicators can ignore the object of the Act (s.3(1)) and sections 9 and 10 of the Act; they can include in their calculation of the amount of a progress payment any moneys that the claimant may like to claim in the payment claim, irrespective of the fact that the moneys are not related to the carrying out of construction work or the provision of related goods or services. On McDougall J s reasoning, a payment claim could be invalid, it could be for damages for defamation or for breach of the Trade Practices Act or for personal injury or for something else not contemplated by the Act, but if an adjudicator decided that the claim was valid, the Court could not decide otherwise. That simply cannot be right. There is nothing in the Act to substantiate that conclusion. The Act does not say that an adjudicator can determine the validity of a payment claim. The Act does not empower an adjudicator to determine his or her jurisdiction. The only matters which the Act empowers an adjudicator to determine are the amount, if any, of the progress payment, the due date for payment, the rate of interest (s.22(1)) and the apportionment of adjudication fees (s.29(3)). McDougall J does not address sections 9 and 10 of the Act or the object of the Act (s.3(1)). Section 3(1) provides: The object of this Act is to ensure that any person who undertakes to carry out construction work (or who undertakes to supply related goods and services under a construction contract is entitled to receive, and is able to recover, progress payments in relation to the carrying out of that work and the supplying of those goods and services. (emphasis added). McDougall J found that a claimant can also recover under the mechanism of the Act amounts unrelated to the carrying out of construction work and the supplying of goods and services. He found that a claimant can recover under the mechanism of the Act amounts which, applying sections 9 and 10 of the Act, an adjudicator cannot validly include in the calculation of a progress payment. Section 9 of the Act prescribes how the amount of a progress payment is to be calculated. It is either in accordance with the express terms of the construction contract or, if there are none, then on the basis of the value of construction work. It may well be that, in the particular construction contract under consideration by the Court, express terms of the contract permitted the delay damages and interest to be included in the calculation of the progress payment. Unfortunately, McDougall J did not decide that issue. Instead, he elected to decide the case on the assumption that neither the construction contract nor the Act gave an entitlement to a progress payment on account of delay damages or interest. The Act does not say that an adjudicator can determine the validity of a payment claim. AUSTRALIAN CONSTRUCTION LAW NEWSLETTER #101 MARCH/APRIL

3 Claimants are ambushing respondents. At paragraph 50 he said: To put it another way, I think that the jurisdiction entrusted by the Act to adjudicators includes the power to determine whether (assuming it to be a relevant consideration) a particular amount claimed is for construction work. That is because, in essence, the adjudicator s function is to determine, in respect of the payment claim that is the subject of the adjudication application, the issues raised in it and the payment schedule. Those issues may include those referred to it in para [45] above, and no doubt more. All those matters are within jurisdiction. They form part of, not preconditions to, the jurisdiction. McDougall J has, in effect, decided that a claimant can claim anything and if the adjudicator decides that the claimant is entitled to make the claim, the adjudicator can determine that the claimant is entitled to a progress payment on account of whatever has been claimed. This is just what is happening. Claimants are claiming damages for breach of contract, damages under the Trade Practices Act, the cost of preparing claims, fees paid to consultants to prepare claims, legal costs, adjudication fees, even amounts for others (eg sub-subcontractors) not parties to the contract. I have not yet seen a claim for mental distress or a claim under the Frustrated Contracts Act 1978 NSW or the Contracts Review Act 1980 NSW but McDougall J has placed no limits on the claims which can be adjudicated. Claimants are ambushing respondents. They are sometimes taking months to prepare (often using lawyers) a multitude of different claims which are then combined in one progress payment claim. Sometimes the progress claim, adjudication application and supporting documents make a pile a metre high. The payment claim and adjudication application may be supported by statutory declarations, spreadsheets, witness statements, expert reports, copies of reported cases and detailed legal submissions. Respondents are expected to respond, with detailed reasons, to each of the many individual claims. If, in the payment schedule, the respondent fails to canvass any allegation in the payment claim, the respondent runs the risk of being barred from doing so in the adjudication response (see s.20(2b) of the Act). This leaves the respondent at a major disadvantage. The respondent has only 10 business days to respond to a payment claim that has taken months to prepare. The respondent has only five business days to respond to the adjudication application which the claimant may also have been preparing for months. The adjudicator is faced with a detailed set of claims supported by a mass of documentation and, at best, a hastily prepared payment schedule and adjudication response and the adjudicator has to make a determination in 10 business days. A classic example is the case of Minister for Commerce v Contrax Plumbing [2004] NSWSC 823, another decision of McDougall J which is on appeal. 38 AUSTRALIAN CONSTRUCTION LAW NEWSLETTER #101 MARCH/APRIL 2005

4 This was not the object of the Act. The object of the Act (s.3(1)) was to enable a person who has carried out construction work under a construction contract to recover a progress payment in relation to the carrying out of that work. The object was not to enable a person who has carried out construction work to recover payment for any claims that the person likes to make. The Act specifies how the amount of a progress payment is to be calculated. It is not open to an adjudicator to calculate the amount in any other manner. If the contract provides how the amount is to be calculated then that is how the adjudicator is to calculate the amount (s.9(a) of the Act). In Coordinated Construction v Hargreaves [2005] NSWSC 77, McDougall J was dealing with the situation where the contract does not provide how the amount is to be calculated. In that situation, s.9(b) of the Act says that the amount is to be calculated by the adjudicator on the basis of the value of construction work carried out. McDougall J found that the adjudicator can, instead, calculate the amount on the basis of claims for other than the value of construction work. With respect, he is wrong. In Brodyn v Davenport [2004] NSWCA 394, [at 47] the Court referred with approval to the decision of Lord Reid in Anisminic Ltd v Foreign Compensation Commission [1969] 2 AC 147 at 171. Lord Reid said: There are many cases where, although the tribunal had jurisdiction to enter on the enquiry, it has done or failed to do something in the course of the enquiry which is of such a nature that its decision is a nullity. The basic error which McDougall J has made is to assume that when an adjudicator has authority to enter upon an adjudication of a payment claim under the Act, he has authority to determine claims for amounts which by sections 9 and 10 of the Act, an adjudicator is precluded from including in the calculation of the amount of the progress payment. Lord Reid gives examples of things which a tribunal might do which would render the tribunal s decision a nullity. They include making a decision which the tribunal had not power to make. An adjudicator has no power to make a decision on any claims that a claimant cares to make. An adjudicator can only make a decision on a claim for a progress payment in relation to the carrying out of that work. Those words are from s.3(1). An adjudicator is not empowered to decide a claim for damages for breach of contract, a claim under the Trade Practices Act or the multitude of other extraneous claims which some claimants are making in the guise of a progress claim under the Act. Another example by Lord Reid is refusal by a tribunal to take into account something which it was required to take into account. A refusal by an adjudicator to calculate the amount of the progress payment in accordance with ss. 9 and 10 of the Act would fall into this category. Lord Reid also cites the example of a tribunal basing its decision on some matter which, under the provisions setting it up, it had no right to take into account. An instance of this would be an adjudicator taking into account extraneous claims such as claims for damages for breach of contract, claims An adjudicator has no power to make a decision on any claims that a claimant cares to make. AUSTRALIAN CONSTRUCTION LAW NEWSLETTER #101 MARCH/APRIL

5 [Adjudicators] are valuing claims which they have no authority to value... under the Trade Practices Act, etc. where the contract does not expressly provide that such claims can be taken into account in the calculation of a progress payment. Lord Reid said: But if it decides a question remitted to it for decision without committing any of those errors it is as much entitled to decide that question wrongly as it is to decide it rightly. I have added the emphasis because it is those words that McDougall J appears to have overlooked. It is a fact that if an adjudicator wrongly decides an amount for the progress payment that, in itself, does not render void the adjudicator s determination. But if, in doing so, the adjudicator commits one of the above errors, then that error renders the determination void. An example may serve to explain. Assume that a valuer is commissioned to value a building. If the valuer undervalues or overvalues the building, that does not mean that the valuation is void. It may be mistaken. The valuer may even be liable for damages. On the other hand, if, in valuing the building the valuer also values a claim for damages and includes his or her assessment of the damages in the valuation of the building then the valuation is void. That is just what many adjudicators are doing. They are valuing claims which they have no authority to value and including their valuation in the calculation of the amount of the progress payment. Their valuations are void. The problem is that, in some instances at least, the Supreme Court has failed to recognise the fact. Unless the Court of Appeal stops the pendulum, it seems that the Act will have to be amended to ensure that the Act is only used for the object for which it was made. 40 AUSTRALIAN CONSTRUCTION LAW NEWSLETTER #101 MARCH/APRIL 2005