Unjust and Biased?

Background

In this article we summarise the first Supreme Court challenge to an adjudication determination under the Building and Construction Industry Security of Payment Act 2009 (SA) (“the Act”).

Built Environs Pty Ltd (“Builts”) was the head contractor on the Woolworths Walkerville Shopping Centre.  In June 2012, Tali Engineering Pty Ltd (“Tali”) tendered to Builts to supply and erect the structural steelwork.  On 12 June 2012 Builts issued a construction program to Tali providing for a start date of 5 June 2012 and a finish date of 21 March 2013.  On the same day, Tali said it could meet the program and Builts sent to Tali the proposed subcontract for the sum of $1.235 million.  The contract provided for a Subcontract Superintendent and for the completion of the works in stages (Separable Portions):

The contract provided for liquidated damages at $10,000 per day to apply to late substantial or practical completion of any Separable Portion and entitled Builts to deduct these amounts from any progress payments otherwise due to Tali.  The subcontract also allowed Builts to deduct from Tali’s progress payments any exposure Builts had to liquidated damages under its Head Contract if Tali caused that exposure.

The steelworks did not reach substantial completion by the dates specified in the subcontract.  Builts applied deductions to Tali’s progress claims due to the delays.  Ultimately, on 25 January 2013, Tali submitted Progress Claim 9, claiming it had completed ~$1.23m worth of the works inclusive of variations against previously certified paid amounts of ~$656k. The net amount claimed by Tali was $581,986.30.  The Superintendent responded on 15 February 2013 with a payment schedule setting off liquidated damages for late completion in amounts of $420,000 for Separable Portion 1, $500,000 for Separable Portion 2 and head contract liquidated damages of $90,000 for Separable Portion 1.  Builts said the net amount payable to Tali was therefore nil.

Tali applies for adjudication

On 22 February 2013 Tali sent an adjudication application to Nominator Pty Ltd (“Nominator”), an authorised nominating authority under the Act seeking the appointment of an adjudicator.  Nominator appointed Mr Allan as adjudicator.  Mr Allan informed Builts of his appointment.

On 1 March 2013 Builts provided a response to the adjudication application.  On 15 March 2013, Mr Allan determined as adjudicator that Builts was not entitled to deduct the liquidated damages from Tali’s claim and awarded Tali almost all its claim.

Builts applies to Court

Builts applied to the Supreme Court for judicial review of the adjudicator’s decision.  We have set out the four bases for challenge by Builts that were considered by the Court, followed by the Court’s findings as to each of these challenges.   Two other bases for challenge were not considered by the Court.

The Grounds of Challenge

1. Tali’s payment claim did not comply with section 13(2) of the Act and this deprived Mr Allan of jurisdiction to undertake an adjudication.
2. Mr Allan exceeded his jurisdiction by:
   1. entertaining a claim for unliquidated damages;
   2. assuming the jurisdiction of the Subcontract Superintendent to grant an extension of time to Tali to achieve substantial completion;
   3. entertaining claims not made in Tali’s payment claim.
3. There was a denial of natural justice because Mr Allan did not invite further submissions or evidence from the parties.
4. There was a denial of natural justice due to a reasonable apprehension of bias of Nominator and/or Mr Allan.

How to assess a Payment Claim’s validity

Builts said that the payment claim served by Tali on 25 January 2013 was invalid as it did not comply with section 13(2) of the Act.  Section 13(2) is in the following terms:

(2) A payment claim—

(a) must identify the construction work (or related goods and services) to which the progress payment relates; and

(b) must indicate the amount of the progress payment that the claimant claims to be due (the claimed amount); and

(c) must state that it is made under this Act.

If a payment claim is not valid, the adjudicator has no jurisdiction to consider the dispute and any subsequent determination is not binding and can be set aside by the Court.  ‘Jurisdiction’ in this context means the authority or power to make a binding decision.  Both parties agreed that an adjudicator only has jurisdiction if a valid payment claim has been served.  Tali said that the adjudicator must decide whether or not the payment claim is valid, and if he so decides, then subject to his decision not being manifestly unreasonable, then he has jurisdiction.  Builts said that whether or not a payment claim is valid has to be assessed objectively.  That is, the Court on an application for review must assess the payment claim and make a decision as to whether or not it is valid.  If on an application for review the Court says the payment claim was valid, then the adjudicator had jurisdiction.  Otherwise, he did not.   Justice Blue agreed with Builts and said that he could decide whether or not the claim was valid.  He then proceeded with the task of assessing the claim.

The bases for challenging the validity of this claim

Builts said that the payment claim was invalid for two reasons; firstly it contained errors and inconsistencies such that it did not enable Builts to understand the claim and secondly it did not identify the work that had been performed since the previous progress claim of 14 December 2012.

On the first point, it was difficult for Builts to succeed because notwithstanding the errors in the claim, Builts had correctly identified the errors in its payment schedule and had corrected the errors in its response.  Justice Blue rejected this ground of invalidity.  There is a clear dilemma here for a principal responding to a defective claim.  If the principal identifies and corrects the errors in a payment claim, the principal demonstrates that it understands the defective claim.  Alternatively, the principal can run the gauntlet of responding to the claim slavishly and potentially be locked into seeking a review of an unsatisfactory adjudication decision based on an erroneous claim.

The Protectavale point

As to the second challenge brought by Builts, more must be said.  Builts said that the Tali claim did not identify the work that had been performed since the last progress claim had been received because it was based on a cumulative assessment of the value of work performed.  Builts’ challenge was based on the so called “Protectavale point” following the decision of Justice Finkelstein in Protectavale Pty Ltd v K2K Pty Ltd.[1]

While it has been standard practice within the construction industry for many years for claims to be made on a cumulative basis, it has been widely stated that payment claims under the new Act must be differently framed to be valid.  In view of the widespread confusion on the point, we analyse the issue in some detail in what follows.

In Protectavale, an adjudicator’s decision was set aside by the Court on the basis that the payment claim that had been served did not allow the responding party to understand what work was included in the claim.

Justice Blue reviewed Protectavale and said:

In [Protectavale ], the payment claim simply showed the entire contract sum plus variation claims and a prolongation claim and then deducted retentions and payments received.  No payment schedule was served and hence there was no response by the principals to demonstrate their understanding of the claim.  It is not apparent from the reasons for judgment what were the contractual terms governing the calculation of progress payments.  The claim was lodged after practical completion.  On its face, it was ambiguous whether it was an interim claim or a final claim.

In passing, it is relevant that the claim in Protectavale was sent one month after practical completion and 11 months before the defects liability period expired.  If it was a final claim, it was served 11 months early.  It could be that the claimant in Protectavale saw an opportunity to use the security of payment legislation to attempt to recover the final payment before it was contractually entitled to do so.  The Protectavale case has been widely quoted and interpreted by some as precluding cumulative percentage-based payment claims.   Justice Blue did not agree with this interpretation of the case.

Sections 9(a) and 10(a) of the Act expressly provide that the amount of a progress payment to which a person is entitled under the Act is the amount calculated in accordance with the terms of the contract and the construction work is to be valued in accordance with the terms of the contract.  As is common practice in the industry, the contract between Builts and Tali required progress claims to include a table in the following format:

The claim sent to Builts by Tali included a completed form of the above table.

Justice Blue held that the claim by Tali was in accordance with the contract and accordingly was valid.  On that basis, he said the adjudicator had jurisdiction.

The Adjudicator exceeded his jurisdiction

Builts’ next ground of challenge was that the determination was invalid because the adjudicator had exceeded his jurisdiction.  Builts was saying that the adjudicator had gone beyond the limited powers granted to him under the Act and had acted outside of those powers.

Builts pointed to three actions of the adjudicator in support of this challenge:

1. He had considered a claim for unliquidated damages;
2. He had taken on the role of the Subcontract Superintendent in granting an extension of time to Tali;
3. Had had considered claims not included in Tali’s payment claim.

These three actions related to one issue:  Builts had deducted from the claim made by Tali an amount for liquidated damages.  In his determination, the adjudicator had disallowed this deduction on the basis that he had found that it was not Tali who had caused the project to be delayed and therefore he had disallowed the deduction of the liquidated damages.

On the first point, Justice Blue held that the adjudicator had not made a finding granting damages to Tali.

As to the second point, he found that while the determination was ambiguous, the adjudicator had not taken on the role of the Superintendent and granted Tali an extension of time.

The new defence point

In relation to the third point, it is necessary to set out the adjudication process.  In accordance with the Act, when Tali asked Nominator to appoint an adjudicator, it provided submissions in support of its claim for the adjudicator.  The adjudicator then asked Builts to provide an adjudication response, which it did.  The adjudicator did not ask the parties for any more material, although under the Act he is entitled to call for further submissions or ask for a meeting.

When Tali made its adjudication application, it raised for the first time its claim that the actions of Builts had prevented it from keeping pace with the contract program, something it had not mentioned in its payment claim.  Under the Act, a party is not entitled to make submissions to the adjudicator on any point that is not raised in its payment claim or payment schedule.  Builts said that the adjudicator should not have taken into consideration Tali’s claim that it had been prevented from complying with the contract by Builts’ actions.  However, Justice Blue did not agree.  He said that a party is entitled to raise a defence to something raised in a payment schedule when making its adjudication application.  He said that Tali’s explanation as to why it was delayed was in effect an answering defence.  Justice Blue said at paragraph 123 of his judgment that ‘[p]rovided that the answer is raised as a response to the respondent’s [payment schedule], as a shield and not a sword, there is nothing in the Act to preclude reliance by the claimant on such an answer.’

The denial of natural justice

As mentioned above, Tali raised in its adjudication application for the first time that Builts had prevented it from keeping pace with the contract program and set out a range of delaying events that it said were beyond its control.  In its adjudication response, Builts said that Tali was not entitled to make the new claims in its adjudication application and that the adjudicator had no jurisdiction to consider them.  We have noted above that Justice Blue did not agree with Builts’ first complaint.

However, in the alternative, Builts said that if the adjudicator was minded to consider the additional information, in the interests of providing natural justice he must call for further submissions in accordance with section 21 of the Act.   However, the adjudicator did not go back to Builts and ask for further submissions or for the parties to meet to discuss this point.  Builts said that this failure had denied it natural justice.

In this context, natural justice simply means the opportunity to be heard on a claim.  Builts said that it was denied the opportunity to explain why its actions had not delayed Tali.  A failure to afford natural justice to the parties renders an adjudication a nullity.

While this issue can be simply stated, it had wide implications in this contract and process.  In earlier progress claims, Builts had deducted liquidated damages from Tali’s payments.  Tali had not taken issue with the deductions nor asked for an extension of time prior to the adjudication.

In its adjudication response, Builts had said that none of the delay events raised by Tali related to critical path activities and that it had not deducted liquidated damages for the events mentioned.  Builts said that Tali was out of time to claim extensions of time by reason of the time bar provisions of the contract.  Builts said that if the adjudicator was to consider the information as to prevention and delays raised in the adjudication application, he must call for further submissions otherwise he would be denying Builts natural justice.

The contract contained clauses entitling the Superintendent to grant extensions of time to Tali even if it did not apply for one and requiring the Superintendent to act fairly and reasonably.  However, the contract also included a clause in the following terms:

If there is a delay to any [works] for which the Subcontractor is not entitled to an EOT, the Subcontract Superintendent may grant an EOT but has no obligation to grant, or to consider whether it should grant, an EOT

His Honour said that if the adjudicator was minded to consider the prevention argument raised by Tali, he needed to consider a number of issues. Some of these were:

1. Whether, given the clause quoted above, the Superintendent would be acting unreasonably if he did not grant the extension of time. His Honour noted the Hervey Bay case,[2] where the Court held that a similar clause did not mean the Superintendent was under an obligation to extend time even if it was fair to do so;
2. Whether Tali had taken all steps reasonable to avoid or minimise the effects of delays cause by Builts;
3. Whether the delays were on the critical path.

On the basis that the adjudicator had not sought Builts’ views on these and several other issues  His Honour found that Builts had been denied natural justice and the adjudication determination was void.

Apprehended Bias Point

The final ground raised by Builts was the apprehended bias of the adjudicator.  This ground was based on two separate factual issues.  First, that the adjudicator had been selected by Nominator and second, that the adjudicator selected had previously been employed by Builts.

Selection of the adjudicator

It is necessary to set out some detail about the personnel involved in Nominator to understand the basis of this challenge.  Nominator’s manager is Mr Sain.  Its registered office is the address of accountants Rugari & Associates.  Mr Sain is also the chief executive officer of ESA.  ESA is a construction contract consultant, project manager and engineer.  It offers services in connection with payment claims under the Act, including preparation of payment claims, payment schedules, applications and submissions for adjudication and provision of support and assistance throughout the adjudication process.  ESA’s website has a link to Nominator’s website.  ESA conducts adjudication training courses on behalf of Nominator.  ESA had trained Mr Allan as an adjudicator.

Tali had already consulted ESA and Mr Sain prior to sending the adjudication application to Nominator.  In anticipation of Tali’s adjudication application, Mr Sain had asked Mr Rugari to act as manager for the specific purpose of any application for adjudication that Tali might send to Nominator to ensure no real or perceived conflict of interest.   When the application for adjudication came to ESA from Tali, Mr Rugari as acting manager of Nominator caused Nominator to appoint Mr Allan as adjudicator.

Under the Act, the parties are not able to choose their adjudicator, even if it is by agreement between them.  Justice Blue commented at paragraph 190 of his judgment that it is a general principle of fairness that a disputing party cannot unilaterally select the decision maker and that it is evident under the Act that the nominating authority that chooses the adjudicator ‘must be independent of the parties to ensure both the reality and the appearance of fairness in selection of the adjudicator.’

Justice Blue noted Mr Sain’s roles as usual manager of Nominator and chief executive officer of ESA.   He noted that since early February 2013, Mr Sain had been advising Tali in its disputes with Builts.  Justice Blue said at paragraph 193 of his judgment that Mr Sain ‘had an interest, as advisor to Tali, in Nominator selecting from the available pool of adjudicators an adjudicator who might tend to be more favourable towards Tali than Built Environs.’  His Honour commented that these circumstances alone are sufficient to give rise to a reasonable apprehension of bias on the part of Nominator in selecting the adjudicator and render the adjudication determination void.

His Honour said that even though Mr Sain had stepped aside as manager for the express purpose of the selection of Mr Allan as adjudicator, this was insufficient to remove the reasonable apprehension of bias.

The adjudicator’s former employment by Builts

Mr Allan had been employed by Builts between 1991 and 2005.  However, Builts did not raise this objection to his selection nor did it bring any evidence suggesting a perception of animosity towards Builts from Mr Allan.  Justice Blue held that Builts had not established a reasonable apprehension of bias on the part of Mr Allan, other than that he was selected by Nominator as detailed above.

Conclusion

The following points summarise the decision:

1. Payment claims under the Act must conform with the requirements of the contract and do not require more specific information as to the work for which money is claimed.  The Protectavale point has been misunderstood by those who have contended otherwise.  With respect, this seems a sensible finding in the light of established practice in the industry.
2. A claimant party is entitled to raise for the first time in its adjudication application a defence to a set off claimed in the respondent’s payment schedule.
3. Where such a defence is raised for the first time in the adjudication application, an adjudicator must exercise caution and afford the parties an opportunity to make full submissions to the adjudicator on the new material.  A failure to do so will render the determination a nullity for breach of natural justice.
4. If a nominating authority has a direct link with a claims consultant who has acted or is acting for a party, the authority cannot select the adjudicator.  Otherwise, there will be a reasonable apprehension of bias rendering the subsequent determination void.