On 11 March 2016, the Supreme Court of Victoria handed down its decision in Krongold Constructions (Aust) v SR & RS Wales [2016] VSC 94 which places a significant onus on adjudicators under the Building and Construction Industry Security of Payment Act 2002 (Vic) Act in Victoria and possibly in other states to demonstrate the valuation process adopted and to ensure that that process aligns with the requirements of the Act.

Peter Wood takes a look at the decision and its likely impacts.

Background

Wales was engaged by Krongold as a civil works contractor to perform earthworks for a lump sum contract price. On 25 August 2015 Wales issued a payment claim for the contract balance of $44,012 and variations of $25,000.

The payment claim consisted of two invoices and eight pages of attachments. Krongold had in its possession work and delivery dockets concerning the variation claims.

The payment claim was referred to adjudication. The adjudicator was not provided with all the attachments to the payment claim. The adjudicator determined that the claimant's valuation was not 'incorrect, unreasonable or excessive' and in the absence of any alternative valuation provided by Krongold accepted the claimant's valuation in full.

Krongold applied to the Court for judicial review of the adjudication determination.

On the date of filing the originating motion for review the Court granted Krongold an interlocutory injunction restraining Wales from enforcing the adjudication determination. We predicted the likelihood of injunctions being granted to restrain enforcement in most cases of judicial review in our Alert after Milburn Lake Pty Ltd v Andritz Pty Ltd [2016]VSC 3 in late January.

The judgment

The Court held that the payment claim was invalid because it was not satisfied that the invoices and supporting documentation identified the construction work with sufficient clarity as required by section 14 of the Act and in light of the principles outlined in the decision in Protectavale Pty Ltd v K2K [2008] FCA 1248. This was despite the facts that Krongold's site supervisor was on site every day, in relation to the balance of work segment of the claim, he was in a position to assess whether Wales had completed its scope, the earthworks nature of the scope made description of segments of the work difficult and in relation to the variations, Krongold had in its possession work and rock delivery dockets which described the variation work.

The Court also held that the adjudicator fell into jurisdictional error in failing to demonstrate in the determination any process of assessment of the value of the work in accordance with sections 11, 22 and 23 of the Act.

The Court referred to SSC Plenty Road v Construction Engineering (Aust) Pty Ltd in which it was said that an adjudicator must demonstrate the process of assessment of the value of the claim rather than merely adopting the amount claimed by the claimant.

The Court noted that this failure was engendered by the lack of definition of the work which was the subject of the claim which rendered the task of valuation at best problematic and at worst impossible.

Who is affected?

The judgment makes the task of adjudicators more difficult and broadens the scope for jurisdictional challenge.

In most adjudications an adjudicator is provided with alternative valuations by the claimant and the respondent. The judgment suggests that an adjudicator who accepts one valuation over the other without setting out in detail the method of valuation will fall into jurisdictional error. Any valuation will need to be carried out in accordance with the terms of the relevant contract under section 11(1)(a) (if the contract provides a method of valuation) or otherwise having regard to the default matters identified under section 11(1)(b). Where an adjudicator fails to engage in this required valuation process (by merely adopting a suggested valuation or by adopting a different process) it may be argued that she or he has fallen into jurisdictional error.

To the extent that the material required to carry out the valuation in accordance with the two methods referred to in clause 11 is not properly before the adjudicator, it may be inferred from the judgment that the adjudicator may request further submissions and the provision of such material pursuant to section 22 of the Act.

The judgment also sets a higher standard for the identification of the construction work to which the payment claim relates.

Whilst it has previously been said that the test of identification is not an overly exacting exercise and is tempered by what is reasonably necessary taking into account the background knowledge of the parties, the requirement to sufficiently identify the work to enable an adjudicator to demonstrate the method of calculation of the value of the work arguably imposes a significantly higher standard.

Respondents to payment claims under the Security of Payment Acts in Victoria and elsewhere may see the additional opportunities for judicial review provided by this judgment.