Major projects & construction 5 Minute Fix 120: completion, adjudicator's reasons, heads of agreement

Practical Completion does not always equal Completion under the NSW Home Building Act... but sometimes it does

In The Owners Strata Plan 64757 v Sydney Remedial Builders Pty Ltd [2023] NSWSC 1127, Justice Rees was called upon to consider the meaning of "completion" for the purposes of the Home Building Act 1989 (NSW).

The issue arose because of a referee's finding that "completion" had occurred on 16 March 2012, with the effect that proceedings commenced by the plaintiff on 15 March 2019 were commenced within the time required by section 18E of the Act (being within seven years after "the completion of the works...").

In determining whether the proceedings were commenced in time, Her Honour considered section 3B of the Act (Date of completion of residential building work), which is in the following terms:

(1) The completion of residential building work occurs on the date that the work is complete within the meaning of the contract under which the work was done.

(2) If the contract does not provide for when work is complete (or there is no contract), the completion of residential building work occurs on practical completion of the work, which is when the work is completed except for any omissions or defects that do not prevent the work from being reasonably capable of being used for its intended purpose.

Her Honour noted that section 3B purposefully drew a distinction between "completion" and "practical completion", noting that:

"[Completion] is probably further down the construction pathway than practical completion but not necessarily final completion. However, ultimately, the matter is one of contractual choice. The question will simply be whether the building contract clearly identifies when the work can be said to be complete."

With that in mind, Justice Rees found that the referee had conflated the meanings of "completion" and "practical completion" and thereby applied the wrong test (ie. applied the contractual definition of "practical completion" rather than that in section 3B(2)). Applying the statutory test of practical completion, Justice Rees found that practical completion had occurred at least a week earlier than the date found by the referee, meaning that the proceedings were commenced out of time.

Key takeaway: The date of "completion" under section 3B of the Act is key to determining the statutory warranty period under the Act. Accordingly, to ensure that parties are correctly calculating key dates, parties should review their contracts to determine whether the contract specifies when work will be "complete", or whether the default statutory definition of "practical completion" in clause 3B(2) will apply.

No reasons for determining a component of an adjudication? No worries

In Niclin Constructions Pty Ltd v Robotic Steel Fab Pty Ltd & Anor [2023] QSC 218, the Queensland Supreme Court dismissed an application to set aside an adjudication determination for jurisdictional error relating to adequacy of the adjudicator's reasons.

Robotic Steel Fab Pty Ltd made a payment claim for works carried out for the supply and installation of metal. Niclin Constructions Pty Ltd submitted a payment schedule in which it purported to set-off an amount for liquidated damages "for the reasons set out in the attached statement of claim". However, the payment schedule did not attach the statement of claim.

At adjudication, the adjudicator accepted Robotic’s submission that because the payment schedule omitted to include the statement of claim upon which an alleged set-off relied, the payment schedule did not give reasons for the alleged set-off. Consequently, such a set-off should not be allowed.

Niclin applied to have the adjudication decision declared void for jurisdictional error, arguing that the adjudicator failed to take into account the argument that Niclin advanced regarding the effect of the omission of the statement of claim. Justice Applegarth noted that Niclin's complaint appeared to relate to the adequacy of the adjudicator's reasons, rather than a failure to consider the liquidated damages set-off issue and the parties therefore provided supplementary submissions on this point.

Ultimately, the Court was not satisfied that the adjudicator had failed to give reasons for his decision, that the reasons were so inadequate that they revealed jurisdictional error, or that the adjudicator had not performed his statutory task. In reaching this conclusion, Justice Applegarth noted that:

• the adequacy of an adjudicator's reasons is to be assessed in the context of an Act under which adjudicators provide their determinations in a "somewhat pressure cooker environment";
• the liquidated damages issue was not a particularly complicated one, which explains why it was permissible for the adjudicator’s reasons on the point to be brief; and
• the absence of elaboration as to why Robotic’s submissions were preferred over Niclin's does not result in a conclusion that the submissions of the parties were not considered.

Accordingly, the application was dismissed and Niclin was ordered to pay Robotic's costs.

This decision reminds us that the fact that an adjudicator does not refer in reasons to all of the submissions made on an issue does not necessarily mean that he or she did not consider them.

NSWCA raises the already high bar for challenging adjudication determinations

It has long been understood that:

• an adjudicator cannot automatically accept or "rubber-stamp" a claimant's claim, pursued at adjudication, where:
  • the respondent has not given any reasons for withholding payment of the claim; or
  • the adjudicator rejects the reasons given; and
• the adjudicator must come to a view as to what is properly payable, on what the adjudicator considers to be the true construction of the contract and the legislation, and the true merits of the claimant's claim.

That understanding was based upon the reasoning of Hodgson JA in Coordinated Construction Co Pty Ltd v JM Hargreaves (NSW) Pty Ltd (2005) 63 NSWLR 388, and also the principle at common law that the claiming party must discharge the onus of proving the facts that give rise to its claim.

According to the New South Wales Court of Appeal in Ceerose Pty Ltd v A-Civil Aust Pty Ltd [2023] NSWCA 215, that understanding is "incorrect".

In Ceerose, Justice Payne (Ward ACJ and Basten AJA agreeing) held that an adjudicator is not required to go beyond the terms of the payment schedule, repeated in an adjudication response, in considering the construction of the contract and the merits of a claim. His Honour clarified that an adjudicator will not fall into jurisdictional error if they accept a claim on the basis that the respondent advanced no reason (or no good reason) for withholding payment, without investigating the true construction of the contract and the true merits of the claim.

At a practical level, the decision in Ceerose won't change a lot. Adjudicators rarely go on a frolic of their own wholly outside the scope of the parties' submissions and, even if they do, they must afford both parties the opportunity to be heard on any material matters that arise from that frolic (lest the decision be set aside for a denial of procedural fairness).

In his reasoning, Justice Payne also reinforced that only in a rare case will it be possible to infer that an adjudicator has failed to consider one of the matters they are required to consider under the legislation. His Honour gave the following example:

"[F]ailure to refer to a submission on a centrally important matter, clearly articulated and based on uncontested facts, may demonstrate a failure to consider that matter". [emphasis added]

It will remain difficult for a party to challenge an adjudication determination where the adjudicator's reasons do not reference a contested submission that was only the subject of brief submissions in that party's material.

Key takeaway for respondents: Clearly articulate in your payment schedule (and adjudication response) all reasons for withholding payment of a claim. The adjudicator is only required to consider the legislation, the contract and the merits of the claim to the extent that those matters are raised in the respondent's reasons.

Key takeaway for claimants and respondents: Ensure that your key arguments are front and centre in the adjudication application and response, respectively. The adjudicator is not required to wade through voluminous material to ascertain a party's position on a particular issue.

Is a "heads of agreement binding"?

Of course, we know the answer to this question is "it depends". Indeed, the outcome of disputes over the enforceability of a preliminary agreement can be challenging to predict, as evidenced by a recent Victorian Court of Appeal case. In Patel v Sengun Investment Holdings Pty Ltd [2023] VSCA 238, the Court of Appeal found that a Heads of Agreement (HOA) constituted a binding contract between the parties. However, the trial judge had previously reached the opposite conclusion: that the parties intended to make a concluded bargain only if and when a formal contract of sale was executed.

Even though the case was not construction-related (involving the sale of land), the decision illustrates the factors a court might consider when determining if parties intended to be legally bound by a HOA or other preliminary agreement. In construction and infrastructure projects, preliminary agreements may be given various names (including HOA, term sheet, memorandum of understanding or letter of intent). These labels are not terms of art, and the substance of each document must be looked at individually to determine whether the parties intended to be immediately bound by their arrangement or only bound upon execution of a formal contract. The Court found that the arrangement fell into either the second category of contract identified by the High Court in Masters v Cameron (1954) 91 CLR 353 or a fourth category recognised by the Courts subsequently. This meant that the parties intended their HOA to be immediately binding but performance subject to the exercise of something akin to a "call option". In reaching this conclusion, the Court of Appeal looked at the following factors:

• the HOA's high level of formality (a deed with significant detail about the parties);
• the contractual nature of the drafting (including reference to an "entire agreement" clause);
• that the HOA included a fee (which had been paid);
• that time was expressed to be of the essence.