Good faith and defective works

In Goodwin Street Developments Pty Ltd v DSD Builders Pty Ltd [2018] NSWSC 1229, Justice McDougall considered an argument that an adjudicator either did not exercise a statutory function, or did not do so in good faith, because she did not reach a conclusion about allegedly defective works as required by the Building and Construction Industry Security of Payment Act 1999 (NSW) (SOP Act).

As there was no express provision in the contract for valuing work, the adjudicator was obliged to consider the issues in section 10(1)(b) of the SOP Act as “fundamental elements in the determination”, which included that "if any of the work is defective, the estimated cost of rectifying the defect".

Justice McDougall noted that the obligation to exercise a statutory function in good faith requires that the adjudicator turned their mind to, grapple with and form a view on all matters they are required to consider under the SOP Act. In this case, the adjudicator referred to the allegedly defective work, but made no precise finding on the topic, which meant that the adjudication determination was "not entirely logical for downplaying the significance of the claim for defective work".

Nevertheless, the judge expressly discarded any predisposition to find error and looked at the adjudication determination in its entirety, and held that the adjudicator did deal with the dispute and the evidence adduced by the parties. As the principal was seeking to offset amounts to cover the cost of alleged defect rectification but had failed to adduce evidence supporting this claim, it was valid for the adjudicator to conclude that she was not satisfied that there was any defective work.

One project, two parties, three payment claims and "no less than four adjudication applications"

In Greenwood Futures Ltd v DSD Builders Pty Ltd [2018] NSWSC 1407, Justice McDougall considered whether an adjudication determination was invalid, by reference to the full gamut of arguments, including a failure to include supporting statements, multiple payments claims, reference dates and the purported withdrawal of adjudication applications.

Justice McDougall followed his earlier decision and concluded that a failure to include a "supporting statement" with the first and second payment claims pursuant to section 13(7) of the SOP Act meant that they were not validly submitted and the adjudicator did not have jurisdiction in respect of them. Notably, Justice McDougall highlighted the decision of Justice Ball in Central Projects Pty Ltd v Davidson [2018] NSWSC 523 that was inconsistent with Justice McDougall's analysis, and recognised that this disagreement between judges should be resolved by a higher judicial authority.

It was also argued that the second and third payments claims were also invalid because they related to the same "reference date" as the first payment claim. Justice McDougall held that the contract did not contain clause containing a reference date. Clause 17.3 only stated that "the builder must give the owner a written claim for a progress payment for the completion of each stage", but did not specify when the payment claim must be submitted. Accordingly, under section 8(2)(b) of the SOP Act, the relevant "reference date" was the last date of the month during which the relevant construction work was undertaken, which for the third payment claim was a new reference date (30 April 2018). The third payment claim was therefore valid.

The first and second adjudication applications were based upon the first and second payment claims. As these payments claims were invalid, the adjudication applications were nullities and there was no need to consider the validity of the withdrawals. The parties agreed that the third adjudication application was validly withdrawn under section 26 of the SOP Act (regarding delayed adjudication determinations), leaving only the fourth adjudication application for consideration by Justice McDougall, which was based upon the validly issued third payment claim. 

For the adjudication, Greenwood Futures adduced expert evidence regarding defect works and the cost of rectification. However, as clause 17.6(b) of the contract stated that Greenwood Futures "has no right of set-off", the adjudicator did not take into account the cost of rectifying alleged defects when valuing the payment claim. Justice McDougall agreed with this approach, as section 9 of the SOP Act requires that a payment claim be valued "in accordance with the terms of the contract". Therefore, it was held that "even if the Adjudicator had erred in his approach to the valuation of the construction work, the error was not jurisdictional".