To err is adjudicatory, to forgive is judicial: Brodyn considered

By Mathew Stulic.

Key Points:
This decision confirms that in the post-Brodyn world, the grounds upon which adjudicator's determinations may be challenged are extremely limited. However it introduces uncertainty about the operation of another part of the SOP regime.

In Minister for Commerce (formerly Public Works & Services) v Contrax Plumbing (NSW) Pty Ltd [2005] NSWCA 142, the NSW Court of Appeal considered the scope of section 34 of the Building and Construction Industry Security of Payment Act 1999 (which renders void contractual provisions which are inconsistent with the Act) and the Court of Appeal's earlier decision in Brodyn Pty Ltd t/as Time Cost and Quality v Davenport [2004] NSWCA 349 which prescribed the scope for challenges to adjudication determinations.

The facts

Contrax Plumbing (NSW) Pty Ltd entered into a lump sum contract (an amended version of AS2124-1986) with the Minister, pursuant to which it undertook to carry out construction work. Contrax then served a payment claim under the Act. In response, the Minister served a payment schedule in which the amount he proposed to pay was nil, the reasons for which included an alleged failure by Contrax to comply with certain conditions precedent to an adjustment of the Contract Price.

Contrax submitted an adjudication application which contained a submission that section 34 of the Act [1] rendered void clauses 2, 40.2, 42 and 46 of the Contract. Clause 2 contained a definition of "Contract Price", which was the "Contract Sum" adjusted by agreement between the parties or by virtue of the clause 46 expert determination process. Clause 40.2 set out the valuation mechanism under which adjustments to the Contract Price were to be made. The Contract provided that where a valuation was to be made under clause 40.2, the adjustment to the Contract Price was to be agreed by the parties, failing which, the amount was to be determined by an expert under clause 46 who was to calculate the amount on the basis set out in that clause. Clause 42 set out the contractual payment regime. The Minister's adjudication response stated that Contrax was not entitled to raise the section 34 submissions as they were not raised in its payment claim, citing John Holland Pty Limited v Cardno MBK (NSW) Pty Limited [2004] NSWSC 258 in support.

The determination

In reliance upon section 20(2B) of the Act [2], the adjudicator excluded from his consideration the Minister's submission based on John Holland, held that section 34 rendered parts of the Contract void, and decided that Contrax was entitled to a progress payment in the amount of $1,519,014.99. The Minister challenged this determination.

The decision at first instance

Justice McDougall's decision at first instance was handed down before the pivotal decision in Brodyn.

In dismissing the Minister's summons, Justice McDougall held that:

• Certain provisions of the Contract were void pursuant to section 34 of the Act: the sentence in clause 42.1, "In aggregate, payment claims shall not exceed the Contract Price" and, in clause 42.2, the sentence "In valuing work, regard shall not be had to the value of variations which value has not been included in the Contract Price".
• John Holland is authority for the proposition that where a respondent is unable to answer a payment claim due to insufficient particulars supplied by the claimant, those missing particulars could not be included in the claimant's adjudication application. In this case however, Contrax was able to include in its adjudication application, submissions in answer to an argument raised by the Minister in his payment schedule.
• While the adjudicator's interpretation of section 20(2B) was not correct, this was of no consequence, as the adjudicator considered the substance of the Minister's submission and the adjudicator's determination that clause 42 of the Contract was void in light of section 34, in any event, was correct.

Minister's appeal dismissed

The two main issues considered on appeal were:

• whether the primary judge erred in determining that Contrax was entitled to raise new issues in its adjudication application; and
• whether the primary judge erred in finding that section 34 rendered parts of clause 42 void.

The Court of Appeal agreed that Contrax's section 34 argument could be considered by the adjudicator under section 22(2)(c) of the Act notwithstanding it was not raised in its payment claim and in any event, it could still be considered (and was required by the Act to be considered) by the adjudicator in considering the matters under section 22(2)(a) and (b), namely the provisions of the Act and the construction contract respectively.

The Minister's submission regarding clause 42 was that the Act gives an entitlement to make a claim for a progress payment. It was submitted that the amount of the progress payment to which a claimant is entitled is determined in accordance with section 9 of that Act, that is, if the contract makes express provision as to how the progress payment is to be calculated, that is the amount of the progress payment to which the claimant is entitled to under the Act. It was argued that the Contract had an express provision as to the calculation of progress payments (namely clause 42), and therefore, the adjudicator was bound to comply with this contractual provision.

The Court rejected the submission and decided that the adjudication was not rendered invalid because of an error in interpretation of the Act by an adjudicator. If an adjudicator considers the matters he is required to consider, or bona fide addresses the requirements of section 22(2) of the Act, a determination is not invalid. This finding was sufficient to decide the appeal.

Justice Hodgson (who also wrote the lead judgment in Brodyn) went on to consider whether section 34 actually rendered void the relevant parts of clause 42. He stated that it was strongly arguable that it did, based on two grounds:

• Clause 40.2 of the Contract listed the items that an expert was required to base a valuation on (failing agreement between the parties) where there was an increase in the Contract Price. If those items were the relevant "express provision" in the Contract for the calculation of the amount of progress payments under clause 42.2, then clause 42 would preclude the payment of progress payments calculated "in accordance with the terms of the contract", and this violates section 34 of the Act.
• Section 3(2) of the Act states that the means by which the Act ensures that a person is entitled to receive a progress payment is by granting a statutory entitlement to a progress payment, irrespective of whether the relevant construction contract makes provision or not. A "progress payment" is defined in the Act to mean a payment to which "a person is entitled under section 8". Section 8(1) provides that on and from each "reference date" a person who has undertaken to carry out construction work (or supply related goods and services) is entitled to a progress payment. Justice Hodgson stated that the term "progress payment" used in some places in the Act must include a more "generalised" meaning of that term, because to hold otherwise would render section 8(1) circular and vacuous.

On that basis, Justice Hodgson's view was that if a construction contract contained a provision which expressly determined reference dates or the calculation of progress payments, that could possibly operate so as to restrict the operation of the Act even though such express contractual provisions are to be deferred to in sections 8(2) and section 9(a) of the Act.

Justice Bryson disagreed with Justice Hodgson that section 34 invalidated some parts of clause 42 on the basis that Justice McDougall's decision in relation to the interaction between the Contract and section 34 was open to question. He stated that this was because of the manner in which Justice McDougall demonstrated that the provisions of the Contract fell within section 34, was not "appropriately specific", however did not elaborate further on this point.

Acting Justice Brownie noted the divergence of opinion on the section 34 issue between both Justice Hodgson and Justice Bryson and declined to express an opinion.

Observations

This decision confirms that in the post-Brodyn world, the grounds upon which adjudicator's determinations may be challenged are extremely limited. As long as an adjudicator complies with the "basic and essential requirements" set out in Brodyn, an error of fact or law will not invalidate a determination provided that the adjudicator bona fide addresses the requirements of section 22(2).

What is not clear as a result of Contrax is the extent of the operation of section 34 of the Act. The decision at first instance was significant. Justice McDougall's decision had important implications for parties that wanted to control how and when payment occurs under a construction contract.

Justice Hodgson's observations in obiter may, on one view, be read as suggesting that provisions in construction contracts whereby parties seek to define "progress payments" or "reference dates" may be void by reason of section 34. Justice Hodgson did not elaborate upon where the dividing line between the validity and invalidity of such provisions lies however it would be a curious result if parties to a construction contract are precluded from defining "reference dates" as being a certain calendar day in a month (for example the 20th of each month).

It may be that his observations were directed at provisions whereby parties agree to quarterly reference dates, or to take an extreme case, a single reference date on practical completion. However, in some circumstances, such provisions might be appropriate and agreed upon for legitimate reasons that are not based upon a desire to subvert the operation of the Act. This uncertainty is compounded by the differing opinion of Justice Bryson, and the silence of Acting Justice Brownie.

Furthermore, the decision does not resolve the debate about whether a provision that is held to be void under section 34 of the Act is void for all purposes (and therefore unable to be relied upon in subsequent proceedings between the parties) or merely for the purposes of the Act.

Whilst the industry would no doubt welcome a definitive judicial statement as to the scope and operation of section 34, it appears that the principles will be developed in increments, rather than in great leaps forward.

[1] Section 34(2) provides that a provision of any agreement under which the operation of the Act is (or is purported to be) excluded, modified or restricted (or that has that effect) or that may be reasonably be construed as an attempt to deter a person from taking action under the Act is void.

[2] Section 20(2B) provides that, "The respondent cannot include in the adjudication response any reasons for withholding payment unless those reasons have already been included in the payment schedule provided to the claimant."