Building and Construction Industry Security of Payment Act 1999 (NSW) (Act) – whether adjudicator failed to exercise powers in good faith
This case tests the boundaries of the adjudicator's duty under section 22 of the Act. Although section 22 requires adjudicators to 'consider' the provisions of the contract in making their determination, this case establishes that the standard imposed upon them is not so high as to require them to 'play devil's advocate' for the respondent, or 'test' the payment claim and adjudication application for all possible defects and non-compliances with any provisions of the Act or the contract.
On 31 July 2014, Pittwater Council (plaintiff) entered into a building contract with Keystone Project Group (defendant) for its surf life saving club at Avalon within the meaning of sections 5 and 6 of the Act. During the period for construction, Keystone served a payment claim to which plaintiff responded with a payment schedule indicating a significantly lower scheduled amount (see sections 13(1) and 14 of the Act). At issue was the Council's failure to include reasons in the payment schedule for withholding payment for certain items. Consequently, an application for adjudication was submitted by the defendant pursuant to section 17(1)(b) of the Act. In the plaintiff's adjudication response, it submitted that its reasons for withholding payment were not included in the payment schedule because:
- certain payments claimed were not approved variations under the contract; and
- a number of the claims related to delay damages for each extension of time granted, and the defendant's entitlement to delay damages under the contract was nil.
The reasons provided in the adjudication response were not considered by the adjudicator pursuant to section 20(2B) of the Act. 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'.
The plaintiff then sought to challenge the adjudication determination on the grounds of jurisdictional error on the basis that the adjudicator failed to exercise his powers under section 22 of the Act in good faith by failing to consider the defendant's entitlement under the contract for the claimed amounts. The plaintiff specifically relied on the phrase regularly used by the adjudicator that he was 'left with no alternative', because there were reasons not referred to in the payment schedule as indicating that the adjudicator failed to consider all the material and blindly awarded the claimed amount without considering it.
The court found against the plaintiff, holding that the adjudicator had validly exercised his powers under section 22 of the Act.
The court found that the adjudicator was properly satisfied of the amount claimed, notwithstanding the use of the phrase that he had 'no alternative' when rejecting the plaintiff's submissions.
The court concluded that, where a respondent has failed to set out its reasons for withholding payment in sufficient detail as to call attention to its entitlements, the adjudicator is not required to 'play devil's advocate' on its behalf . Further to this point, the court held that the plaintiff was precluded from introducing additional reasons in its adjudication response pursuant to section 20(2B) as a consequence of its failure.
On that basis, the court saw no reason to grant the orders sought, and the case was dismissed.