Back to the past for dodgy construction payment adjudications
First published 20 February 2018
Construction lawyers got very excited last week, when Australia’s highest court rendered two decisions on the rights of principals to construction contracts to seek judicial review of adjudications made under security of payment legislation — Probuild Constructions (Aust) Pty Ltd v Shade Systems Pty Ltd [2018] HCA 4, and Maxcon Constructions Pty Ltd v Vadasz [2018] HCA 5.
Security of payment legislation — for those wondering — is legislation that has been enacted in every Australian state and territory to ensure that that construction contractors and sub-contractors are promptly paid for the work that they have performed. Although different in each state and territory, the legislation establishes a fast-track process for the interim resolution of progress payment disputes under construction contracts by an adjudicator.
The High Court decision excited construction lawyers because it answered the question of when an error by an adjudicator will entitle the principal to apply to the court to have the adjudication declared void and set aside. Numerous judges have provided different answers to this question since it was first considered in detail in the 2003 decision of Musico v Davenport [2003] NSWSC 977. The sad news, for those who have funded the intervening litigation, is that the High Court has basically taken us back to the position that was espoused in Musico almost 15 years ago.
Sadder still, the High Court hasn’t exhaustively determined, once and for all, the requirements of the security of payment legislation that, if not satisfied, will allow the court to set the determination aside. As such, further litigation on the grey areas can be expected.
What did the High Court decide?
The High Court held that a principal to a construction contract can apply to a court to have the adjudication declared void and set aside, but only if the adjudicator has committed a “jurisdictional error of law”, as opposed to a “non-jurisdictional error of law”.
In so doing, the High Court effectively confirmed that the decision of the NSW Court of Appeal in Brodyn v Davenport [2004] NSWSC 394 was wrong to the extent that it held that the security of payment legislation limited the Supreme Court’s power to review and quash an adjudicator’s determination for jurisdictional error – a conclusion that was reached by Court of Appeal itself in Chase Oyster Bar v Hamo Industries [2010] NSWCA 190, following the intervening High Court decision in Kirk v Industrial Relations Commission of New South Wales [2010] HCA 1, which considered the right to judicial review under different legislation.
But what does the distinction between jurisdictional and non-jurisdictional errors really mean? Any why does it exist?
The reason for the distinction is ultimately driven by the “separation of powers” principle in Australia’s system of government. The principle is that, in order to prevent oppressive government, the three powers of government should be held by separate bodies — the legislature, the executive, and the judiciary — which can act as checks and balances on each other.
The legislature (i.e. parliament) has power to make laws; the executive has power to carry out and enforce the laws; and the judiciary has power to interpret laws and to judge whether they apply in individual cases.
Accordingly, under our system of government it is not legally possible for a parliament to deprive its highest court — the High Court in the case of the Commonwealth, and the Supreme Courts in the case of each State — of its “supervisory jurisdiction” to enforce the limits on the exercise of executive and judicial power by persons and bodies other than the highest court. To do so could, in effect, “allow the decision maker to assert unrestrained power” and create “islands of power immune from supervision and restraint”.
In the context of security of payment legislation, an adjudicator is empowered by the legislature to make a determination as to the statutory right of a contractor to immediate payment of its progress claim. While the determination does not finally resolve the rights of the parties under the construction contract, it does have an immediate impact of their legal rights — the cash flows to the contractor and the risk of the contractor being insolvent, if the principal happens to obtain a subsequent court order for the cash to be returned, is borne by the principal. For this reason, it is appropriate that the exercise of this power is supervised by the Supreme Court to ensure it is only exercised in the circumstances that the legislature intended.
However, the power and duty of our highest courts to review actions and decisions of the executive and inferior courts and tribunals need not go beyond declaring and enforcing the law which determines the limits and governs the exercise of their power. It is not necessary to prevent administrative error or injustice for the highest court to consider the merits of the decision or to remake it. The merits of the decision, to the extent to which they can be distinguished from legality, are for body to whom the legislature has bestowed the power and, unless the legislature has provided otherwise, for that body alone.
Accordingly, our highest courts have drawn a distinction between ensuring that powers conferred by parliament are exercised for the purpose for which they were conferred and in the manner in which they were intended to be exercised, on the one hand, and the reasonableness or appropriateness of the decisions made in the exercise of such powers on the other hand.
Jurisdiction is the power or authority to decide. An error by the decision maker in determining its jurisdiction, or in making a decision that lies outside its jurisdiction, is termed a “jurisdictional error of law”, whereas an error in making a decision that the decision maker is empowered to make is termed a “non-jurisdictional error of law”.
While it is legally permissible for a parliament to oust the power of its highest court to review a decision of the executive or an inferior court for non-jurisdictional error, it is not legally permissible to do so for jurisdictional error.
The distinction between jurisdictional errors, and non-jurisdictional errors, has challenged judges for over a century. The end points are clear enough but there is a grey area between the two. Nevertheless, as a past Chief Justice of High Court once said: “Twilight does not invalidate the distinction between night and day”.
When can a principal ask the court to quash an adjudication, and when can’t it?
There is no single test by which the distinction between jurisdictional and non-jurisdictional error can be determined. Three (non-exhaustive) categories of jurisdictional error were identified by the High Court in Kirk:
the mistaken assertion or denial of jurisdiction (i.e power), or (in a case where jurisdiction does exist) misapprehension or disregard of the nature of or limits on power;
entertaining a matter or making a decision of a kind that lies, wholly or partly, outside the limits on power, as identified from the relevant statutory context;
proceeding in the absence of a jurisdictional fact; disregarding something that the relevant statute requires to be considered as a condition of jurisdiction, or considering something required to be ignored; and misconstruction of the statute leading to misconception of powers.
Whether a particular legislative requirement amounts to an “essential requirement” for a valid exercise of power depends on whether there can be discerned a legislative intention to invalidate any act that fails to comply with the requirement. The existence of this intent is to be ascertained by reference to the language of the legislation, its subject matter and objects, and the consequences for the parties of holding void every act done in breach of the requirement.
So which requirements of the security of payment legislation are essential for a valid determination?
Brodyn’s five basic and essential requirements
At this point, it seems reasonably safe to say that compliance with the five “basic and essential requirements” identified by the NSW Court of Appeal in Brodyn is an essential condition for a valid adjudication. The five “basic and essential requirements” were:
the existence of a construction contract between the principal and the contractor, to which the Act applies (sections 7 and 8);
the service by the contractor on the principal of a payment claim (section 13);
the making of an adjudication application by the contractor to an authorized nominating authority (section 17);
the reference of the application to an eligible adjudicator, who accepts the application (sections 18 and 19); and
the determination by the adjudicator of this application (sections 19(2) and 21(5)), by determining the amount of the progress claim, the date on which it becomes or became due and the rate of interest payable (section 22(1)), and the issue of a determination in writing (section 22(3)(a)).
The Court of Appeal said these “may not be exhaustive”.
Accordingly, if an adjudicator errs by making an adjudication determination in circumstances where any of these basic and essential requirements have not satisfied, he or she will commit a jurisdictional error.
The problem is, many of the sections of the Act referred to in Brodyn’s five basic and essential requirements contain numerous requirements, some of which seem more essential than others. The Court of Appeal in Brodyn said that satisfaction of the “more detailed requirements” of the Act was not essential for a valid determination.
By way of example, section 13 sets out several requirements for a payment claim, whereas the Court of Appeal in Brodyn said “if there is a document which purports to be a payment claim under the Act, questions as to whether to document complies in all respects with the requirements of the Act are generally … for the adjudicator to decide (emphasis added). It seems the Court of Appeal considered compliance with some of these requirements was not essential for a valid determination. Indeed, subsequent court decisions have held that the requirements in section 13(2) as to what a payment claim must identify, indicate and state, are not essential for a valid determination. But surely for a payment claim to trigger the statutory adjudication process, it must be sufficiently detailed to enable the principal to understand the basis of the claim. If the principal is unable to ascertain the work to which the claim relates, how can it decide whether to accept or reject the claim and, if the principal opts for the latter, to respond appropriately in a payment schedule? It is doubtful that parliament intended that an adjudicator could determine an adjudication application in circumstances where the contractor has failed to serve an adequate payment claim. This view is supported by Kitchen Xchange v Formacon Building Services [2014] NSWSC 1602, where the court held that a failure by a head contractor to provide, with its payment claim, the supporting statement required by section 13(7) declaring that all subcontractors have been paid, would render the payment claim invalid, such that an adjudicator would lack jurisdiction.
A further example of the problem mentioned above is provided by section 17 of the Act, as it sets out many requirements for an adjudication application, some of which seem more essential than others. It is not clear whether the Court of Appeal in Brodyn intended for all or only some of the requirements for an adjudication application set out in section 17 of the Act to be “basic and essential requirements” which, if not satisfied, would give rise to jurisdictional error.
Section 17(2) - Time requirements for a valid adjudication application
Section 17 was considered in Chase Oyster Bar. According to this decision, compliance with each of the time requirements set out in section 17(2) of the NSW Act, ie:
the contractor has notified the principal, within 20 business days following the due date for payment, of the contractor’s intention to apply for adjudication; and
the principal has been given an opportunity to provide a payment schedule within 5 business days after receiving the contractor’s notice,
is an essential condition for a valid adjudication application. Although some doubt is cast on this proposition by the statement in the majority judgement of the High Court in Probuild that “it is neither necessary nor appropriate to consider how an order in the nature of certiorari might be framed in such a way as to recognize that the time limits fixed by the Security of Payment Act do not easily accommodate the intervention of judicial review proceedings which lead to a determination being quashed”, the majority doesn’t say that the decision on Chase Oyster Bar on section 17(2) was wrong. You would expect the High Court to be more explicit if it thought Chase Oyster Bar got the characterization of section 17(2) wrong. Accordingly, the better view appears to be an adjudicator will commit a jurisdictional error if he or she errs by making an adjudication determination in circumstances where these time requirements have not satisfied.
Section 17 sets out additional requirements for an adjudication application. For example, section 17(3) specifies additional time requirements within which an adjudication application must be made. It remains unclear whether compliance with these additional requirements is also “essential” for a valid determination.
Section 8(2) – the existence of a reference date
The statutory right to a progress payment arises under section 8(1) of the NSW Act “on and from each reference date”. The ‘reference date” is either:
a date determined in accordance with the contract as the date on which a claim for a progress payment may be made, or
if the contract makes no express provision with respect to the matter — the last day of the month in which the construction work was first carried out under the contract and each subsequent month.
It is now clear as a result of the High Court decision in Southern Han Breakfast Point Pty Ltd (in Liquidation) v Lewence Construction Pty Ltd [2016] HCA 52 that the existence of a reference date under a construction contract within the meaning of section 8(1) is a precondition to the making of a valid payment claim under section 13(1), and that a document purporting to be a payment claim that is not in respect of a reference date is not a valid payment claim under the Act. Accordingly, an adjudicator will commit a jurisdictional error if he or she errs by making an adjudication determination in circumstances where no reference date arose on or before the payment claim was made.
Section 22 - matters to be considered by adjudicator
Section 22(1) was included in Brodyn’s list of five basic and essential requirements, but section 22(2) wasn’t. Section 22(2) provides that, in determining an adjudication application, the adjudicator is to consider certain matters, and only those matters. The matters to be considered are:
the provisions of the Act;
the provisions of the relevant construction contract;
the relevant payment claim, together with all submissions (including all relevant documentation) that have been made by the contractor in support of the claim;
the relevant payment schedule (if any), together with all submissions (including all relevant documentation) that have been made by the principal in support of the schedule; and
the results of any inspection carried out by the adjudicator of any matter to which the claim relates.
Although the adjudicator is required to consider the terms of the construction contract in working out the amount to which the contractor is entitled, it is clear from the decision in Probuild that an error by the adjudicator in interpreting the contract and, consequently, in determining the amount of the progress payment payable, is considered to be non-jurisdictional, and will not give the principal a right to apply to have the adjudication set aside — even if the error is obvious and significant.
But what if the adjudicator fails to consider the construction contract, or any of the other matters listed in section 22(2), or has regard to an extraneous matter? There remains a serious question as to whether the Court of Appeal in Brodyngot it right when it said that the requirements of section 22(2) are not essential for a valid determination. Surely parliament could not have intended that an adjudicator could determine a contractor’s entitlement to payment without even considering the terms of the relevant construction contract? It is suggested that the NSW Court of Appeal should revisit this conclusion in light of Probuild.
Is the principal stuck with an error that is non-jurisdictional?
The absence of a right to ask the court to quash a determination if the adjudicator makes an error that is non-jurisdictional does not mean the principal has no remedies in relation to that error. The principal can commence court proceedings to enforce its contractual rights, and the court can and must in those proceedings correct any errors in an adjudicator’s determination and the consequences of such errors. This can, however, be a hollow remedy if the contractor has since become insolvent and is not able to repay the amount that exceeded its entitlement.
Final remarks
In 2005 I remarked — in “Challenging Security of Payment Adjudications after Brodyn”, (2005) 21 Building and Construction Law 328 at 335 — that the decision in Brodyn was bolder than it needed to be, and that the Court of Appeal could have achieved the same outcome by following Musico but clarifying that a breach of a requirement of the Act will only result in jurisdictional error of law if the relevant requirement as a “basic and essential requirement” of the Act (or an essential precondition of a valid adjudication, to use the language in this article).
As it turns out, the High Court has, more or less, determined that the Court of Appeal should have done just that.
Unfortunately for industry participants, the High Court hasn’t exhaustively determined, once and for all, the requirements of the security of payment legislation that constitute essential pre-conditions for a valid determination, which if not satisfied will allow a Supreme Court to set the determination aside. Construction litigators will remain busy for a few more years as the twilight between night and day is sorted out.
The assistance that Hannah Stewart-Weeks and Julia Swift provided on this article is gratefully acknowledged.
