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Australia – Security Of Payment: When Is A Denial Of Natural Justice Material?

16 May, 2014

 

Legal News & Analysis – Asia Pacific – Australia – Dispute Resolution

 

What You Need To Know

 

  • Where a party challenges an adjudication determination on the ground that there has been a denial of natural justice, the failure must be “material” in order for the court to grant relief. 
  • In Anderson Street Banksmeadow Pty Ltd v JCM Contracting Pty Ltd, the NSW Supreme Court provides a useful practical example of the application of the materiality test and the obligations of the adjudicator where he or she makes findings on grounds not contended for by the parties. 

 

Adjudicators And Natural Justice 


There is no doubt that adjudicators are bound by the rules of natural justice. A failure to afford a party natural justice (as that term is understood in the context of an adjudication application) may result in the adjudication determination being held to be void and of no effect. 


An adjudicator’s obligation to comply with the rules of natural justice is affected by the nature of the process to which the rules apply. While the legislation is not uniform across the states and territories, adjudicators are required to determine adjudication applications as expeditiously as possible and, in the ordinary course, within a timeframe of no longer than 10 business days.1 As McDougall J explained in Watpac Construction (NSW) Pty Ltd v Austin Corp Pty Ltd:

 

Any entitlement to natural justice must accommodate the scheme of the Act, including the extremely compressed timetable provided for the submission of payment schedules, adjudication applications, and adjudication responses; and the limited time (subject to the consent of the parties, which they may give or withhold at their will) for an adjudicator to determine an application. It must also accommodate the fact that, in many cases, claimants and respondents will prepare theirdocuments themselves, and will not avail themselves of legal advice in doing so.2

 

The Concept Of Materiality 


Where a party challenges an adjudication determination on the ground that there has been a denial of natural justice, that party usually alleges that it was deprived of an opportunity to address the adjudicator on matters which were germane to the outcome of the adjudication determination. 


Where such an allegation is made, for the court to grant relief in respect of a failure to follow the requirements of natural justice, the failure must be “material”. The concept of materiality was explained in the following terms by McDougall J in Trysams Pty Ltd v Club Constructions (NSW) Pty Ltd:

 

… the concept of materiality is inextricably interlinked with the concept of natural justice, insofar as the latter concept is relevant to the determinations of adjudicators under the Act. On my view, that flows not only from Hodgson JA’s use of the adjective “substantial” in Brodyn, but also from the point made by Gleeson CJ in Lam: that the law is concerned with the practical effect of the denial of an opportunity to be heard. Thus the concept of materiality requires some analysis of at least:

 

(1) the importance or otherwise of the relevant subject matter (as to which, it is said, there was a denial of an opportunity to put submissions): in particular, its significance to the actual determination; and

 

(2) whether or not there were submissions that could properly have been put that, as a matter of reality and not mere speculation, might have affected the determination.3

 

Similarly, in the context of the Queensland legislation, Applegarth J in John Holland Pty Ltd v TAC Pacific Pty Ltd summarised the position as follows:

 

The adjective “substantial” has been used in the relevant authorities to capture the principle that the opportunity denied was material, namely that the matter about which the adjudicator did not provide an opportunity to be heard was a point upon which the adjudicator based his or her decision and was significant to the actual determination. In addition, the Court’s concern is with the practical effect of the denial of natural justice. Reference to the High Court’s decisions in Stead v State Government Insurance Commission and Ex parte Aala support the proposition that even if the Court is satisfied that there has been a denial of natural justice, relief may be denied if it can be shown that compliance with the requirements of natural justice could have made no difference to the outcome. It is probably sufficient in this regard for the applicant for relief to show that there were substantial submissions that, as a matter of reality and not mere speculation, might have persuaded the adjudicator to change his or her mind.4


Submissions By The Parties 


In determining an adjudication application, an adjudicator is constrained by what he or she can take into account. Generally speaking, the adjudicator must only consider the provisions of the legislation; the provisions of the construction contract from which the application arose; the payment claim, together with submissions duly made in support of the application(including relevant documentation); the payment schedule, together with submissions duly made in support of the schedule (including relevant documentation); and the results of any inspection carried out by the adjudicator.5


Insofar as submissions are concerned, the legislation in the different jurisdictions diverges in what matters can be addressed. For example, in Victoria, if the submissions in the adjudication response include any reasons for withholding payment that were not included in the payment schedule, the adjudicator must serve a notice on the claimant setting out those reasons and affording the claimant an opportunity to lodge a response to those reasons.6 In other words, a respondent in Victoria is not constrained by what was said in the payment schedule but, if the respondent does stray into other areas, the adjudicator is bound to draw those matters to the claimant’s attention and allow for a response. In contrast, the legislation in New South Wales and Queensland prohibits a respondent from including any reasons for withholding payment in the adjudication response unless those reasons were included in the payment schedule.7


Given the short timeframes for the submissions and the constraints imposed on respondents in jurisdictions such as New South Wales and Queensland, adjudications may proceed in circumstances where parties have overlooked contractual or other legal issues which might otherwise have affected the outcome of the determination. What then is an adjudicator to do if he or she becomes aware of a potentially determinative point which has been overlooked or misconstrued by the parties? 


The legislation permits the adjudicator to request either party to provide further submissions and to give the other party the opportunity to comment.8 This right to request further submissions appears to be unfettered and is in the discretion of the adjudicator. The right does, however, beg the question as to the circumstances in which an adjudicator should exercisethat right, having regard to the fact that he or she is bound by the rules of natural justice.


Anderson Street Banksmeadow Pty Ltd v JCM Contracting Pty Ltd 


The recent decision of the Supreme Court of New South Wales in Anderson Street Banksmeadow Pty Ltd v JCM Contracting Pty Ltd9 provides a useful practical example of the application of the materiality test and the obligations of the adjudicator where he or she makes findings on grounds not contended for by the parties. In that case, the plaintiff owner (Anderson) sought a declaration that an adjudication determination was void and of no effect on the ground that it had been denied natural justice.


Background 


On 15 November 2012, the defendant contractor (JCM) sent two payment claims endorsed under the Building and Construction Industry Security of Payment Act 1999 (NSW) (the Act) to Anderson. The first was dated 5 November 2012 and the other was dated 15 November 2012. Anderson did not pay the second payment claim and failed to respond with a payment schedule within the required time. Consequently, JCM served a notice of intention to suspend work under the Act. 


Anderson asserted that the two invoices concerned the same reference date (being the end of the previous month – 31 October 2012). This was contrary to s 13(5) of the Act, which precludes a claimant from serving more than one payment claim in respect of the same reference date. Anderson asserted that the second invoice was invalid under the Act and could not form the basis of a suspension by JCM. Notwithstanding that assertion, JCM suspended the construction works under the Act. In response, Anderson asserted that the suspension amounted to a repudiation which it accepted to terminate the construction contract. 


After the purported termination, JCM served a further payment claim, which was referred to adjudication. Anderson submitted that the question of whether it was entitled to terminate the construction contract was relevant to a number of items claimed in the payment claim.
During the adjudication process, it became apparent that the reference date under the construction contract was not the end of the month, but rather the 15th day of the month. This put into question Anderson’s argument that the two invoices issued on 15 November 2012 concerned the same reference date. If the two invoices concerned different reference dates, then Anderson’s termination of the contract would also be put into question. Anderson maintained that the 5 November date on the first invoice was a typographical error and should, in fact, have been a reference to 15 November.


The adjudicator was not satisfied that the 5 November date was a typographical error. He found that the submission of that payment claim on 15 November could have been a resubmission of the 5 November invoice — there was evidence of Anderson having requested that JCM resubmit previous claims and there was a reference in correspondence from Anderson of the 5 November invoice having been issued on that date. These findings were not the subject of submissions by either of the parties. 


On the basis of these findings, the adjudicator determined that the payment claim dated 5 November 2012 concerned the 15 October reference date and the second payment claim concerned the reference date it bore – namely, 15 November. Consequently, the adjudicator found that the payment claims were valid and JCM had validly suspended the work in accordance with the Act. Having reached these conclusions, the adjudicator allowed the amount claimed by JCM. 


Anderson challenged the adjudicator’s determination on the basis that the adjudicator had determined the repudiation issue (ie, its submission that the two payment claims concerned the same reference date, contrary to s 13(5)) on a basis not contended for by JCM and in respect of which Anderson was not afforded the opportunity to make submissions. 


Decision 


Justice Ball held that the fact that Anderson was not given an opportunity to make submissions in relation to the correct reference date or dates for the two payment claims did not, in the circumstances, amount to a denial of natural justice. In reaching that conclusion, his Honour was of the view that the adjudicator was not required to invite JCM to make submissions on the issue. This was because there was adequate information before him to come to the view that was formed by the adjudicator. His Honour also held that the adjudicator was not required to give Anderson an opportunity to comment on his reasoning process when that reasoning process depended on the material that was already before him. 


Further, and in any event, his Honour was also of the view that even if Anderson was denied natural justice,any denial was not material. In reaching this conclusion, his Honour was not satisfied that there were any further submissions or evidence Anderson could have made that would have made a difference to the determination. The only submission that could have been made by Anderson was that there was no evidence that the first invoice had been sent to it prior to 15 November. In his Honour’s view, the absence of evidence did not establish anything. On the evidence before the adjudicator, the judge found that it was open to the adjudicator to conclude that the first invoice had been first sent to Anderson on 5 November and was resent to Anderson on 15 November because the original had been misplaced. Finally, his Honour was also not satisfied that the conclusions reached by the adjudicator in relation to the items claimed were dependent on whether or not Anderson’s termination was lawful.


Comment 


The above decision stands in stark contrast to the decision of the Supreme Court of Queensland in John Holland Pty Ltd v TAC Pacific Pty Ltd.10 In John Holland, the adjudicator decided the application on a point of law not contended for by either of the parties and which the parties were not given an opportunity to address. 


In setting aside the adjudication determination, the court held that the requirements of natural justice will not be observed where the adjudicator proposes to determine the issue in dispute on a basis other than that contended for by the parties and on a basis of a view that a crucial authority upon which a party relies has been effectively overruled by an appellate court to which no reference was made in the parties’ submissions. The plaintiff in that case maintained that the adjudicator’s analysis of the relevant case law was incorrect. In those circumstances, where an adjudicator intends to determine the issue in dispute on the basis that a crucial authority is incorrect, being a ground for which neither party has contended, then natural justice requires that the parties be given notice of that intention so that they may put submissions on the point. 


Clearly, an adjudicator is not required to expose his or her provisional views about the legal issues contended for by the parties, or to seek submissions on all authorities on which he or she intends to rely. The difficulty that an adjudicator will encounter where he or she intends to decide an adjudication application on a basis not contended for by the parties is that the adjudicator will not know, at the time, what the parties might say if they knew how the adjudicator was intending to approach the matter. It is here that the adjudicator must consider whether to use the right conferred under the Act to request either or both parties to make submissions in relation to the issue.

 

End Notes:

 

See, for example, s 22(4) of the Building and Construction Industry Security of Payment Act 2002 (Vic); s 21(3) of the Building and Construction Industry Security of Payment Act 1999 (NSW); and s 25 of the Building and Construction Industry Payments Act 2004 (Qld).

 

Watpac Construction (NSW) Pty Ltd v Austin Corp Pty Ltd [2010] NSWSC 168; BC201001439 at [142].

 

Trysams Pty Ltd v Club Constructions (NSW) Pty Ltd [2008] NSWSC 399; BC200803099 at [52], referring to Brodyn Pty Ltd t/as Time Cost and Quality v Davenport (2004) 61 NSWLR 421; [2004] NSWCA 394; BC200407256 and Re Minister for Immigration and Multicultural Affairs; Ex parte Lam (2003) 214 CLR 1; 72 ALD 613; [2003] HCA 6; BC200300198. 


John Holland Pty Ltd v TAC Pacific Pty Ltd [2010] 1 Qd R 302 at 40; [2009] QSC 205; BC200906868, referring to Stead v State Government Insurance Commission (1986) 161 CLR 141; 11 ALN N80; 67 ALR 21; BC8601459 and Re Refugee Review Tribunal; Ex parte Aala (2000) 204 CLR 82; 62 ALD 285; [2000] HCA 57; BC200006927.

 

See, for example, s 23(2) of the Building and Construction Industry Security of Payment Act 2002 (Vic); s 22(2) of the Building and Construction Industry Security of Payment Act 1999 (NSW); and s 26(2) of the Building and Construction Industry Payments Act 2004 (Qld)


Section 21(2B) of the Building and Construction Industry Security of Payment Act 2002 (Vic). 


Section 20(2B) of the Building and Construction Industry Security of Payment Act 1999 (NSW) and s 24(4) of the Building and Construction Industry Payments Act 2004 (Qld). 


Section 22(5) of the Building and Construction Industry Security of Payment Act 2002 (Vic); s 21(4) of the Building and Construction Industry Security of Payment Act 1999 (NSW); and s 25(4) of the Building and Construction Industry Payments Act 2004 (Qld).

 

Anderson Street Banksmeadow Pty Ltd v JCM Contracting Pty Ltd [2014] NSWSC 102; BC201400997.

 

10 Above, n 4.

 

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For further information, please contact:

 

Joseph Mulcahy, Partner, Ashurst

jos.mulcahy@ashurst.com

 

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