Adjudication Down Under: A Survey of the Adjudication Legislation in Australia

Construction Act Review

Published in Construction Law Journal 2007 Vol 23 No 5 page 364

Edited by Peter Sheridan and Dominic Helps

Editors’ introduction

When the editors decided, in view of the ongoing (and seemingly never-ending) consultation regarding possible amendment of the HGCR Act 1996 and the continuing speculation about whether the proposed changes would go nearly far enough to achieve a significant improvement in the operation of the legislation, that it would be interesting to explore the different features of adjudication as adopted in other parts of the world and to investigate how adjudication has fared in those jurisdictions, Robert Fenwick Elliott was the obvious choice for who to approach.

It is no exaggeration to say that Robert was one of the single most influential figures in shaping the way in which statutory adjudication was introduced into the UK. Indeed, as the chairman of the relevant sub-committee of the Technology and Construction Solicitors Association (“TeCSA”) it was Robert who was the prime mover in the preparation of the TeCSA Adjudication Rules the First Edition of which was published in advance of the first version of the Scheme for Construction Contracts and which remain in force largely unchanged. Robert moved to Australia in 2002 in order to retire. Since then he has continued to write and lecture on construction law topics, learned to play competitive croquet, designed and produced a high-tech croquet mallet (see www.insearchoftheperfectmallet.com), requalified as an Australian lawyer and mediator and set up a new construction law firm.

We are delighted that Robert agreed to prepare a paper examining the Australian experience of adjudication and, in doing so, explaining the difference characteristics of this form of dispute resolution both as between the UK and Australia but also as between different regions of Australia. Robert enlisted the assistance of Jeremy Coggins, a lecturer and Program Director at the University of South Australia, and the result is the fascinating paper below that we are delighted to include in this issue of CAR.

Adjudication Down Under: A Survey of the Adjudication Legislation in Australia

By Robert Fenwick Elliott and Jeremy Coggins

The purpose of this paper is to consider the impact of adjudication in Australia, and in particular to consider what light  the Australian experience might shed on the process, and how it should be encouraged to develop.

Australia is governed on a Federal system, such that each State and Territory falls to be considered separately.  Some years ago, Australia harmonised its arbitration law, such that the Commercial Arbitration Act 1986 applies in virtually the same form throughout Australia.  Anomalously, however, adjudication has not yet been harmonised, and the relevant legislation is contained in:

There is, as yet, no legislation in South Australia, Tasmania or the ACT.

The greatest number of adjudications by far has taken place in New South Wales (NSW) and Queensland, where the legislation follows the “East Coast model”.  In its original 1999 form, the legislation was almost entirely ineffective, because an adjudication loser could avoid the need to pay the winner by giving security and commencing litigation or arbitration.  NSW fixed this problem by requiring payment to be made to the claimant in the 2002 amendments, thereby breathing real life into the process.

By mid 2006 there had been over 2,500 adjudications in NSW.  Conversely, Victoria did not fix that problem until the recent amendments, effective only from the end of March 2007.  The effect of allowing losers to provide security instead of making payment appears clear.  Despite the fact that the State is of a comparable size with NSW (5 million people in Victoria as compared with 7 million people in New South Wales) there have been only about 100 adjudications in Victoria in total.  Practitioners are overwhelmingly agreed; allowing the option of giving security instead of making payment deprives the process of virtually all its teeth.

Queensland is slightly less populous with a population of 4 million people; there have been about 500 adjudications in Queensland so far.

Numbers in Western Australia and Northern Territory are, so far, fairly small.

The East Coast model is somewhat different from the UK model in a number of important respects:

1. The system is less to do with resolving disputes, and more to do with setting up default provisions.  A head contractor, or more often a sub contractor, can make his interim payment claims in the form of a payment claim.  If he wishes to challenge it, his employer has to promptly respond with a payment schedule.  If the paying party neither pays nor puts in a payment schedule, then the claimant can either enter judgement, or if he prefers, they commence an adjudication.  If the respondent has not put in a payment schedule, the adjudication is essentially a formality.
2. If the claimant chooses to take the adjudication route, he puts in an adjudication notice, and the respondent is entitled to put in an adjudication response. However, the respondent is not allowed in his adjudication response to raise matters that have not been identified in the payment schedule; all he can do is expand upon those matters.
3. The parties are not allowed to agree on the identity of the adjudicator.  Instead, the claimant must obtain a nomination from one of the adjudicator nominating authorities.  These ANAs are licensed by the State government authorities, and they include both professional bodies and “privateers”.  There is some evidence, perhaps unsurprising, that, forbidden from choosing an adjudicator by agreement with the respondent, claimants tend to choose the ANAs with the most pro claimant reputation.  The average amounts awarded by such adjudicators are in the order of 80% or 90% of the sums claimed.
4. The adjudicator is given just 10 days to make his decision.  The legislation discourages the adjudicator from having hearings, or allowing legal representation .  The adjudicator is required to limit his considerations to the content of the payment claim, payment schedule, adjudication notice and adjudication response . In practice, many adjudications require the adjudicator to consider just two matters:
   •  Has there been a payment claim in accordance with the Act?
   •  Was a payment schedule served within the strict time limits required?
5. The scope of the adjudications is rather more limited than in the UK.  Claims can only be made “up the line” and are restricted to the payment claims that are made under the contract.  In the early days, it was thought that claims for time related costs (delay and disruption) might be excluded, but it is now clear that such claims may be brought , and of course it is in theory possible for a respondent to raise any sort of cross claim that might be available to him in law, although in practice it is relatively rare for respondents to have the foresight (or indeed the administrative and legal resources) needed to plead his legal defences in his payment schedules.
6. In Queensland, every adjudicator’s decision is published on the internet.

Australia is, compared with the United Kingdom, a surprisingly regulated society; in construction, as in other areas, there is an expectation that things should be done according to regulated schemes. Indeed, in their 2006 review of the Act, the NSW Department of Commerce identified, inter alia, the need for more robust regulation of the adjudication system in order to further improve the operation of the scheme. The current regulation of ANAs and adjudicators, however, does not seem to have led to any benefit in terms of the quality of adjudicators; on the contrary, it is unusual to see, for example, senior construction lawyers getting appointed as adjudicators.

About half the number of adjudications that have taken place are for claims of less than $40,000, and about 10% are for less than $5,000.  No doubt because there is a relatively high number of small claims, the average adjudication fees are quite high, some 10% of the amounts claimed, of which about 1/6th goes to the ANAs.

The pattern that has emerged in the area of enforcement is not dissimilar from that which has emerged in the UK.  In the early days, there were many challenges made on jurisdictional and natural justice grounds, but a fairly robust approach has now been adopted following the decision of the NSW Court of Appeal in Brodyn v Davenport.  The Court found that the ingredients of a valid determination are:

1. compliance with the basic and essential requirements of the Act;
2. a bona fide attempt by the adjudicator to exercise the relevant power; and
3. no substantial denial of the measure of natural justice that the Act requires to be given.

Thus, post Brodyn, a mere error of law by an adjudicator in the consideration of the issues in dispute will not amount to a reviewable jurisdictional error of law, as had previously been the case, so long as the following five basic and essential requirements of the Act have been met:

• The existence of a construction contract between the claimant and the respondent, to which the Act applies (ss.7 and 8);
• The service by the claimant on the respondent of a payment claim (s.13);
• The making of an adjudication application by the claimant to an authorised nominating authority (s.17);
• The reference of the application to an eligible adjudicator, who accepts the application (ss.18 and 19); and
• The determination by the adjudicator of this application (ss.19(2) and 21(5), by determining the amount of the progress payment, the date on which it becomes or became due,the rate of interest payable (ss.22(1)) and the issue of a determination in writing (s.22(3)(a)).

However, despite its requirement for a substantial denial of natural justice, Brodyn has still not prevented some successful applications for review of adjudicators’ determinations based upon breach of natural justice; whilst most natural justice challenges have failed, the courts have by no means turned their backs on the doctrine as a means of controlling the process.

There has been some tension between the Courts on the fundamental nature of the adjudicator’s job; is the adjudicator supposed to be ascertaining what, if anything, is due to the claimant? Alternatively is he to be constrained by the question of whether the requisite pieces of paper as required by the legislation had been served?  This may seem a bizarre question to an English mind, but it has to be noted that there is nothing in the Australian legislation expressly requiring the adjudicator to take the initiative to ascertain the law or the facts, and there is not by any means the same expectation that an adjudicator should do any such thing.  Adjudicators see their role as much more an executive function than a quasi judicial function.

In Pacific v Solomon the adjudicator had disregarded the respondent’s submissions on the basis that these had not been raised in the payment schedule as required by the legislation, and, accordingly, he accepted the claimant’s claim at face value, without any enquiry at all into its validity.  The Court held that the determination was void, because there had been no determination that the work had been done, or of its value, as required by the Act.

Conversely, in GW Enterprises v Zentex it was held that there had been no breach of natural justice by the adjudicator.  Whilst there was evidence before the Court that the claim was in fact stale, since it had not been brought within 12 months of the time when the work was done, as required by the Act, this lack of jurisdiction was not apparent on the face of the payment claim, and the Court decided that it was too late for the respondent to raise the point in his adjudication response.

To some extent, the current shape of adjudication in Australia reflects the nature of its beginnings, and in particular the emphasis of adjudication being not so much a method by which the parties can quickly and effectively resolve their disputes, but rather as a weapon put into the hands of the “little guy” for political reasons. As the Hon Morris Iemma, MP , stated in the second reading of the Bill on 8 September 1999:

It is all too frequently the case that small subcontractors, such as bricklayers, carpenters, electricians and plumbers, do not get paid for their work. Many of them cannot survive financially when that occurs, with severe consequences to themselves and their families.

The default nature of the legislation is indeed remarkable. It means, in effect, that a paying party must, every time he receives an interim payment claim, plead every defence in fact or in law of which he might want to avail himself.  Many head contractors have found themselves unable to rise to the administrative challenge that this presents, and so the default provisions kick in and he finds himself obliged to pay, at any rate, on the same “pay now, argue later” basis that applies in the UK.

There are, however, a number of signs that the adjudication system in Australia is beginning to transmute itself into something a little closer to the UK model:-

1. There has been some increase in the size of claims.  The largest claim brought to date appears to be one for some $94 million.  In the first half of 2006, the average size of adjudication claim brought in NSW rose to some $1,168,000 (mean of $48,000), compared with an average before 2006 of some $679,000 (mean of $40,000).
2. When legislation was introduced in 2004 in Western Australia, it followed a more expansive path than the East Coast legislation.  The adjudicator has 28 days instead of the East Coast 10 business days; either party can apply for adjudication; there is no prohibition on the parties agreeing their adjudicator; and there is no prohibition on the parties having lawyers attend any conference called by the adjudicator.  When the Northern Territory introduced legislation, it followed the Western Australian model.
3. In Queensland, the Building & Construction Industry Payments Agency has already started work to expand the ambit of adjudication there, for example by allowing claims to be made either up or down the contractual chain. Such initiatives suggest a shift towards a more even handed approach.
4. In South Australia, where legislation is yet to be introduced, the authors have found some support for a contractual adjudication scheme which is, again, much more liberal than the East Coast model.

It appears that in the UK some initial scepticism and resistance to the concept of adjudication on the part of main contractors has, to a significant degree, melted away.  It is difficult to observe quite the same thing in Australia.  Many head contractors, perhaps understandably, appear to regard the legislation as one sided and pro sub contractor.

Despite the shortcomings in the East Coast model, it has nevertheless proved to have a significant impact in the NSW construction industry, particularly since the catalytic effect of the 2002 amendments to the Act which triggered a sharp increase in applications for statutory adjudication.  After the amendments came into force on 3 March 2003, there were, according to the NSW Department of Commerce, five times more adjudication applications during the following 12 months than there were during the previous three years of operation of the Act.

Table 1: Volume of Statutory Adjudication activity in NSW under the Building & Construction Industry Security of Payments Act 1999

Note: This data has been calculated using statistics published from the NSW Department of Commerce

Table 1 above and Figure 1 below show that the number of adjudication applications has continued to gather momentum at a steady, but significant, pace such that there was an average of 85 adjudication applications per month (representing approximately $77 million per month in payment claims) for the period  January 2006 to June 2006 as compared with 46 adjudication applications per month (representing approximately $15 million per month in payment claims) for the period March 2003 to September 2003.  Of the $1.786 billion total value of payment claims brought to adjudication between March 2003 and June 2006, approximately 86% has been determined.

Conclusion

Adjudication in Australia has followed a slightly different path  from that followed in the UK, and it is difficult to see that many of the variations have been beneficial. Nevertheless, the system has taken root, and has steadily spread throughout most states (only South Australia and Tasmania have yet to enact legislation), and has also been having a regional influence (Singapore has recently introduced legislation based on the NSW model). The different flavours operating side by side in the very similar conditions of each state suggest that the process is remarkably robust – the only variant that appears to kill its effectiveness has been the one that allows losers to provide security instead of making payment.

Bibliography

Iemma. M., Second Reading Speech, Building and Construction Industry Security of Payment Bill, NSW Legislative Assembly, Hansard, 8 Sept 1999.

¹ Barrister and Solicitor of the Supreme Court of South Australia, Lawyer of the Supreme Court of New South Wales and Solicitor of the Supreme Court of Judicature of England and Wales, Partner of Fenwick Elliott Grace, Adelaide, and Consultant to Fenwick Elliott LLP, London.

² Lecturer and Program Director at the University of South Australia, Adelaide.

³ This table includes the New Zealand and Singapore legislation, which follows a similar model.

⁴ See for example section 21(4A) of the Building And Construction Industry Security Of Payment Act 1999 as amended (NSW) www.austlii.edu.au/au/legis/nsw/consol_act/bacisopa1999606.

⁵ Thus, section 26(2) of the Building And Construction Industry Payments Act 2004 (Queensland) www.austlii.edu.au/au/legis/qld/consol_act/bacipa2004493 provides that:

In deciding an adjudication application, the adjudicator is to consider the following matters only-

(a) the provisions of this Act and, to the extent they are relevant, the provisions of the Queensland Building Services Authority Act 1991, part 4A;16

(b) the provisions of the construction contract from which the application arose;

(c) the payment claim to which the application relates, together with all submissions, including relevant documentation, that have been properly made by the claimant in support of the claim;

(d) the payment schedule, if any, to which the application relates, together with all submissions, including relevant documentation, that have been properly made by the respondent in support of the schedule;

(e) the results of any inspection carried out by the adjudicator of any matter to which the claim relates.

This is a far cry, of course, from the UK requirement that the adjudicator use his initiative to ascertain the facts and the law. Its practical effect has clearly been, on occasion, to lead to injustice, and the UK system appears to be preferable.

⁶ See, for example, Coordinated Construction Co Pty Ltd v JM Hargreaves Pty Ltd [2005] NSWCA 228.

⁷ See www.bcipa.qld.gov.au/BCIPA/DecisionSearch

⁸ Thus, for example, State legislation requires contractors to be licensed. Contracts, at least in the domestic sector, have to be in writing and follow certain form’s. In default,  Contractors are not entitled to enforce their contracts.  Much of this regulation is ineffective, in that the Courts allow contractors to recover on a quantum meruit basis (except in Queensland, it seems, see Gino D’Alessandro Constructions Pty.Ltd. v. Powis and Anor (unreported, 26 September 1986)).

⁹ [2004] NSWCA394.  Full transcripts of most of the cases are available on Baillie on www.bailii.org.

¹⁰ See Musico v Davenport [2003] NSWSC 977.

¹¹ Brodyn [2004] NSWCA 394 at [53].

¹² See, for example, Fifty Property Investments Pty Limited v Barry J O’Mara & Anor [2006] NSWSC 428; Reiby Street Apartments v Winterton Constructions [2006] NSWSC 375; and, Pacific General v Soliman & Sons [2005] NSWSC 1129.

¹³ [2006] NSWSC13.

¹⁴ [2006] QSC399.

¹⁵ Then Minister for Public Works and Services of New South Wales, now Premier.

¹⁶ See  www.bigbutton.com.au/~afa/CAG/index.html