Introduction

Adjudicators are given the power under the Security of Payment legislation[1] (“SOP Act”) to require builders or owners to make progress payments to their subcontractors or contractors, even when there is a dispute about whether the payment is due.  The system is known as a “pay now argue later” system and has become widely used across Australia to keep cash flowing in the construction industry.

Until February this year, it was unclear whether adjudicators could make an error of law and have their determinations upheld on a review. In two decisions, one on appeal from South Australia[2] and the other on appeal from New South Wales,[3] the same issue arose for determination and the High Court has delivered an incisive answer.

The adjudication system has elements of rough justice due in part to the rapid timeframes imposed under the legislation.  Payment disputes are generally resolved within weeks, very different to the timeframe in the Court system where resolution of a whole dispute can take years.  Adjudicators, unlike judges, are not required to be lawyers.

As the power of an adjudicator comes from the SOP Act, the law requires an adjudicator to carefully follow the rules set out in that Act.  If an adjudicator fails to follow those rules, they will be acting without “jurisdiction” and their determination can be set aside by a Court.

Some courts had held that an adjudicator who was following the rules and within jurisdiction was also required to make a decision that was in accord with the law.  Those courts have set aside an adjudicator’s determination for an error of law.

Other courts had disagreed with this approach and said that the system is a rough and ready one; adjudicators are not lawyers and it would neuter the system if every decision of an adjudicator was subject to challenge for legal error.

Both schools of thought have agreed that adjudicators could not erroneously give themselves jurisdiction or exceed their jurisdiction. This type of error is known as a jurisdictional error of law. The High Court was not considering this type of error by an adjudicator in its recent decisions.

Maxon and Vadasz

Maxcon was building the Boheme apartments in Adelaide. It engaged Vadasz to design and construct the piles.   Vadasz undertook the work and completed it.

Maxcon’s contract with Vadasz included a term that is frequently found in commercial construction contracts, effectively delaying the repayment of retention monies until Maxcon had achieved completion on the project. That is, the subcontractor, Vadasz, was not entitled to his retention monies until the head contractor, Maxcon, had completed its contract works.

Clause 11 of the subcontract said:

“Subject to [Maxcon’s] rights to any deductions made or pending deductions which are likely to be made under the [subcontract], retention shall be released:

(a)   50% of retention within the time nominated in Schedule E

(b)   Remaining 50% within the time nominated in Schedule E”.

Schedule E to the subcontract provided for 50 per cent to be released “90 days after CFO is achieved”, with the remaining 50 per cent to be released “365 days after date of CFO”.

Under the subcontract, “CFO” was defined to mean:

“the certificate of occupancy and any other Approval(s) required under Building Legislation which are required to enable the Works lawfully to be used for their respective purposes in accordance with [Maxcon’s] Project Requirements”.

When Vadasz made his final claim for payment after completing his work, Maxcon deducted about $60,000 from the claim in reliance on this clause.  Vadasz disagreed and said he was entitled to be paid the retention.  Vadasz referred the dispute to adjudication.

The adjudication

The adjudicator considered the claims of both parties.  Maxcon relied on its contract clause to say it was entitled to withhold the retention amount.

Vadasz referred to the SOP Act and to section 12 of the Act.  Section 12 says that “pay when paid” clauses in contracts are of no effect.  A pay when paid clause is defined in the SOP Act to include a clause that:

“makes the liability to pay money owing, or the due date for payment of money owing, contingent or dependent on the operation of another contract.”

Vadasz said clause 11 made the payment to Vadasz contingent upon the issue of the CFO under the head contract. The adjudicator agreed with Vadasz, found clause 11 to be of no effect and awarded him the full amount he had claimed.

Maxcon went to the Supreme Court to get the adjudication reviewed. Justice Stanley dismissed the application. He said that while the adjudicator was wrong to decide clause 11 was a pay when paid clause, in any event, adjudicators can make errors of law of this type. Maxcon appealed to the Full Court of South Australia.  The Full Court dismissed the appeal.

The High Court

Maxcon appealed to the High Court. The High Court heard the appeal together with a similar fact appeal from NSW.  It is unusual for the High Court to hear an appeal of this nature but the Court said it raised an issue of public importance in relation to the uncertainty as to whether adjudicators are permitted to make non-jurisdictional errors of law.  There were three questions for the High Court to consider:

  1. Did the adjudicator’s reasons disclose an error of law?
  2. If so, is disclosure of an error of law in an adjudicator’s reasons sufficient to quash the adjudicator’s determination?
  3. If not, is the error of law a jurisdictional error of law?

1. Pay when Paid:

The first question asks whether deciding the pay when paid clause was void was an error of law.  In a determination of significance for the industry, the High Court agreed with the adjudicator that clause 11 of the subcontract was a pay when paid provision and therefore of no effect.  In other words, head contractors can no longer rely on this type of clause to delay repaying to their subcontractors their retention monies.

2.  Errors within jurisdiction

While it was not necessary for the High Court to consider questions 2 and 3, it decided to get rid of the uncertainty that has plagued lawyers working on the SOP Act. The short answer of the High Court to question 2 was “no”.

The Court said that, for a number of reasons, the scheme of the SOP Act implicitly precludes judicial review for non-jurisdictional error of law. The Court pointed out that adjudication determinations are not final.  Determinations require a payment to be made, but it is made “on account” and ultimately a dissatisfied party can approach the Court to have the money repaid.  There is no right of appeal under the SOP Act.  The certificate that issues from the determination can be lodged with the Court as a judgment and no defence can be filed. The timetables imposed on adjudicators are extremely tight and it is implicit in such a short timeframe for Parliament to have expected determinations to not be challenged for an error of law, particularly when the SOP Act was to create an entitlement of the informal, summary and quick resolution of claims for cashflow.

In relation to the third question, the answer was “no”. Even if the adjudicator had been wrong saying clause 11 was a pay when paid clause this would not have been a jurisdictional error of law.

Conclusion

Adjudicators who make their determination inside the power granted by the SOP Act, that is, “within jurisdiction”, will not have their determinations quashed if they make an error of law.  Mistakes by adjudicators as to whether a clause is a pay when paid clause will not be jurisdictional errors of law.

Contractors should review their subcontracts to ensure that clauses permitting the withholding of a subcontractor’s retention are drafted in such a manner that they do not rely on provisions in another contract.  For example, to the extent that a subcontract clause permits retention to be held until a certificate is issued under the head contract, the clause will be found void and adjudicators will require the retention to be paid out.

Similarly, subcontractors should consider retentions presently held by head contractors and whether, given the recent decision in the High Court, they are now entitled to ask for those retentions to be released.

Contributor:   Tom Grace

Tom is a former engineer who ran his own construction company before becoming a construction lawyer.  His legal practice is centred on resolving construction and engineering disputes.

[1] Building and Construction Industry Security of Payment Act 2009 (SA)

[2] Maxcon Constructions Pty Ltd v Vadasz [2018] HCA 5

[3] Probuild Constructions (Aust) Pty Ltd v Shade Systems Pty Ltd [2018] HCA 4