In the recent decision of Alliance Contracting Pty Ltd v James [2014] WASC 212, the Supreme Court considered whether it was possible to award amounts raised by counter-claim in an adjudication application under the Construction Contracts Act 2004 (WA). In so doing, the Court provided important guidance about the process that should be followed when responding to a payment in claim, in circumstances where a party considers it is entitled to a counterclaim or set-off.

In this case, Tenix issued a payment claim to Alliance. Alliance rejected the claim, on the grounds of different, competing and larger claims which (on its view) meant that Tenix was liable to pay money to Alliance. The adjudicator determined that, on the merits, there was a net balance owing to Alliance in excess of AUD6 million. However, because that liability did not arise out of the relevant payment claim and dispute, the adjudicator determined that no amount was payable to Alliance. In upholding the adjudicator’s determination, Beech J held that an adjudicator’s task is limited to determining the payment dispute that gave rise to the application. Whilst competing claims may be relevant to determining the merits of the payment dispute, they do not form part of the payment dispute itself and accordingly the adjudicator cannot determine that amounts be paid in respect of those claims.

As a result, if the recipient of a payment claim disputes the claim on the basis of a competing right to payment, it is important that they issue a separate payment claim for that amount, and seek a separate adjudication application to be heard together. This will preserve the recipient’s right to receive a favourable determination.

Facts

20 November 2012, Tenix and Alliance entered into a sub-contract under which Tenix engaged Alliance to do work for the construction of the Karratha waste water treatment plant for a lump sum of just under AUD11 million. Numerous payment disputes, including an adjudication application relating Tenix’s decision to draw down on bank guarantees, arose during the term of the contract.

On 11 October 2013, Tenix issued its final certificate under the contract. In the final certificate Tenix assessed the amount finally due from one party to the other as being an amount of AUD3,676,815.70 owing by Alliance to Tenix. On 25 October 2013, Alliance gave Tenix a formal notice of dispute. On 22 November 2013, Tenix made an application for adjudication regarding the payment claim set out in the final certificate. In the determination, the adjudicator considered the merits of the various competing claims, and calculated a net balance in favour of Alliance of AUD6,242,232.90. However, the adjudicator determined that it was not possible in the adjudication to order any sum to be paid by Tenix to Alliance, and as such, determined that the adjudicated amount was nil.

Decision

The matter turned on the proper construction of s31(2)(b) of the Act, and in particular, whether this allowed the adjudicator to make a determination that Tenix was liable to pay Alliance identified the net balance.

Beech J held that the area of enquiry for, and the power of, the adjudicator is confined to the specific payment dispute that gave rise to the adjudication application. The Act provides that the scope of a payment dispute is set by the rendering of a payment claim by one party, and then either the failure or refusal to pay that claim by the other party (whether due to a dispute or otherwise). The determination by an adjudicator of whether any party to a payment dispute is liable to make a payment involves, and is limited to, determining whether the recipient of the payment claim is liable to make payment in respect of that payment claim. In other words, the adjudicator’s power is confined to accepting (wholly or in part) or rejecting the claim.

In this case, the payment dispute the subject of the adjudication was constituted by Alliance’s rejection of Tenix’s payment claim. Accordingly, the payment dispute related to whether Alliance was liable to pay the sum claimed by Tenix, or any lesser sum. Even though Alliance’s rejection of that claim was on the grounds of competing claims that, if accepted, meant that there was a balance owing from Tenix to Alliance, those competing claims did not impact upon the payment claim giving rise to the application

Beech J held that what Alliance should have done, if it wished to have its claims considered by an adjudicator, was to set out its competing claims in a separate payment claim, the rejection of which would then give rise to a separate payment dispute. With the consent of the parties, the appointed adjudicator could then have heard those separate payment disputes simultaneously. As it failed to take this course, Alliance was unable to secure a determination for any payment in its favour.