A Court may declare void and quash an adjudication determination under the Building and Construction Industry Security of Payment Act 1999 (NSW) (the NSW Act) if the adjudicator acts outside his or her jurisdiction or fails to comply with the rules of natural justice (essentially requiring both parties to be heard) or both. The Supreme Court of New South Wales recently quashed a determination for both of those reasons in Leighton v Arogen [2012] NSWSC 1323.

The decision is relevant to all participants to adjudication, as it provides a timely reminder of what is permitted by the NSW Act and how the issues and pitfalls can easily be avoided.

Background

Leighton Contractors contracted with Ausgrid to undertake significant upgrade works to the electricity supply system in part of Sydney. The work included the installation of underground electricity cables. Leighton subcontracted the horizontal directional drilling work necessary to undertake that work to Arogen.

During the works, Arogen submitted to Leighton a monthly payment claim for more than $6.2 million (mostly for variations). Leighton responded by submitting a payment schedule to Arogen by email, assessing the sum as a negative amount.

Arogen disagreed with Leighton’s assessment and made an adjudication application. The adjudicator found in favour of Arogen.

Leighton was dissatisfied with the determination and applied to the Supreme Court to have it quashed.

Decision

Can evidence of the parties’ understanding be used to interpret a payment claim or a payment schedule?

The Court noted that, when interpreting payment claims and payment schedules, it may be appropriate to have regard to the background knowledge of the parties to the construction contract, evidenced, for instance, by correspondence passing between them around the time the payment claim and payment schedule is exchanged.

In that sense, the Court observed that documents which could be regarded as extremely summary or even almost incomprehensible to an outside observer may be sufficiently meaningful to the parties to allow them to understand the bases set out in a payment claim and opposed in a payment schedule.

The Court suggested that having regard to this material may enable the Court to have a more informed view of ‘the way that the parties would have perceived, and understood, the real issues sought to be raised’.

In this case, Arogen had relied on a stop work order after it had encountered underground heritage items on site as a basis of claim in its payment claim. However, in its adjudication application, for the first time it relied on inclement weather as a basis of claim. Against that backdrop, the Court observed that if there had been a ‘barrage of correspondence’ showing that Arogen and Leighton understood the underlying problem to be the impact of inclement weather on the underground structures, then it might have been possible to construe the references in Arogen’s payment claim to ‘Cooks River Heritage Issues’ to not only those issues but also to the other issues of inclement weather.

Here, the Court held that the correspondence did not go that far.

Can a contractor advance a new basis of claim in adjudication?

After refusing to find that Arogen’s reference in its payment claim to ‘Cooks River Heritage Issues’ included inclement weather, the Court considered whether it had been open to Arogen to raise (and for the adjudicator to consider) the new ‘inclement weather’ basis of claim in its adjudication application.

The Court reached the view that Arogen could not rely on (and the adjudicator could not consider) the new basis of claim because it amounted to material that was outside the scope of the claim described in the payment claim.

The first reason for this finding was that s 20(2B) of the NSW Act prevents a respondent’s adjudication response from including material that does not relate to reasons given in the payment schedule. Given this, short of crystal-ball gazing, a respondent can only ever address in its payment schedule material set out in a payment claim—and will be deprived of natural justice to the extent that an adjudicator considers the claimant’s new submissions.

The second reason was based on the Court’s reading of ss 22(2)(a)-(e) of the NSW Act, which limit the matters the adjudicator is able to consider in an adjudication. Relevantly, s 22(2)(c) of the NSW Act requires an adjudicator to consider: ‘…the payment claim to which the application relates, together with all submissions (including relevant documentation) that have been duly made by the claimant in support of the claim …’.

The Court decided that the adjudicator could not consider Arogen’s submissions relating to inclement weather because, as they related to a basis of claim that had not been included in Arogen’s payment claim, they had not been ‘duly made’. The adjudicator’s consideration of those submissions meant the determination was not made in accordance with the NSW Act’s jurisdiction.

What amounts to reasons for the purposes of a payment schedule?

The email Leighton served on Arogen in response to its payment claim attached two versions of the payment schedule. The first version was a PDF attachment that contained the text of the payment schedule, but not the supporting calculations for the variations in issue. The other version was a spreadsheet, which included both the text and the supporting calculations.

It appears from evidence considered by the Court that Arogen had assumed that the spreadsheet was another version of the payment schedule and did not consider it. That was despite the PDF attachment’s reference to ‘calculations attached’.

It is therefore somewhat unsurprising that Arogen appears to have only provided the adjudicator with a copy of the PDF attachment of the payment schedule (i.e. it does not appear to have made available the spreadsheet containing the supporting calculations). Arogen also incorrectly stated that the calculations were not provided with the payment schedule.

Compounding this, a statutory declaration accompanying Leighton’s adjudication response failed to confirm to the adjudicator that the calculations had been attached to a version of the payment schedule that Leighton had served on Arogen. It also neglected to state that the copy provided to the adjudicator (the PDF file) was not the only version served by Leighton on Arogen. In that sense, Leighton facilitated the adjudicator’s acceptance of the erroneous submission made by Arogen.

The adjudicator accepted Arogen’s position. The adjudicator accordingly said that s 20(2B) of the NSW Act (which prevents a respondent from relying on reasons for withholding payment when they were not included in the payment schedule) ‘barred’ Leighton from relying on the spreadsheet calculations.

The Court thought the adjudicator’s determination on this issue was incorrect for two reasons.

First, the Court accepted that the spreadsheet (including the calculations) was served on Arogen by Leighton as part of its payment schedule. Being part of its payment schedule, Leighton was entitled to rely on the reasons in its adjudication response.

Second, even if the spreadsheet had not formed part of Leighton’s payment schedule, the Court noted that Leighton, in respect of three of the claimed variations, had stated its reasons for withholding payment as being that the variations were valued at an excessive amount. At most, then, the spreadsheet constituted either a part of or an amplification of the reasons for non-payment given in the PDF file.

The Court noted that the adjudicator had denied Leighton natural justice by preventing it from relying on material that formed part of, or supported, the reasons given in the payment schedule for withholding part of the amount claimed by Arogen.

Must the adjudicator give reasons for its decision?

The adjudicator accepted the amounts claimed by Arogen without giving any reasons. That was despite Arogen seeking payment on rates that were different to those set out in the contract.

The Court viewed this as a failure by the adjudicator to exercise the jurisdiction provided by the NSW Act. This was particularly so given that quantum was at issue between the parties, and Arogen had claimed rates higher than those claimable under the contract.

Conclusion

The Court accordingly quashed the adjudicator’s determination.

The Court lamented that its conclusion was reached without ‘any degree of satisfaction’. It observed that its decision paid no regard to the merits of the determination, that the flaws in the adjudicator’s approach had deprived Arogen of the benefit of the determination, and that the purposes of the NSW Act (to ensure prompt payment and the quick and efficient resolution of payment disputes) had been subverted.

What this decision means for you

In general, this decision highlights that parties to a construction contract should take care to ensure that all documentation, including claims, schedules, submissions, and supporting documentation, complies with the NSW Act. Doing this will at least reduce the prospect of it providing the other party with the ammunition it needs to challenge an adjudication determination.

In particular, the Court’s findings illustrate that:

  • it may be open for the parties to rely on correspondence exchanged around the time the payment claim or payment schedule was sent as an aid to the interpretation of what was meant in those documents.
  • a party serving a payment claim or payment schedule should clarify precisely which documents are said to form part of that claim or schedule, for example ‘this email and the attached covering letter and invoice together constitute a payment claim made under the Building and Construction Industry Security of Payment Act 1999’. In that way, a party can avoid any confusion as to which documents are said to be included.
  • a payment claim should advance all possible bases of claim, as the applicant will not be able to introduce a new basis of claim in its adjudication application.
  • while a principal should set out in its payment schedule all reasons it may wish to raise if the matter is taken to adjudication, those reasons may not need to be fully fleshed out, allowing a respondent to provide amplification to its reasons in its adjudication response.
  • any assertions made in a payment claim that a respondent considers to be incorrect should be directly countered in the payment schedule as the respondent will be restricted to its reasons for non-payment as raised in the payment schedule when submitting its adjudication response.