Major projects & construction 5 Minute Fix 51

NSW Supreme Court restrains contractor from seeking adjudication of purported payment claim under the NSW SOP Act

The NSW Supreme Court, in Grocon (Belgrave St) Developer Pty Ltd v Construction Profile Pty Ltd [2020] NSWSC 409, has held that a purported payment claim for reimbursement of amounts paid under bank guarantees is void and of no effect for the purposes of the NSW Building and Construction Industry Security of Payment Act 1999 (SOP Act). The Court granted an order permanently restraining the defendant from seeking a determination under the SOP Act in respect of that claim.

Grocon entered into a contract with Construction Profile Pty Ltd (CP) in 2017 to construct the Telstra Exchange residential development in Manly. In response to a payment claim served by CP, Grocon deducted some $1.65 million on account of liquidated damages for delay in reaching practical completion, relevantly in accordance with clause 42.8 of the Contract (a set-off provision).

In an ensuing adjudication, an adjudicator found that CP was entitled to extensions of time and on that basis, extended the date for practical completion and determined the value of Grocon's claim for liquidated damages as nil. Despite this, Grocon proceeded to call on two bank guarantees provided by CP to satisfy its claim for liquidated damages. In its next payment claim, CP included an amount effectively by way of reimbursement of the moneys called on under the bank guarantees. The issue for the Supreme Court was whether that claim could properly be characterised as a payment claim in respect of "construction work" or "related goods and services" under the SOP Act.

CP argued that the claim was in respect of construction work because it included the value of the whole of the work undertaken, less amounts it had been paid. CP also contended that the question whether the claim was properly a claim under the SOP Act could be determined by an adjudicator, and further, that clause 42.8 of the Contract was rendered void by section 34 of the SOP Act (the prohibition against "contracting out" provision).

Justice Ball agreed that the claim in issue was not a claim for construction work or for related goods and services because it was, in effect, "a claim for credit" in respect of the amount called on by Grocon under the bank guarantees. The Court also rejected CP's argument that the status of the claim should be determined by an adjudicator, noting the High Court's observation in Southern Han Breakfast Point Pty Ltd (In Liquidation) v Lewence Construction Pty Ltd (2016) 260 CLR 340 that "it is ultimately a question for the Court, not the adjudicator, to determine whether the adjudicator has jurisdiction to determine a particular claim".

While conceding that, ordinarily, an adjudicator would determine an application in respect of a claim before the Court was required to determine whether it was within the jurisdiction of the SOP Act, the Court noted that there is "no reason why in an appropriate case the question of jurisdiction should not be determined in advance of an application under the Act". Although CP pointed to a number of cases where the Court has been reluctant to restrain a purported payment claim from being referred to adjudication, the Court found that "… those cases must be treated with some caution and do not establish any general principle".

CP's argument regarding the validity of clause 42.8 was, the Court said, "more difficult". Did the clause "modify or restrict" the operation of the SOP Act by reducing the amount to which CP was entitled according to the adjudicator’s determination? In the context of this case, it was not necessary for the Court to finally determine this issue, having decided that CP's purported payment claim was not a claim for the purpose of the SOP Act. The Court did note, however, the tension between a contractual risk allocation device that "addresses the issue of who is to be out of pocket" while a dispute is being determined (namely the right to have recourse to security), and that contained in the SOP Act.

The interesting take-out from this case is that recipients of payment claims need not await the outcome of an adjudication before challenging the jurisdiction of the adjudicator to determine a claim that, arguably, does not fall within the scope of the SOP Act.

For contracts preceding the 2019 SOP reforms in NSW, a useful reminder about the importance of an available reference date to avoid jurisdictional challenge

The 2019 SOP reforms in NSW introduced key changes to the SOP legislation, precipitated by the "Review of Security of Payment Laws" of Mr J Murray AM. The Murray Report recommended that a harmonised security of payment (SOP) legislative model move away from "reference dates" due to industry confusion associated with the concept of a "reference date". The NSW SOP reforms sought to simplify the progress payment and payment claim provisions by removing the "reference date" concept, used to determine the date on and from which a party can claim a progress payment. However, the SOP reforms were not retrospective. For contracts signed before 21 October 2019, the thorny issue of reference dates still arise.

Brolton Group Pty Ltd v Hanson Construction Materials Pty Ltd [2020] NSWCA 63 provides another example of "reference dates" causing confusion in SOP cases. The decision serves as a useful reminder of the grounds on which an adjudication determination can be challenged for, and revisits authorities opining on the concept of, jurisdictional error.

A contract between Brolton (appellant) and Hanson (respondent) for the construction of a quarry processing plant at Bass Point was terminated by Hanson in October 2018. Some ten months later, in August 2019, Brolton served a payment claim expressed as covering work "up to September 2018", but which included amounts for work completed after 25 September 2018 and interest up to August 2019. Under the Contract, Brolton was entitled to submit claims for progress payment on a monthly basis, and upon termination of the Contract for the value of work completed.

A dispute attending Brolton's payment claim was referred for adjudication under the Building and Construction Industry Security of Payment Act 1999 (NSW). The adjudicator adopted a reference date of 23 October 2018 for the purpose of assessing Brolton's payment claim and determined that $2,877,052.75 was payable to Brolton.

In proceedings commenced by Hanson, the Supreme Court made a declaration that the adjudicator's determination was void. Brolton's appeal against that decision to the Court of Appeal was unanimously dismissed.

The relevant provisions of the Act at the time of Contract, specifically sections 8 and 13, were subsequently amended with effect from 21 October 2019 (Building and Construction Industry Security of Payments Amendment Act 2018 (NSW)). Prior to amendment, the Act was clear that a payment claim must be supported by an available "reference date". It was common ground between the parties, however, that the purported reference date of 23 October 2018 relied on by the adjudicator was not in fact an available reference date under the Contract. It was not nominated by either party. That date accrued after the termination of the Contract and, as was noted by the Court of Appeal, the contractual "entitlement to progress payments … did not survive termination".

In dismissing Brolton's appeal, the Court of Appeal upheld the primary judge's finding that the adjudicator's determination involved two jurisdictional errors:

• it was noted that the "the precondition which enlivens the exercise of the adjudicator’s statutory power" under the Act was the existence of a valid payment claim, relevantly, one made “on and from” a reference date. By making a determination on the "basis of an unavailable reference date", the Court of Appeal held that "the adjudicator did not embark on the task he was required to perform under section 22(1) of the Act";
• the Court of Appeal considered that the adjudicator's determination was attended by a denial of natural justice "because the adjudicator determined the dispute on a basis for which neither party had contended without giving the parties an opportunity to make submissions on the matter".

For contracts signed on or after 21 October 2019, the process for contractors to recover a progress payment is more straightforward because the concept of a "reference date" triggering entitlement to a progress payment has been removed. Now, in NSW, contractors have an automatic minimum right to make a payment claim every month on and from the last day of the month in which related goods and services were first supplied, and upon termination.

WA Supreme Court confirms that a second adjudication arising from the one progress claim can consider issues that were not pressed in the first adjudication

In Sandvik Mining and Construction Australia Pty Ltd v Fisher (No 2) [2020] WASC 123, the Supreme Court of Western Australia considered whether it is permissible for a party to commence an adjudication application in relation to disputed items included in a progress claim the subject of a previous adjudication decision.

Sandvik Mining and Construction Australia Pty Ltd sought judicial review of a determination made by an adjudicator under the Construction Contracts Act 2004 (WA).

In the first application, Sandvik and Civmec Construction & Engineering Pty Ltd chose to adjudicate a limited number of items in the progress claim. The adjudicator determined that Sandvik was liable to pay Civmec an amount of $4,938,369.60.

In the second application, Civmec sought to adjudicate a number of items that were included in the same progress claim but which were not the subject of the first adjudication (referred to by the parties as the "Unchallenged Items"). The adjudicator of the second application, Mr Fisher, determined that Sandvik was liable to pay Civmec the sum of $1,664,650.29.

It was undisputed between the parties that, per section 41, the Act precludes parties from applying for an adjudication of a "payment dispute" which was previously determined by adjudication.

Justice Archer considered whether, on the proper construction of the Act, a progress claim could only give rise to one payment claim and one "payment dispute" such that the adjudication of any part of a progress claim would render the whole of the progress claim a "payment dispute" for the purposes of section 6 of the Act, preventing a party from subsequently adjudicating any other aspect of the progress claim.

Relying on the decision of President Buss and Justice Murphy in Duro Felguera Australia Pty Ltd v Samsung C&T Corporation [2018] WASCA 28; (2018) 52 WAR 323, Justice Archer held:

"Accordingly, where a progress claim contains a number of itemised amounts, each may itself be a "payment claim" as defined in the Act and each may be treated as such.

Further, a number of individual items in a progress claim may be added together and treated as part of the one "payment claim", and thereby form part of the one "payment dispute" if the progress claim is rejected by the principal."

Justice Archer also considered and dismissed the proposition that a set off raised by a principal as a counterclaim, could extend the "payment dispute" to include the whole of the payment claim, even items not the subject of the contractor's adjudication claim, on the basis that it is the applicant which determines the scope of the "payment dispute" not any defences raised in response.

It is not uncommon for disputed items to be carried over from one payment claim to the next. On a practical level, if Sandvik's position were found to be correct, the adjudication of any part of a payment claim would require a party to effectively choose between adjudicating the whole of the payment claim or abandoning its right to adjudicate the balance of the payment claim at a later date.

It should, though, be noted that the situation in Sandvik was relatively limited in this respect, as it considered a situation where two separate adjudication applications were brought in respect of the same payment claim. Such a situation would not arise on the east coast of Australia as the security of payment legislation limits the number of payment claims that can be made each month.

Also, unlike in Western Australia, the security of payment legislation on the east coast of Australia prevents double jeopardy of claims in adjudication by limiting an adjudicator's ability to value work to the value given to such work under any previous adjudication. The operation of the restriction turns on the nature of the "work" rather than the broader concept of a "payment dispute" as provided for in the Act.

NSW now allows signatures to be witnessed via audio-visual link, with other jurisdictions set to follow

As the construction industry comes to grips with the legislative safeguards put in place to prevent the spread of COVID-19, logistical challenges mean that it is no longer straightforward for construction industry participants to arrange the execution of documents. Wet ink signatures and witnessing requirements are impracticable in the current environment.

NSW was the first Australian jurisdiction to pass new laws and regulations to facilitate the witnessing of signatures via audio-visual link during the COVID-19 pandemic. Other States have since followed in NSW's lead to varying extents. However regulatory responses to the COVID-19 pandemic are dynamic.