Introduction

This is the third in our series of updates dealing with the Building and Construction Industry Security of Payment Act 2009 (SA) which comes into effect on 10 December 2011.

Earlier updates were “The Payment Claim” and “The Payment Schedule”. We now turn to examine the adjudication process.

Fenwick Elliott Grace has produced a series of videos on the new law. The third video “Referring to Adjudication” is now available in our Videos section.

Adjudicators are given considerable power under the law to make determinations as to how much money is due for progress payments and the dates upon which payment should be made. When an adjudicator makes an error, the aggrieved party is likely to try to find what is called a ‘jurisdictional error’ to enable them to have the adjudicator’s decision overturned
by a court.

In the absence of such an error, even if the adjudicator’s decision appears flawed, a Court will not intervene. The purpose of the legislation is to keep cash flowing in the construction industry and to minimise the flow-on effects of insolvencies. The law does not allow an adjudicator’s decision to be overturned for errors made within his or her power, as it would negate the purpose of the legislation.

This Update discusses Chase Oyster Bar v Hamo Industries1; a NSW Court of Appeal decision in relation to similar legislation in that State. Any relevant differences between the South Australian Act and the NSW Act are mentioned in this Update.

The facts

Chase Oyster Bar Pty Ltd (“Chase”) engaged Hamo Industries Pty Ltd (“Hamo”) to carry out fitout work at the Chase Oyster Bar in Chatswood, NSW. On 31 December 2009 Hamo sent Chase a Payment Claim seeking payment of $115,822.73. The Payment Claim was due to be paid on 13 January 2010. Chase did not send Hamo a Payment Schedule or pay the claim. In South Australia, the Act requires a responding Payment Schedule to be served within 15 business days, not 10 business days as in NSW.

Following the failure by Chase to send the Payment Schedule or to pay the amount due, Hamo had two options: either apply for summary judgment through the Court system or refer the matter to adjudication.

Summary Judgment or Adjudication?

While the summary judgment path appears attractive, adjudication is frequently chosen as it may result in a more rapid payment.

Summary judgment requires an application to the Court and a short trial, a process that may take a minimum of two or three months. Unlike the adjudication path, if summary judgment is applied for, the other party does not have a second chance to provide a Payment Schedule and is precluded from raising defences that might be available under the contract.

In contrast, if the adjudication path is chosen the party that failed to send a responding Payment Schedule must be given a second opportunity to do so.

Hamo elects to adjudicate

Hamo decided to refer its Payment Claim to adjudication. Given that Chase had failed to respond with a Payment Schedule, Hamo was required to notify Chase within 20 business days of the due date for payment of its intention to apply for adjudication. Under the Act, Chase then had a further 5 business days to respond with a Payment Schedule. The due date for payment of the claimed amount was 13 January 2010. Hamo gave notice of its intention to apply for adjudication on 11 February 2010, outside of the 20 business day period provided for in the Act. An adjudicator was appointed and Chase then lodged with the adjudicator an Adjudication Response.

The adjudicator decided that he should not consider Chase’s Adjudication Response because Chase had not provided a Payment Schedule within the time required under the Act.

The adjudicator’s decision to exclude Chase’s Adjudication Response from his consideration was based on the section of the Act that excludes from consideration by an adjudicator any reasons set out in an Adjudication Response that were not previously indicated in a Payment Schedule.

The adjudicator awarded Hamo the full amount of its Payment Claim with interest. Chase applied to the Supreme Court of NSW to have the determination quashed. Chase said the adjudicator had erred because he had allowed the adjudication to proceed, notwithstanding that he found Hamo had failed to notify Chase within the 20 business day period of its intention to apply for adjudication.

The issue on appeal

In an earlier decision of the NSW Court of Appeal, (Brodyn Pty Ltd v Davenport & Anor2) the Court had limited the avenues of attack on an adjudicator’s decision and had expressly stated that an error on timing, such as had been obviously made by the adjudicator in this matter, did not void a determination. The Court of Appeal referred to the recent High Court authority in Kirk v Industrial Relations Commission of New South Wales.In Kirk, the High Court examined the role of the Supreme Court in supervising inferior courts and tribunals and said that this supervisory role is a defining characteristic of the Supreme Court, notwithstanding what the legislation of the State might say.

After examining the adjudicator’s decision in Chase’s case, the Court said that the requirement of Hamo to notify Chase of its intention to apply for adjudication within 20 business days was an essential requirement. A party who fails to comply with that requirement cannot then make a valid application for adjudication based on that Payment Claim. The Court pointed out the usual position is that, at worst, the claimant can render another Payment Claim, or can apply for summary judgment.

The Court noted that the Act can have ‘draconian’ effects on parties in the construction industry. Therefore, it is not unreasonable to require strict compliance with the requirements of the Act when seeking to rely on its provisions to the detriment of another. The Court said that the task of counting 20 business days ‘requires no more than a calendar and perhaps a pencil’.

Accordingly, as the notice was served late, the adjudicator had no authority to determine the dispute in the first place and his determination was quashed for jurisdictional error.

Conclusion

When a claimant does not receive payment or a Payment Schedule in response to their Payment Claim, they may elect to apply for summary judgment through the Courts or to apply for adjudication. If electing to apply for adjudication, a notice must be sent to the other party, within 20 business days of the due date for payment, informing of the intention to apply for adjudication.

The other party then has a further opportunity to respond to the Payment Claim, with a Payment Schedule, but only has 5 business days to do so. A failure by an adjudicator to properly
consider the time frames set down in the Act, or to ignore those time frames, may constitute a jurisdictional error and lead to the determination being quashed.

For a practical demonstration of referring a Payment Claim to adjudication, see the third video in our series on the new law, “Referring to Adjudication”.

Contributor: Tom Grace

1 [2010] NSWCA 190.
2 [2004] NSWCA 394.
3 (2010) 239 CLR 531.