Introduction

The Queensland Supreme Court was recently asked to decide whether adjudication under the Building and Construction Industry Security of Payment Act 2004 (Qld) (“the Act”) is valid when it arises from a contract that has been terminated.[1]

In considering this question, the Court had to decide whether the contract had been properly terminated, and then decide whether the adjudicator had power to make an award under this contract.

Background

Walkrete Pty Ltd (“Walkrete“) was a subcontractor to McNab NQ Pty Ltd (“McNab“) for concrete work on a building project at Rockhampton.  McNab terminated Walkrete’s contract on the basis of a substantial safety risk which McNab said gave rise to a serious breach of contract.

On 8 September 2012 McNab’s site manager, Mr Port, had instructed two employees of Walkrete to remove props under some panels but had expressly instructed them to not remove the props under panel 51. Contrary to this instruction, the two employees of Walkrete removed the props under panel 51 while other employees of McNab were working nearby.  When Mr Port later realised what had been done, he at once instructed Walkrete to replace the props and this was done.

Clause 53 of the subcontract entitled McNab to terminate the subcontract if Walkrete defaulted “in the performance or observance of any serious condition”.  Walkrete said that a contractual requirement relating to safety had been breached and hence it was entitled to terminate the contract, which it did on 10 September 2012.

The dispute enters into adjudication

Following termination, on 12 November 2012 Walkrete sent a payment claim under the Act to McNab seeking payment for the work performed prior to termination of the contract.  McNab refused to pay the amount claimed and sent a payment schedule to Walkrete saying that there was no basis for using the Act to obtain payment because the termination of the contract prevented Walkrete from relying on the Act.

Walkrete referred the matter to adjudication.  The adjudicator determined that McNab owed the full amount claimed to Walkrete on the basis that the termination of the contract was not justified, given that the breach of contract by Walkrete in removing the props under panel 51 was not serious.  He formed this view because he said that McNab’s employees had seen Walkrete’s employees removing the props from panel 51.

McNab applies to set aside the determination

McNab applied to the Supreme Court for a declaration that the adjudicator’s determination was void.  The Court considered the competing arguments.  The Court said that it was not for the adjudicator to determine whether the breach of contract by Walkrete was serious by considering whether McNab had observed what they had done

“Whether a condition is “serious” is not determined by the circumstances of its observance or non-observance.  If McNab acquiesced in an unauthorized removal of the props, that might deny it the right to terminate on the basis of that non-compliance.  The way in which a contract is carried out does not, however, determine the issue of its proper construction.”

In any event, the Court said, Mr Port had asked Walkrete to replace the props as soon as he became aware that they had been removed.  On that basis, and on a closer analysis of the terms of the contract, the Court said that McNab was justified in terminating the contract.

Did the adjudicator have jurisdiction?

Having reached that conclusion, the Court turned to consider whether the adjudicator had power to consider the dispute.  It said he did not.  This follows the earlier similar decision in Walton Constructions[2].

In Waltons, the contract contained a clause expressly dealing with rights after termination and stating that a party could then sue for damages.  The Court in Waltons held that no reference date for making a payment claim could arise after the termination of the contract. There is no discussion of the contract clauses in Walkrete.

The Court in Walkrete cited Waltons as establishing a rule that no reference dates arise after termination of a contract. Walkrete’s legal team sought to rely on various NSW decisions which have allowed adjudication awards to stand where they have been made over disputed payments following termination of a contract.

In Waltons the Court discussed the definition of “reference date” in the Act and noted that the Act defines it as “under” a contract whereas in NSW, the definition of “reference date” in their Security of Payment legislation uses the words “in relation to” a contract.  As a matter of policy, the Court in Waltons said that disallowing a payment claim made after termination is consistent with the provisional nature of adjudication payments.

In consequence, following the termination of the contract, the Court said, there was no jurisdiction for the adjudicator to enter into the dispute and make a determination because no reference date arose following termination.

Accordingly, the Court said the adjudicator lacked the power to make his determination and had made an error when he entered into the adjudication.  The Court said that this is not an error as to the extent of jurisdiction, it is an error that goes to the existence of jurisdiction and therefore the adjudicator’s determination was void.

As stated above, the Queensland legislation differs from the NSW legislation.  The SA legislation is almost identical to the NSW legislation in its definitions of reference date and progress payment.

In our view this makes it more likely that in SA, the Courts will find that an adjudicator has jurisdiction to consider a payment claim made after a contract has been terminated.  This view has some support from the NSW Court of Appeal authority in Brodyn Pty Ltd v Davenport[3] where the Court said that reference dates continue to accrue following lawful termination.

Conclusion

A subcontracting party who allows a head contractor to terminate a contract by, for example, abandoning works due to non payment may preclude themselves from recovering payment under the adjudication legislation in Queensland.

Similarly, a head contractor faced with a subcontractor in serious breach has an additional consideration to weigh in reaching the decision to terminate the subcontract.  The option of electing to affirm the contract may be less appealing now.

Termination may reduce exposure to a potentially unsatisfactory adjudication should the errant subcontractor seek to obtain cash flow notwithstanding unresolved defects or liabilities for delay.

The Queensland adjudication legislation has different wording to the NSW and SA legislation and in our view it is likely that SA will follow the NSW line and allow payment claims following termination.

In any event, early termination of a contract is a serious step.  There are other significant risks arising from early termination of a construction contract not addressed in this Update.

Contributor:  Tom Grace

 

[1] McNab NQ Pty Ltd v Walkrete Pty Ltd & Ors [2013] QSC 128

[2] Walton Constructions (Qld) Pty Ltd v Corrosion Control Technology Pty Ltd (2012) 2 Qd R 90

[3] [2004] NSWCA 394