Introduction

This is the second 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.

This Update discusses the necessary content of a Payment Schedule, the document that must be sent within 15 days in response to a Payment Claim, unless intending to pay in full.

Fenwick Elliott Grace has produced a series of short videos using actors to illustrate the practical effects of the legislation. Part 2, “The Payment Schedule”, can be found in our Videos section.
This update discusses a recent NSW Supreme Court case, Owners Strata Plan 61172 v Stratabuild Ltd1 dealing with similar legislation enacted there in 1999.

The Facts

Owners Strata Plan 61172 (“Owners”) entered into a contract with Stratabuild Ltd (“Stratabuild”) to have building repairs and external painting work performed on a development in NSW called Balmain Cove.

On 22 February 2011, Stratabuild requested a progress payment of $96,802 from Owners by serving a Payment Claim under the Building and Construction Industry Security of Payment
Act 1999 (NSW) (“the Act”). There are minor differences between the NSW Act and the pending South Australian equivalent that are not relevant to this update unless mentioned.

On 8 March 2011, Owners served a Payment Schedule in response on Stratabuild.

The Payment Schedule

In the Payment Schedule, Owners indicated several reasons for withholding payment but did not attach any supporting expert evidence.

In summary, Owners said:

  • the works had not reached practical completion;
  • testing had shown:
    • the painting was ‘substantially defective”; and
    • the paint thickness specified in the contract was approximately 2.5 times the thickness of the applied paint;
  • it had obtained a quotation for remedying the painting works in the amount of $405,000 including scaffolding; and
  • the result was that no money was payable to Stratabuild as claimed in the Payment Claim.

The Payment Schedule annexed quotations for the remedial works but did not attach any expert report describing the tests.

Adjudication commences

On receipt of the Payment Schedule, refusing to pay anything at all, Stratabuild served its Adjudication Application on 22 March 2011. Owners served its Adjudication Response on 30 March 2011.

The Adjudication Response included the expert report of Dr Bayliss dated 25 March 2011 regarding defects in the painting work together with a quote from another contractor for repairing the works in the amount of $765,600. Significantly, the Bayliss report stated that the applied paint thickness was less than specified by a factor of 2.5.

The adjudicator determined that Owners should pay to Stratabuild the full quantum of its payment claim. He reached this conclusion as a result of excluding from consideration the Bayliss report and the accompanying quote.

The adjudicator based his decision to exclude this material on the section of the Act which states that an Adjudication Response cannot include reasons for withholding payment unless those reasons have already been included in the Payment Schedule.

The adjudicator said that the reference in the Payment Schedule, to tests showing that the paint was of insufficient thickness, was not enough to allow him to subsequently consider the contents of the expert report attached to the adjudication response. He said Owners must have had the report before they supplied the Payment Schedule because of their assertion about the paint thickness, as verified by the Bayliss Report. As a result of his decision to exclude the Bayliss report from consideration, the adjudicator was left with no evidence to support Owners’ claim as to inadequate thickness of the applied paint.

Owners goes to Court

Owners filed a summons in the Supreme Court of NSW. The issue that confronted the Court, was whether the Act permits the reasons included in a Payment Schedule to be supplemented by further supporting reasons or submissions. The Court distinguished between “submissions” and “reasons”. It said that the Act expressly provides for submissions to be included in an adjudication response. On the other hand, a Payment Schedule has only to “indicate” all of the reasons for withholding any part of the payment requested.

The Court said that the Payment Schedule provided by Owners had adequately identified the reasons expanded on in the Bayliss report and that the report did not contain additional “reasons”. In other words, the Court did not agree with the adjudicator’s decision to exclude the Bayliss report.

When the adjudicator gets it wrong 

However, even if an adjudicator makes a flawed decision that is not sufficient for a court to overturn the decision. The flawed decision will almost certainly stand if the adjudicator gave proper consideration to the law and the facts before making the decision.

On the other hand, if the adjudicator commits an error of jurisdiction while making the flawed decision, the Court will quash the determination. An adjudicator makes an error of jurisdiction when a decision is made without the legal authority.

The Court examines whether an adjudicator lacked legal authority by considering a range of factors that have been established over the years in administrative law cases. The essential inquiry is whether the adjudicator made an error in law. However this is a generalisation, partly because the lines between law and fact interact. Misconstruing the law and ignoring relevant material are both errors of jurisdiction.

In this case, the Court examined whether the adjudicator had committed an error of jurisdiction and said that the adjudicator had failed to consider the Act’s distinction between “reasons” required in a Payment Schedule and “submissions” allowed in an Adjudication Response. Additionally, the adjudicator had not considered whether the requirement to “indicate” reasons on the Payment Schedule inferred a lesser requirement than the subsequent requirement to “include” reasons in the Adjudication Response.

The adjudicator had therefore confused the issues and misconstrued the Act. This had resulted in an error of jurisdiction. The adjudicator’s determination was quashed by the Court.

Conclusion 

A Payment Schedule must indicate all of the reasons for withholding any of the amount claimed in the Payment Claim.

In South Australia, a party not wanting to pay a Payment Claim in full must serve its responding Payment Schedule within 15 business days of receiving the Payment Claim.

An Adjudication Response cannot include any reasons that were not indicated on the Payment Schedule but can include submissions elaborating on the indicated reasons.

An application to quash an adjudicator’s decision will succeed where there has been a jurisdictional error.

The essential requirements for a Payment Schedule are set out in the Act and are summarised in the video entitled “The Payment Schedule”.

Contributor: Tom Grace

1 [2011] NSWSC 1000