Challenging an adjudication

By Rory Murphy.

Key Points:
Challenging an adjudicator's decision made under the security of payment legislation in New South Wales became more difficult following two important decisions by the NSW Court of Appeal.

The past year saw an increase in the number of challenges to adjudicators' determinations brought in the New South Wales Supreme Court by respondents dissatisfied with the outcomes of the adjudication. At one point, these challenges constituted approximately 20 percent of the business of the Construction List in the Court.

Since 3 November 2004, however, challenging an adjudicator's decision made under the security of payment legislation ("SOP Act") in New South Wales became more difficult following two important decisions by the NSW Court of Appeal.

The decisions in Brodyn Pty. Ltd. t/as Time Cost and Quality v Davenport [2004] NSWCA 394 and Transgrid v Siemens Ltd. [2004] NSWCA 395 overturned a line of cases in the lower courts[1] which had held that an adjudication could be quashed if an adjudicator had made a jurisdictional error (eg. where an adjudicator has refused to exercise jurisdiction or acted beyond his or her power). The Court of Appeal held that the lower courts had cast the net for relief too widely. The correct approach, it said, was to ask whether a requirement under the SOP Act was intended by Parliament to be an "essential pre-condition" for the existence of an adjudicator's determination. If an essential pre-condition was not satisfied, then the determination was void. The Court also identified that a determination would be void:

• if there is a substantial denial of natural justice (such as a failure to receive and consider the respondent's submissions); and
• if a purported determination is not a bona fide attempt by the adjudicator to exercise the power granted under the SOP Act.

Without being exhaustive, the Court of Appeal in Brodyn identified the following essential pre-conditions for the validity of an adjudicator's determination:

• the existence of a construction contract between the claimant and the respondent, to which the Act applies (sections 7 and 8 of SOP Act);
• the service of a payment claim on the respondent (section 13 of the SOP Act);
• the making of an adjudication application by the claimant to an Authorised Nominating Authority (section 17 of SOP Act);
• the reference of the application to an eligible adjudicator, who accepts the application (sections 18 and 19 of SOP Act);
• the determination by the adjudicator of a valid application (sections 19(2) and 21(5) of SOP Act) , by determining the amount of the progress payment, the date on which it becomes or became due and the rate of interest payable (section 22(1) of SOP Act), and the issue of a determination in writing (section 22(3)(a) of SOP Act ).

In the Court's view, exact compliance with all the other "detailed requirements" in the Act is not essential to the existence of a valid determination.

Justice Hodgson, who wrote the judgment of the Court, included the following in his list of "detailed requirements" (as opposed to essential pre-conditions):

• the content of a payment claim (section 13(2) of SOP Act );
• the time when an adjudication application may be determined (section 17 of SOP Act); and
• the matters to be considered by the adjudicator (section 22 of SOP Act).

Just what is an "essential precondition" is likely to be the subject of a considerable number of arguments before the courts. There has already been one decision addressing this issue (Rothnere Pty Limited v Qasar Constructions NSW Pty Limited [2004] NSWSC 1151).

Denial of natural justice

The Court of Appeal considered that natural justice was of such importance that it could be inferred that Parliament intended it to be essential to the validity of an adjudicator's determination. The Court expressed the view that if there was a "substantial" denial of natural justice then the determination would be void and not voidable. In Brodyn the Court held that if an adjudicator failed to consider submissions provided by the parties then this would amount to a denial of natural justice, however, there would be no denial of natural justice if the adjudicator either misinterprets the submissions or misapplies the law.

As well, the Court of Appeal approved the decision in Emag Constructions Pty Ltd v Highrise Concrete [2003] NSWSC 903, to the effect that the parties must ensure strict compliance with the timing and service requirements of the SOP Act and, in particular, the requirement that a payment claim be served on the respondent or delivered to the respondent's ordinary place of business.

In TQM Design and Construct Pty Ltd v Dasein Constructions Pty Ltd [2004] NSWSC 1216 (decided after Brodyn) the Supreme Court held that a failure by the adjudicator to consider a respondent's adjudication response will constitute a denial of natural justice, even if the adjudicator has considered the respondent's payment schedule.

The principles of natural justice considered in the earlier decisions in the lower courts will still provide helpful guidance for when there has been a "substantial" denial of natural justice. For instance, in the Musico case, Justice McDougall held that the adjudicator had reached a number of conclusions which had not been put forward by the claimant and of which both parties did not have notice. He held that if an adjudicator intended to come to a determination upon a ground which neither party had put forward, natural justice required the adjudicator to give the parties notice of that intention so that they may put submissions on it.

In John Holland v Cardno MBK (NSW) Pty Limited [2004] NSWSC 258, the applicant included claims for variations in its payment claim and the respondent rejected them in its payment schedule on the basis that no timesheets had been provided in support of the claim (which the variation provision in the construction contract required). In its adjudication application, the applicant, for the first time, advanced a new contractual basis for some of the variations and provided timesheets to support its claims. The adjudicator determined the matter on the basis of the new contractual claim which he found was supported by the timesheets. The respondent objected on the basis that it had been denied natural justice because, by reason of section 20(2B) of the SOP Act, it was unable to deal with the new claim and the timesheets in its adjudication response. The court agreed that the respondent had been denied natural justice and quashed the adjudicator's determination.

Bona fide attempt

Justice Hodgson also stated a purported determination will be void if there has not been a bona fide attempt by the adjudicator to exercise his/her power under the SOP Act. There is some guidance given in Brodyn as to the basis upon which an adjudication might be challenged on these grounds. For example:

• if a question is raised before an adjudicator as to whether more detailed requirements have been exactly complied with, a failure to address that question could indicate that there was not a bona fide attempt to exercise the power; but if the question is addressed, then the determination will not be made void simply because of an erroneous decision that they were complied with or as to the consequences of non-compliance; or
• if there is fraud of the claimant in which the adjudicator is also involved.[2]

This avenue for challenge is likely to generate some opportunities for arguing that a failure to follow a detailed requirement demonstrates the absence of a bona fide attempt. It may well be that the grounds previously explored by the lower court in respect of jurisdictional errors will provide some guidance for challenging a determination on this ground.

However, if the requirement is at least considered (regardless of whether it is properly considered) that may be enough to validate the determination.

Role of an adjudicator

An interesting aspect of many of the decisions relates to the role of the adjudicator in his or her assessment of progress claims and whether the adjudicator is bound by the decisions or determinations of the superintendent/architect.

In Musico, Justice McDougall observed that it would have been open to the adjudicator to reach some assessment for himself of extensions of time and corresponding liquidated damages.

This issue was further developed in Abacus. In that case, the plaintiff contended that the adjudicator could not "step into the shoes of the architect" to substitute his or her own decision in relation to delay costs. Justice McDougall found that an adjudicator was not bound by the terms of any progress certificate issued by the superintendent as such a construction would undermine in a very serious way the evident intention of the legislature that is embodied in the Act.

Master Macready considered this issue in detail in Transgrid v Siemens Ltd [2004] NSWSC 87. The Master indicated that he disagreed with Justice McDougall's decision in Abacus in relation to the ability of an adjudicator to step into the shoes of a superintendent. He observed that it seemed "strange" that the whole process could be opened up by an adjudicator.

This decision in Transgrid was considered by the Court of Appeal. Justice Hodgson preferred the view of Justice McDougall in Abacus to the opinion tentatively expressed by Master Macready as to whether the adjudicator could step into the shoes of the superintendent, although the Court of Appeal was not required to conclusively decide the issue.

It is also evident from Justice Hodgson's decision that even if, on a true construction of section 9 of the SOP Act, the amount of a progress payment must be the amount certified by the Superintendent, a decision to the contrary by an adjudicator would be a mere error of law, and not enough to render the determination invalid. It is suggested that the converse is also true, so that if, on a true construction of section 9 of the SOP Act, the amount of a progress payment must be independently assessed by the adjudicator, a decision by the adjudicator to the contrary (ie. that he or she is bound by the superintendent's certification) would be a mere error of law and not enough to render the determination invalid.

Discretion

Prior to the decision in Brodyn, the nature of the relief supplied by the lower courts was discretionary. Whether or not the court would grant relief depended on the particular facts which were said to give rise to an entitlement to the relief and the circumstances of the matter. The court occasionally refused to grant relief as it said that the determination was provisional, and that the final rights of the parties would be determined in the ordinary course.

A consequence of the decision in Brodyn is that determinations that are successfully challenged are now void (it was if they never existed) as opposed to voidable (valid until successfully challenged and an order to quash made). A consequence of this distinction is that judges no longer have a discretion to withhold relief where a party has made out one of the grounds identified above for which a determination is void.

[1] Musico v Davenport [2003] NSWSC 977, Brodyn Pty. Ltd. v Davenport [2003] NSWSC 1019, Abacus v Davenport [2003] NSWSC 1027, Leighton Contractors Pty. Ltd. v Campbelltown Catholic Club [2003] NSWSC 1103, Multiplex Constructions Pty. Ltd. v Luikens [2003] NSWSC 1140, and Transgrid v Walter Construction Group [2004] NSWSC 21.

[2] If a determination is induced by fraud on the part of the claimant in which the adjudicator is not involved, then the determination is voidable not void.