8 September, 2012

 

Legal News & Analysis – Asia Pacific – Australia – Construction & Real Estate

 

In brief 

 

Parties who seek judicial review of an adjudication determination under the Security of Payment Act 2002 (Vic) (the "Act") should be aware of the limitations on challenging such a determination.

 

In 470 St Kilda Road Pty Ltd v Reed Constructions Australia Pty Ltd & Anor [2012] VSC 235, the Supreme Court of Victoria held that:

 

  • the Act does not contain an implied obligation on claimants to make payment claims in good faith, and no enquiry into the bona fides of a claimant is necessary or desirable for the effective functioning of the Act;
  • where an adjudicator considers the Act and comes to a wrong conclusion, the determination will not be open to jurisdictional challenge unless the wrong conclusion concerns a basic and essential requirement of the Act; and
  • a court will only make an order setting aside an adjudicator's decision (by way of certiorari) in respect of an error in a finding of a fact by the adjudicator if there is no probative evidence to support the finding.

 

In 470 St Kilda Road Pty Ltd v Reed Constructions Australia Pty Ltd & Anor [2012] VSC 235, Justice Vickery of the Supreme Court of Victoria considered a number of challenges to the validity of an adjudication determination under the Victorian Security of Payment Act, including whether an adjudication determination could be challenged on the basis that the payment claim was not issued in good faith.

 

Facts

 

470 St Kilda Road Pty Ltd ("St Kilda Road") engaged Reed Constructions Australia Pty Ltd ("Reed") to design and construct residential apartments, office suites and associated works at 470 St Kilda Road, Melbourne, Victoria.

 

Reed sought payment from St Kilda Road of $760,698.84 for works undertaken in January 2012 in a payment claim issued under the Victorian Security of Payment Act. St Kilda Road responded with a payment schedule that indicated that it did not propose to pay any amount in respect of the payment claim. This was an unusual case in that both parties agreed the value of the works which were the subject of the payment claim, however, St Kilda Road withheld the whole of the amount on the basis that Reed was not entitled, at law, to receive it. The matter proceeded to adjudication under the Act. The adjudication determination was in favour of Reed and required St Kilda Road to pay the full amount of the payment claim.

 

Must a payment claim be made in good faith?

 

St Kilda Road challenged the adjudication determination on the basis that the adjudicator did not have jurisdiction to make the determination because the payment claim was void for want of good faith. Central to the case of St Kilda Road was an allegation that the payment claim included a statutory declaration (required under the construction contract to be provided with each payment claim) which St Kilda Road alleged to state falsely that all subcontractors had been paid all amounts due.

 

In support of this challenge, St Kilda Road relied on previous decisions of the New South Wales Court of Appeal in Nepean Engineering Pty Ltd v Total Process Services Pty Ltd (In Liquidation) (2005) 64 NSWLR 462, which held that in order for a payment claim to be valid it needed to be made in good faith and of the Victorian Supreme Court in Metacorp Australia Pty Ltd v Andeco Construction Group Pty Ltd [2010] VSC 199, which held that in order for a payment claim to be valid it needed to be made bona fide.

 

St Kilda Road submitted that there was substantial direct and probative evidence (including evidence from Reed’s subcontractors) before the Court that demonstrated the falsity of the statutory declaration. On this basis, St Kilda Road sought a declaration that the payment claim was invalid and the entire adjudication null and void as a consequence.

 

The Court undertook a careful analysis of the earlier authorities and found that the observations fell a long way short of authoritatively ruling that good faith and bona fides were essential requirements for a valid payment claim under the Act. A claimant who makes a patently unsustainable or untrue claim is likely to be met with a payment schedule. If pursued to adjudication, the adjudicator is likely to disallow so much of the claim as is patently false or unsupportable. Accordingly, the Court held that the bona fides of the claimant should not be treated as a separate criterion of a valid claim.

 

Further, the Court held that the importing into the Act of an implied obligation upon claimants to make payment claims in good faith would fly in the face of the simple robust mechanism provided by the Act to achieve a speedy interim resolution of payment claims to promote early recovery of progress claims.

 

The Court stated that the circumstances in which words can be implied into the text of legislation is strictly limited and held that there was no warrant for implying into the Act an obligation of good faith on the part of the claimant in preparing and submitting a payment claim. Following the service of a payment claim, the Act provides mechanisms for the claim to be reviewed by the respondent and an adjudicator. The Court held that it is at these review points that a spurious claim lacking any proper foundation can be addressed. Accordingly, the Court held that no enquiry into the bona fides of a claimant is necessary for the effective functioning of the Act. Nor is any enquiry desirable given the important objective of providing expedition in the determination of the interim rights of the parties in relation to the recovery of progress claims under a construction contract.

 

Must an adjudication application be submitted for adjudication within the required time?

 

In relation to the express requirements of the Act, the Victorian Supreme Court has observed that, with the exception of the case where the basic and essential requirements of the Act for a valid determination are not satisfied, a challenge to the jurisdiction of the adjudicator will not be available unless the Act makes the jurisdiction of an adjudicator contingent upon the actual existence of a state of facts, as distinguished from the adjudicator’s determination that the facts do exist to confer jurisdiction (Grocon Constructors Pty Ltd v Plannit Cocciardi (No 2) (2009) 26 VR 172).

 

In other words, where the adjudicator considers the Act and comes to a wrong conclusion, the determination will not be open to jurisdictional challenge unless the wrong conclusion concerns a basic and essential requirement of the Act.

 

It was common ground that the payment schedule was received by Reed on 13 February 2012 and that the adjudication application was commenced on 20 March 2012. One of the arguments before the adjudicator and before the Court was whether the adjudication application was submitted for adjudication within time and, if not, what consequences followed.

 

St Kilda Road contended that s18(1)(c) of the Act applied which required the adjudication application to be made within 10 business days after receiving the payment claim – in which case the adjudication application was out of time. St Kilda Road contended that, as a consequence, a basic and essential requirement for the adjudicator’s jurisdiction was absent.

 

Conversely, Reed contended that s18(1)(d) of the Act applied which required the adjudication application to be made within 10 business days after the due date for payment – in which case the adjudication application was in time. In the alternative, Reed contended that even if s18(3)(c) applied, the time regime was not a basic and essential requirement with the consequence that a failure to comply would not result in the adjudication application being invalid.

 

The adjudicator accepted Reed’s contention that s18(1)(d) applied and found that the adjudication application was made within time.

 

The Court expressed the view that the Act fell short of declaring that an adjudication application which fails to comply with the time limits provided for in s18(3) is void. All that is required is for the adjudicator to consider the Act. If this is done and the adjudicator arrives at a wrong conclusion, no invalidity arises. Accordingly, the Court held that the time regime set out in s18(3) is not a basic and essential requirement resulting in an invalid adjudication if not made in time. Further, the Court declined to embark on an analysis of whether the adjudicator’s view was correct. The Court held that the adjudicator fulfilled his statutory duty by considering and applying the provisions of the Act. Accordingly, the Court declined to disturb the adjudicator’s findings on the matter.

 

An error on the face of the award?

 

Certiorari is a process by which a superior court, in the exercise of its original jurisdiction, supervises the acts of an inferior court or tribunal. It is not an appellate procedure, but rather it enables quashing of the decision upon one or more of a number of grounds including jurisdictional error, failing to observe procedural fairness, fraud and error on the face of the record.

 

In Victoria, judicial review of an adjudication determination by certiorari is available for both jurisdictional error and error on the face of the record. St Kilda Road submitted that the adjudicator wrongly made a finding that the Act did not empower him to consider whether the statutory declaration was false. This was put as an error on the face of the record being amenable to the issue of certiorari.

 

The Court held that although the adjudicator stated that he did not have power to determine whether the statutory declaration was true or not, he did proceed to consider the issue in the determination by stating that Reed had complied with clause 38.1 even though St Kilda Road questioned the veracity of the claimant’s documents. Accordingly, the Court held that St Kilda Road's submission did not result in a reviewable error. The Court also stated that adjudicators are ill equipped to deal with controversial issues of fact, particularly within the tight timeframes and, in this case, without the advantage of having the deponent of the statutory declaration cross-examined. The adjudicator was faced with competing submissions in relation to the veracity of the statutory declaration and without the terms of the relevant subcontracts to test what work was done by the subcontractors, what payments were actually due and when those payments became due.

 

The Court confirmed the position that the circumstances in which an error in the finding of a fact may result in an error on the face of the record in respect of which certiorari will lie, will only be open if there is no probative evidence to support the finding. The Court stated that although the adjudicator may have made a wrong finding of fact and it was open for him to arrive at a different conclusion, equally there was some evidence upon which the adjudicator could have arrived at the finding which he did.

 

Comment

 

  • The case highlights the difficulties which may be encountered by adjudicators in having to decide disputed questions of fact under tight deadlines.
  • It also highlights the difficulties in setting aside adjudication determinations particularly by certiorari.
  • The outcome is, however, consistent with the robust mechanism provided by the Act to achieve a speedy interim resolution of payment claims and to maintain the cash flow of a builder notwithstanding the risk that the builder might ultimately be required to repay the amount in question.

 

 

For further information, please contact:

  

Jos Mulcahy, Partner, Ashurst

jos.mulcahy@ashurst.com

 

Ashurst Construction & Real Estate Profile – Australia

 

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