It seemed to many that South Australia’s new adjudication regime had hit an early stumbling block when the District Court held that Romaldi Constructions Pty Ltd (“Romaldi”) did not have to pay its subcontractor Adelaide Interior Linings Pty Ltd (“Adelaide Interior”) the amount awarded by an adjudicator.
The new adjudication regime was established under the Building and Construction Industry Security of Payment Act 2009 (SA) (“the Act”) and applies to contracts formed after 9 December 2011. It has been introduced to make it simpler and less expensive for contractors and subcontractors to obtain progress payments for construction work. The Act provides for a rapid and cost effective means for suppliers and others in related construction industries to ensure that they obtain their due payments and keep their cash flow moving. The Act requires strict compliance in order to rely on its provisions due to the stringent requirements it imposes on those who owe money on construction work.
Adelaide Interior entered into a contract with Romaldi in July 2012 to supply and install linings at Burc College. Adelaide Interior sent an invoice to Romaldi in September for the amount of $48,455. Romaldi did not pay the invoice. On 5 November 2012 Adelaide Interior sent a payment claim under the Act to Romaldi. Romaldi responded with a payment schedule on 23 November, again refusing to pay.
Adelaide Interior made an application for adjudication on 11 December 2012 and on 13 February 2013 an adjudicator issued a determination in favour of Adelaide in the amount of $51,219.83 including costs.
Under the adjudicator’s determination, Romaldi was required to pay the amount due within 5 days. If it did not, Adelaide Interior was entitled under the Act to apply for an adjudication certificate and then file the certificate as a judgment debt in Court. Parties are usually at pains to avoid having a judgment debt registered against them as it has been known to have an adverse impact on credit ratings.
Romaldi claimed Adelaide Interior owed it other monies and also may not be able to pay the awarded money back to Romaldi in due course if it was ordered to do so. The Act precludes a party from raising any defence in Court against the enforcement of an adjudication certificate. It is necessary for a party to take immediate action to prevent the enforcement; however, it is not usual to adopt the course chosen by Romaldi.
Romaldi goes to the District Court
Before the five days expired, Romaldi issued proceedings in the District Court claiming that Adelaide Interior had abandoned the works and failed to complete the works in keeping with the subcontract (“the New Proceedings”). In the New Proceedings Romaldi claimed against Adelaide Interior an amount of $60,000, marginally more than the adjudicated award.
Romaldi then asked the Court for an injunction restraining Adelaide Interior from filing an adjudication certificate. This would effectively freeze the effect of the adjudication until the New Proceedings had been finalised. The District Court granted the injunction on the basis that the Court had power to do so under the New Proceedings. The Court found that there was a real risk that Adelaide Interior might not be able to pay the money back if Romaldi’s claim in the New Proceedings ultimately succeeded.
The District Court ordered that Romaldi pay the adjudicated amount into the District Court Suitor’s Fund while the parties fought out their dispute by traditional litigation.
The Court’s decision effectively locked Adelaide Interior into a potentially lengthy legal battle against Romaldi in order to recover its payment. Romaldi was also locked in to the dispute as to whether the work performed by Adelaide Interior was defective or whether it had abandoned its contract.
Adelaide Interior appeals to the Supreme Court
Adelaide Interior appealed to the Supreme Court. There were two main points considered by the Supreme Court.
- Was it permissible for Romaldi to issue the New Proceedings in order to delay paying Adelaide Interior?
- What level of evidence of potential future insolvency of the claimant does a Court require before it will stay an adjudicator’s award?
Justice Anderson, who heard the appeal, said:
The first main point is simply that the [District Court] judge has circumvented the operation of the Act by his order granting an injunction.
The objects of the Act make it clear that the legislation was intended to create a regime for the payments of amounts owing to subcontractors.
The Act sets out very precise steps as to the pathway by which an adjudication certificate can be obtained. In this matter [Adelaide Interior’s] attempts in following the natural progress contemplated by the Act have been thwarted by the order made by the judge.
At the point when [Adelaide Interior] was about to register the adjudication certificate, thus making it a judgment debt, [Romaldi] chose to issue proceedings in the District Court.
His Honour said that the District Court’s decision had allowed Romaldi the luxury of delaying payment by instituting an action in court under the guise of bringing all matters between the parties into Court and had permitted Romaldi to circumvent the Act.
Future Potential Insolvency
Justice Anderson then considered Romaldi’s contention that the possible future insolvency of a subcontractor entitled it to obtain a stay on enforcing a determination by an adjudicator to pay a progress payment.
His Honour discussed cases from NSW under similar legislation to the Act where parties have been granted a stay on the basis that the claiming party has a potential future insolvency issue.
His Honour said that those cases make it clear that there has to be a balancing act performed where the payment to be made to a subcontractor may become irrecoverable due to a later insolvency. His Honour preferred the test set out by Justice Einstein of the New South Wales Supreme Court that there has to be a ‘high level of likelihood of insolvency’ before any stay will be granted.
In any event, Justice Anderson found that many of the claims made by Romaldi about Adelaide Interior’s potential insolvency were hearsay. These claims came from Mr Romaldi and from his solicitor. This evidence was to be contrasted with the clear contrary statements made by the sole director of Adelaide Interior. The Court found that Romaldi’s information did ‘not approach a high level of likelihood of insolvency’ and overturned the decision of the District Court on this ground also.
Parties who wish to challenge the decision of an adjudicator are not able to raise defences or cross claims in the usual litigious manner. The only avenue open is to seek judicial review on the basis of an error of law or of jurisdiction. It is generally difficult to succeed on such a review.
The purpose of the Act is to keep cash flowing and the industry moving. To institute new proceedings and seek injunctive relief to delay or avoid payment of an adjudicator’s determination is an attempt to circumvent the Act.
If a head contractor or principal has concerns as to the solvency of a claimant, there must be clear evidence that the claimant will be unlikely to be able to repay money to which it is not entitled. Hearsay evidence is unlikely to be adequate. The SA Supreme Court has adopted a high bar for this test in the Romaldi decision, stating that there has to be a ‘high level of likelihood of insolvency’ of the claimant before any stay will be granted.