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

Principals in Western Australia have breathed a collective sigh of relief as a result of two recent decisions of that State’s Supreme Court quashing adjudication determinations on administrative law principles. In so doing, the Supreme Court has broadened the scope to challenge such determinations.

 
Both matters related to adjudications under the Construction Contracts Act 2004 (WA) (CCA) where the adjudicator made determinations in favour of the contractor. The principals in each matter sought judicial review of the determinations and were successful in having the determinations quashed on the basis of:

• a breach of procedural fairness in circumstances where the contractor was unable to show that the breach of procedural fairness could not have affected the adjudicator’s decision: Zurich Bay Holdings Pty Ltd v Brookfield Multiplex Engineering and Infrastructure Pty Ltd [2014] WASC 40; and
• jurisdictional errors on the part of the adjudicator arising from misconceptions by the adjudicator as to his functions and powers: Red Ink Homes Pty Ltd v Court [2014]  WASC 52.

 
Zurich Bay Holdings Decision: A Breach Of Procedural Fairness

Background

 
Zurich Bay Holdings Pty Ltd (Zurich) applied for adjudication under the CCA in relation to a payment dispute under a subcontract with Brookfield Multiplex Engineering and
Infrastructure Pty Ltd (Brookfield). The subcontract was for earthworks, drainage and road work requirements for the Roy Hill Iron Ore accommodation village. The adjudicator determined that Brookfield should pay Zurich AUD 1,191,402.84 plus interest.

 
The adjudicator found that:

• the subcontract made no provision for when Brookfield should respond to a payment claim;
• accordingly, pursuant to section 17 of the CCA, the provisions of schedule 1 division 5 of the CCA, concerning when and how a party is to respond to a claim for payment, were to be implied in the subcontract; and
• Brookfield did not comply with these provisions and was therefore required to pay Zurich the amount claimed.

 
The adjudicator also found that clause 42.1 of the subcontract, which purported to exclude, modify, or restrict the operation of the CCA, had the effect of contracting out of the CCA and, by reason of section 53 of the CCA, was void. This issue had not been raised in the parties’ application and response.

 
Brookfield applied to the Supreme Court of Western Australia for a writ of certiorari to quash the determination on two grounds:

 
1. the adjudicator denied Brookfield natural justice by failing to give notice of his intention to determine the dispute on a basis not contended for by either of the parties, denying Brookfield an opportunity to make submissions on the point; and

 
2. the adjudicator acted beyond his jurisdiction because he dealt with issues not raised in the application and its attachments or the response and its attachments.

 
Was Brookfield Denied Procedural Fairness?

 
Le Miere J dealt with both grounds together, given that each ground essentially raised the same questions.

 
His Honour considered that while procedural fairness does not normally require a decision maker to disclose his proposed conclusions, a decision maker should notify the parties of proposed conclusions that were not put forward by the parties and could not reasonably be anticipated. Le Miere J held that:

• it could not reasonably be anticipated by Brookfield that the adjudicator would conclude that clause 42.1 of the subcontract was void because it had the effect of contracting out of the CCA and the adjudicator should have heard the parties further on this point; and
• the adjudicator failed to afford procedural fairness to Brookfield by failing to draw the issue to its attention and give it an opportunity to make submissions on the issue.

 
Was There A Possibility Of A Successful Outcome?

 
Le Miere J noted that a party denied procedural fairness need only show that the denial of procedural fairness deprived it of the possibility of a successful outcome: Stead v SGIO (1986) 161 CLR 141. Accordingly, the question for his Honour was whether it could make any difference to the adjudicator’s decision if Brookfield was given an opportunity to make submissions on the contracting out issue.

 
Zurich submitted that the adjudicator’s conclusion that clause 42.1 of the subcontract was void was additional and independent to the conclusion that the terms of the CCA should be implied into the subcontract and, therefore, had no effect on the outcome of the determination. However, Le Miere J found that the adjudicator
treated the issue of whether clause 42.1 of the subcontract purported to exclude, modify or restrict the operation of the CCA as being relevant to what terms of the subcontract, concerning responding to a claim for payment, were enforceable terms of the contract.

 
His Honour was not satisfied that the adjudicator’s conclusion on the contracting out issue did not affect the adjudicator’s finding that the relevant terms in the CCA, concerning how and when to respond to a payment claim, must be implied into the subcontract because the subcontract made no express provision for these matters. On this basis, his Honour considered that there was a possibility of a successful outcome by Brookfield.

 
Threshold Considerations And Discretion Of The Court

 
Counsel for Brookfield submitted to the Court that there may be a threshold question of whether an adjudicator is analogous to a courtor a tribunal for the purposes of determining whether there has been a jurisdictional error of law.

 
Le Miere J acknowledged the authorities on this point, but it was unnecessary for his Honour to consider whether an adjudicator is more akin to an inferior court or tribunal because breach of procedural fairness is a ground for granting a writ of certiorari regardless of whether an adjudicator is considered to be analogous to a tribunal or to a court. His Honour concluded that it was open to the Court to grant relief by way of a writ of certiorari in circumstances where he had found that there had been a breach of procedural fairness and it had not been shown that the breach could not have affected the adjudicator’s decision.

 
Zurich submitted that the court should refuse the writ of certiorari on discretionary grounds, having regard to the objectives of the CCA, the interim character of the determination, Brookfield’s future opportunities to dispute Zurich’s entitlement to payment and to have that dispute finally determined. However, his Honour held that there was no reason to deny the application on discretionary grounds because:

• quashing such a decision, due to the manner in which it was made, enforces the requirement of legality; and 
• the requirement to afford procedural fairness is a restriction on the exercise of the power conferred on the adjudicator.

 
Red Ink Homes Decision: Jurisdictional Errors By The Adjudicator

 
In this matter, three related applicants sought judicial review on behalf of related residential home building corporations of three adverse determinations under the CCA. The adjudicator determined that agreed percentage remunerations from Red Ink Homes Group corporations were payable to persons who had performed drafting, design, quotation or costing work as follows:

• AUD 65,472 plus interest was payable by Red Ink Homes Pty Ltd to Goldvance Holdings Pty Ltd; 
• AUD 254,871.77 plus interest was payable by Red Ink Homes Pty Ltd to Escape Design Corporation Pty Ltd (Escape Design); and 
• AUD 246,644.67 was payable by 101 Residential Pty Ltd, and $11,120.90 plus interest was payable by Red Ink Homes Pty Ltd, to JBBJ Plans Pty Ltd (JBBJ).

 
Five grounds common to each adjudication and a separate ground for each of the adjudications involving Escape Design and JBBJ were advanced. Grounds 4 and 5.4 of the common grounds and ground 6 in each of the Escape Design and JBBJ adjudications were upheld by Kenneth Martin J as constituting serious jurisdictional errors on the part of the adjudicator.

 
Misconceptions By The Adjudicator Of His Functions And Powers

 
Grounds 4 and 5.4 alleged that the adjudicator misapprehended, or misconstrued the CCA and thereby had misconceived the nature or limits of his functions or powers. This was on the basis that the adjudicator held that the agreement, in each case, included an oral term that payment was due and payable only after
any ground slab for the building was poured, but failed to apply that term to his determination.

 
The adjudicator determined that each agreement was wholly oral, but did not contain any express terms. On the basis of this finding, the adjudicator found that terms of the CCA could be implied into each agreement. Kenneth Martin J found that this constituted significant jurisdictional error, labelling these inconsistent findings as ‘illogical’, ‘bizarre’ and findings that ‘simply cannot stand unchallenged’. His Honour commented that:

[a]n irrational conclusion as to an absence of express terms in oral contracts is something of a rarity and, so I conclude, meets the high threshold of showing a misapprehension or disregard for the nature or limits of an adjudicator’s functions or powers.

 
On this basis, his Honour found that, even having regard to the lesser degree of legal precision held to an adjudicator, the adjudicator’s fundamental misconceptions established jurisdictional errors and all three of the determinations should be quashed.

 
Failing To Identify Which Entity Was Exposed To The Payment Obligation

 
Kenneth Martin J also upheld a ground advanced by the applicants in the Escape Design adjudication. The ground of appeal alleged that the adjudicator failed to identify which of the two respondents to that application was liable to meet a percentage commission in the amount of AUD 245,871.77, inclusive of GST. The adjudicator later attempted to address this by purporting to correct that matter, pursuant to section 41(2) of the CCA, on the basis that it was ‘an accidental slip or omission or a material mistake in the description of a person, thing or matter’.

His Honour found that the underlying problem was not one of slip, omission or mistake. Rather, it was a result of the adjudicator’s failure to make the essential determination as to which of two potential entities was to be ultimately liable to make the payment. The failure to make this determination could not legislatively be excused or brushed off as a mere slip, omission or mistake.

 
Failing To Acknowledge The Separate Legal Personality Of A Corporation

 
Kenneth Martin J upheld a further ground advanced by the applicants in the JBBJ adjudication. The adjudicator found that a binding and legally enforceable oral contract had been made between the Red Ink Homes entities and JBBJ, a company of Ms Jemma Costigan, in October 2011. However, this was 12 months prior to JBBJ’s incorporation.

 
The adjudicator attempted to address this issue by treating JBBJ as only a ‘business entity name’ of Ms Costigan. In his Honour’s view, this insulted ‘a cardinal grounding principle of corporations law concerning the separate legal personality of a corporation’. His Honour considered that this constituted a serious error because JBBJ could not enter into contracts when it did not yet exist.

 
Policy Considerations And Discretion

 
Despite the policy of the CCA to keep matters informal and to keep money flowing to contractors and subcontractors, Kenneth Martin J considered that the errors in these determinations were too grave and fundamental not to require the court’s intervention to quash. In considering the court’s discretion, his Honour found no basis to refuse the issue of a writ of certiorari and commented that ‘there presents a point where demonstrated jurisdictional error is so manifest a court simply must intervene to quash’.

 
What These Decisions Mean For You

 
Given the position of principals in adjudications under the CCA, these decisions are of significance to the preservation of the rights of the principal where determinations are made in favour of the contractor. They illustrate the willingness of the courts, in certain circumstances, to enforce principles of procedural fairness in relation to adjudication determinations under the CCA and to quash determinations based on jurisdictional error.

For further information, please contact:

Ante Golem, Partner, Herbert Smith Freehills
[email protected]

 
Melissa De Abreu, Herbert Smith Freehills
[email protected]

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