Supreme Court New South Wales Medium Neutral Citation: Lahey Constructions Pty Ltd v Trident Civil Contracting Pty Ltd [2013] NSWSC 176 Hearing dates: 21 February & 6 March 2013 Decision date: 08 March 2013 Jurisdiction: Equity Division - Technology and Construction List Before: Stevenson J Decision: Determination void Catchwords: BUILDING AND CONSTRUCTION - adjudication - requirement for a payment schedule - whether determination void - jurisdictional error - procedural fairness - natural justice Legislation Cited: Building and Construction Industry Security of Payment Act 1999 Cases Cited: Bauen Constructions v Westwood Interiors [2010] NSWSC 1359 Chase Oyster Bar Pty Ltd v Hamo Industries Pty Ltd [2010] NSWSCA 190; (2010) 78 NSWLR 393 Clarence Street Pty Ltd v Isis Projects Pty Ltd [2005] NSWCA 391; (2005) 64 NSWLR 448 Craig v South Australia (1995) 184 CLR 163 John Holland Pty Limited v Roads and Traffic Authority of New South Wales [2007] NSWCA 19 Kirk v Industrial Court of New South Wales (2010) 239 CLR 531 Multiplex Constructions Pty Ltd v Luikens [2003] NSWSC 1140 Musico v Davenport [2003] NSWSC 977 Nepean Engineering Pty Ltd v Total Process Services Pty Ltd [2005] NSWCA 409; (2005) 64 NSWLR 462 O'Reilly v Mackman [1983] 2 AC 237 Roseville Bridge Marina Pty Ltd v Bellingham Marine Australia Pty Ltd [2009] NSWSC 320 Watpac Constructions v Austin Corporation [2010] NSWSC 168 Category: Principal judgment Parties: Lahey Constructions Pty Ltd (plaintiff) Trident Civil Contracting Pty Ltd (first defendant) Philip Martin (second defendant) Adjudicate Today Pty Ltd (third defendant) Representation: Counsel: F P Hicks (plaintiff) B DeBuse (first defendant) Solicitors: Moray & Agnew (plaintiff) Watson & Watson (first defendant) P J Davenport (second and third defendants) File Number(s): SC 2012/360086 Publication restriction: Nil Judgment Introduction 1These proceedings relate to a dispute under the Building and Construction Industry Security of Payment Act 1999 ("the Act"). 2The second defendant, Mr Philip Martin ("the Adjudicator") is an adjudicator appointed under the Act. On 9 November 2012, the Adjudicator made a determination under the Act ("the Determination") that the plaintiff, Lahey Constructions Pty Limited ("Lahey") should pay to the first defendant, Trident Civil Contracting Pty Limited ("Trident"), a "progress payment" within the meaning of s 8 of the Act of $126,187.12. 3No adjudication certificate has yet been issued pursuant to s 24 of the Act. 4These proceedings were commenced on 19 November 2012. On that day I noted Lahey's undertaking to pay into Court the unpaid balance of the Determination by 23 November 2012. That was done. 5Lahey seeks a declaration that the Determination is void because the Adjudicator had committed jurisdictional error, failed to give reasons for a critical aspect of his decision and denied it natural justice. Decision 6In my opinion, the Determination is void. Background 7Lahey is a builder. By a "Subcontract Agreement" dated 20 April 2011 ("the Subcontract"), Lahey engaged Trident to carry out earthworks at North Beach Bathers Pavilion in Wollongong. 8Under the Subcontract, Trident agreed to carry out the earthworks for a lump sum of $591,831. 9Trident claims (and the Adjudicator determined) that there was a variation to the scope of works under the Subcontract in respect of certain excavation ("the Excavation Variation"). The Adjudicator determined Lahey should pay Trident $71,417.50 ("the Sum") in respect of the Excavation Variation. 10Lahey's position before the Adjudicator was that, amongst other arguments, Trident was not entitled to the Excavation Variation because Trident had not complied with certain contractual conditions precedent. Thus, Lahey argued, Trident was contractually barred from making the Excavation Variation ("the Bar to Variation Point"). 11Clause 40 of the Subcontract dealt with variations. It provided that if Trident: - (1)was given a direction to "vary the work" by Lahey, such direction would not itself "constitute a variation"; (2)considered "a variation applies" it "must claim a variation" within 2 days of the direction "otherwise it shall be barred"; (3)was of the opinion that a direction was a variation, even if not expressly so identified, it "shall within 2 days of receiving the direction" notify Lahey "of its opinion in writing"; and (4)did not give the notices required by cl 40 strictly in accordance with cl 40, then Trident "shall not be entitled to make any Claim with respect to the direction". 12Clause 46 also dealt with "Time for Notification of Claims". Arguably, that provision did not apply to claims for variations; in any event, it is not necessary to consider that matter for present purposes. 13On 20 June 2011 Lahey gave Trident a site instruction as follows: - "Find attached [the geotechnical engineer's] recommendations for slope stabilisation where you are unable to achieve the 1:1 benching due to protected trees and other obstructions. These recommendations are based on the site inspection on 17/06/11, of the retaining wall excavation... Please note that this direction is not a variation to your contract.... Should you consider that this direction is a variation, you need to inform us in accordance with your contract conditions." 14It was common ground that this instruction amounted to a direction by Lahey to Trident to implement the recommendations made by the geotechnical engineers. The content of those recommendations were not in evidence before me. 15Later on 20 June 2011, Trident replied to the site direction as follows: - "Please refer to our contract all shoring is a variation charged at $50.00 per m2 plus GST. We will require a variation to be issued prior to commencement of works." 16The work that Trident ultimately performed, and which gave rise to the Excavation Variation, was not "shoring". In those circumstances, there is an issue between the parties, not necessary for me to resolve, as to whether Trident's email of 20 June 2011 amounted to a notice of the kind called for by cl 40 of the Subcontract, as set out at [11] above. 17Later on 20 June 2011, Lahey replied to Trident's email as follows: - "Trident have to provide a safe excavation for other trades to work within, this is governed by Australian Standards and Work Cover COP. This could be benching/shoring or in this case cyclone fencing is provided as a recommendation by [the geotechnical engineers]. As experienced Civil Engineering Contractors, what are your proposals to make these excavations safe as required by legislation?" 18It is Lahey's case that, by this email, Lahey was suggesting that the relevant works could be carried out by benching or shoring, that it was up to Trident to make a proposal as to which course should be followed and that Lahey was making it clear it did not accept that the proposed work constituted a variation. Again, it is not necessary for me to express an opinion about that submission. 19On 30 June 2011, Lahey wrote to Trident: - "Further to our discussions today regarding the retaining wall excavation, the most important factors to consider is [sic] the stability of the existing slope and the safety of workers underneath it. The [geotechnical engineer's] report was provided as a suggestion, the final stabilisation solution needs to be determined by Trident or your own Geotech Consultant. You need to provide us with a method and product that suits the site conditions, provides the tensile strength to prevent excavation collapse, falling rocks and any other hazard protection needed, so we can detail and construct the retaining walls." 20Lahey submitted that this communication was "only a suggestion" and that Lahey was making clear that it considered that the proposed retaining wall excavation was part of the scope of works under the Subcontract, and was not a variation. 21Mr Harry Hatzitanos, from Trident, stated in a document before the Adjudicator: - "I went to the site on the 1st of July 2011 and showed [Lahey's representative] the samples and explained that this would not fix the problem of a possible slide of the embankment as the only solution to that was to shore, so he asked me to excavate it a bit further back just so that they would have a bit more room to move, I explained to him that this will incur further expense as it would involve more excavation and more backfilling and that we could only backfill with granular fill which would not require compaction with a vibration plate as this would eliminate the fear of collapse of material. [Lahey's representative's] response to that was [to] go ahead as it would be a cheaper option so we went ahead." 22There is no suggestion in Mr Hatzitanos's statement that he was then contending that the works to be done constituted a variation. 23The relevant work was carried out in July 2011. 24On the evidence before me, the next communication from Trident to Lahey about this work was the service of a payment claim pursuant to s 13 of the Act on 25 September 2012 ("the Payment Claim"); some 14 months after the work had been done. 25The Payment Claim annexed an invoice dated 24 August 2012 numbered 1697 from Trident to Lahey which, amongst other claims, claimed the Sum as follows: - Extra Works Over excavation to retaining walls 60.00 17,490.00 265m3 @ $60.00 per m3 Extra Works Removal of additional spoil 265m3 @ $45.00 per m3 45.00 13,117.50 Extra Works Backfill with granular fill 265m3 @ $140.00 per m3 140.00 40,810.00 26On 10 October 2012 Lahey served on Trident a payment schedule pursuant to s 14 of the Act ("the Payment Schedule"). 27In relation to the claim for the Sum, the Payment Schedule provided: - "Additional excavation to retaining wall due to Lahey's refusal to shore as recommended by the geotech report. Trident are required to provide documentation to substantiate this claim. We note that no marked-up drawings have been provided for the area described, nor documentation to evidence 'Lahey's refusal to shore'. Furthermore, as per scope item 56, the subcontractor 'has allowed for any over excavation, benching and/or supports required in accordance with the Geotechnical Report'. This is also noted throughout the scope of works, including but not limited to item 69, 71, 80. Scope item 89 refers to accepting the site condition prior to commencing works within an area, and as such we refer you to the Variation & Notice clauses within the contract. You are required to provide additional information to substantiate this variation claim." (emphasis added) 28As can be seen, although Lahey referred to "the Variation & Notice clauses in the contract", it did not refer, in terms, to cl 40 of the Subcontract. Nor did it emphasise (as it did before the Adjudicator and before me) that Trident's alleged failure to give the notices called for by cl 40 was a complete bar to Trident's claim in respect of the Excavation Variation. 29Section 14(3) of the Act states that a payment schedule "must indicate why" the amount in the payment schedule is less than the amount claimed in the payment claim, as well as "reasons" for withholding payment. 30A payment schedule need not articulate the response to the payment claim as precisely as would be required in a pleading. However, "cryptic or vague" statements in a payment schedule as to the reasons for withholding payment are not sufficient. Particularity is required "to a degree reasonably sufficient to apprise the parties of the real issues in dispute" and "to enable the claimant to make a decision whether or not to pursue the claim and to understand the nature of the case it will have to meet in an adjudication". Sometimes, however, the issue "has been so expansively agitated in prior correspondence that the briefest reference in the payment schedule will suffice to identify it clearly": Multiplex Constructions Pty Ltd v Luikens [2003] NSWSC 1140 at [77] per Palmer J; cited with approval in Clarence Street Pty Ltd v Isis Projects Pty Ltd [2005] NSWCA 391; (2005) 64 NSWLR 448 at [27] per Mason P, with whom Giles and Santow JJA agreed; see also Nepean Engineering Pty Ltd v Total Process Services Pty Ltd [2005] NSWCA 409; (2005) 64 NSWLR 462 at [24] per Hodgson JA. 31In this case, there was a previous application under the Act in relation to an earlier dispute between the parties. In that application a different adjudicator determined an issue between the parties involving, amongst other matters, the effect of cl 40 and cl 46 of the Subcontract ("the Previous Determination"). The Previous Determination dealt, at some length, with the parties' competing contentions (in the context of the earlier dispute) concerning cl 40 and cl 46. 32On 24 October 2012, Trident served an Adjudication Application pursuant to s 17 of the Act. 33Trident included the Previous Determination as an attachment to the Adjudication Application. In those circumstances, it is clear that issues arising from cl 40 and cl 46 had been "expansively agitated" between the parties prior to this dispute. Thus, in my opinion, the relatively brief reference to that issue (as it arose in this dispute) in the Payment Schedule was sufficient, for the purposes of s 14(3) of the Act. 34The Adjudication Application referred to invoice 1697 (of 24 August 2012), and described the work done as "additional excavation to retaining wall in lieu of shoring that [Lahey] refused to carry out" and made submissions as to why such work was a variation. 35The Adjudication Application acknowledged that Lahey's "reasons for non-payment" were set out in the passage in the Payment Schedule that I have set out at [27] above. Otherwise, Trident made no reference to Lahey's reference in the Payment Schedule, to the "variation and notice clauses within the contract". 36The Adjudicator accepted his appointment on 30 October 2012. 37On 1 November 2012, Lahey lodged its Adjudication Response in which it made detailed submissions on the Bar to Variation Point. It submitted that as Trident had "failed to comply with the variation and notice requirements under the Subcontract, the Excavation Claim is now barred". 38On 9 November 2012, the Adjudicator determined that the amount to be paid by Lahey to Trident was $126,187.12. This included the Sum. 39The Adjudicator dealt with the Bar to Variation Point as follows: - "[Lahey] submits that the conditions of contract provide a bar on any variation made other than in accordance with the contract conditions. The Act provides at section 3 that a person who undertakes to carry out construction work under a construction contract is entitled to receive and is able to recover progress payments in relation to the carrying out of that work. I determine that where [Trident] has undertaken construction work it is entitled to payment for that work and the conditions of contract do not provide a bar to the payment for that work". The Issues 40Lahey contends that the Adjudicator thereby misapprehended the effect of the Act; that he thereby failed to discharge his statutory function under the Act and failed to consider something that the statute required him to consider, namely the terms of the contract between the parties. 41Lahey submitted the Adjudicator: - (1) thereby committed jurisdictional error; (2)decided the contractual issue adversely to it, and on a basis not advocated by, and without notice to, either party; and thus in breach of the requirements of natural justice; and (3)failed to give reasons for his decision contrary to s 23(3)(b) of the Act and thereby committed further jurisdictional error. Jurisdictional Error? Misapprehension of jurisdiction 42In Chase Oyster Bar Pty Ltd v Hamo Industries Pty Ltd [2010] NSWSCA 190; (2010) 78 NSWLR 393, McDougall J referred to Kirk v Industrial Court of New South Wales (2010) 239 CLR 531 and said, at [158]: - "The majority pointed out (at [71]) that '[i]t is neither necessary, nor possible, to attempt to mark the metes and bounds of jurisdictional error'. However, by reference to the decision in Craig v South Australia (1995) 184 CLR 163 at177-178, the majority identified three categories of jurisdictional error (at [72]): (1) The mistaken denial or assertion of jurisdiction, or (in a case where jurisdiction does exist), misapprehension or disregard of the nature of or limits on functions and powers; (2) Entertaining a matter or making a decision of a kind that lies, wholly or partly, outside the limits on functions and powers, as identified from the relevant statutory context; (3) Proceeding in the absence of a jurisdictional fact; disregarding something that the relevant statute requires to be considered as a condition of jurisdiction, or considering something required to be ignored; and misconstruction of the statute leading to misconception of functions. (Of this last example, it was said in Craig (at 178) that 'the line between jurisdictional error and mere error in the exercise or jurisdiction may be particularly difficult to discern.')." The asserted error 43In this case, Lahey contended that the Adjudicator misapprehended the nature of his powers, disregarded something (namely the contractual relationship between the parties) that the Act required to be considered as a condition of jurisdiction and misconstrued the Act, leading to a misconception by him of his functions. 44The misapprehension of jurisdiction asserted by Lahey arises out of the manner in which the Adjudicator dealt with the Bar to Variation Point. 45Mr Hicks, who appeared for Lahey, submitted that the passage set out at [39] above shows that the Adjudicator dismissed the Bar to Variation Point by reference to, and only by reference to, s 3 of the Act, and that: - (1)in so dealing with the Bar to Variation Point, the Adjudicator was in error; and (2)such error was in the category of "last example" referred to by McDougall J: a misconstruction of the statute leading to a misconception of the Adjudicator's functions. Did the Adjudicator make the asserted error? 46However, Mr DeBuse, who appeared for Trident, submitted that, seen in its proper context, the Adjudicator's words in [39] above do not bespeak such an error. 47Mr DeBuse pointed to the fact that, in its Adjudication Response, Lahey drew the Adjudicator's attention to the object of the Act (albeit without specific reference to s 3) and contended that cl 40 and cl 46 of the Subcontract provided a sound basis for the Bar to Variation Point. 48Mr DeBuse submitted that the passage at [39] above should be seen in the context of the surrounding passages in the Determination. 49In earlier paragraphs of the Determination, the Adjudicator dealt with Lahey's submission that the work done by Trident in response to the site instruction referred to at [13] above was not a variation, but fell within the scope of the work called for by the Subcontract. The Adjudicator did not accept that submission and said (adding sub-paragraph numbers to facilitate reference, and including the passage earlier set out at [39]): - "[1] I do not accept that [Lahey's] instruction is for the [Trident] to excavate a greater area but I accept that [Lahey] requested [Trident] provide a solution to the problem. I am satisfied that [Trident's] work was a satisfactory solution and was accepted as a solution by [Lahey]. [2] [Lahey] submits that the conditions of contract provide a bar on any variation made other than in accordance with the contract conditions. The Act provides at section 3 that a person who undertakes to carry out construction work under a construction contract is entitled to receive and is able to recover progress payments in relation to the carrying out of that work. I determine that where [Trident] has undertaken construction work it is entitled to payment for that work and the conditions of contract do not provide a bar to the payment for that work. [3] I determine, on the documents provided, that the additional work for the slope stabilisation is a variation to the contract work. [Lahey] submits that [Trident] has not substantiated the claim or provided evidence for the volume of material involved in the stabilisation work. [Lahey] does not contest that [Trident] carried out the additional excavation. [Trident] includes a calculation to substantiate the volume claimed included on the marked up plan with its submissions. [Lahey] has not provided an alternate volume of material excavated or an alternate value for the additional excavation. [4] I determine that the additional excavation is a variation to the contract work and I accept [Trident's] value for the work. I determine that [Trident] is entitled to a payment of $71,417.50 plus GST for the additional excavation." 50 Mr DeBuse submitted that: - (1)read fairly, the critical passage (at [2] of the extract above) was merely an aside made during the Adjudicator's decision (commencing at [1] of the passage and concluding in [3] and [4]) that the relevant work was not a variation; and (2)the reference in [2] of the extract to s 3 of the Act was no more than an acknowledgment by the Adjudicator that, consistently with Lahey's submission in its Adjudication response, he had regard to the objects of the Act as set forth in s 3. 51Mr DeBuse submitted that the Adjudicator's words (in [2] of the extract) should not be construed as if he had "completely ignore[d]" everything put to him. 52I am not able to accept this submission. 53The only paragraph in the Determination in which the Adjudicator deals with the Bar to Variation Point is that at [2] of the extract. The first sentence of that paragraph recites the Bar to Variation point. The last sentence to the paragraph rejects the Bar to Variation Point. The middle sentence must be, in my opinion, the Adjudicator's reason for reaching that conclusion. Otherwise, the Adjudicator has given no reason at all for the conclusion; which would itself bespeak jurisdictional error (see s 22(3)(b) of the Act and, for example, Bauen Constructions v Westwood Interiors [2010] NSWSC 1359 at [27] per McDougall J). 54In my opinion, a fair reading of these passages from the Determination is that the Adjudicator felt entitled to reject the Bar to Variation point by reference, and only by reference, to s 3 of the Act. In doing so, the Adjudicator fell into error. The Adjudicator made jurisdictional error 55That error was, in my opinion, a jurisdictional error. 56Section 3 of the Act is, relevantly, in the following terms: - "Object of Act (1) The object of this Act is to ensure that any person who undertakes to carry out construction work ... under a construction contract is entitled to receive, and is able to recover, progress payments in relation to the carrying out of that work ... (2) The means by which this Act ensures that a person is entitled to receive a progress payment is by granting a statutory entitlement to such a payment regardless of whether the relevant construction contract makes provision for progress payments." 57Sub-section 3(1) sets out the object of the Act. Sub-section 3(2) provides that such object is to be achieved by ensuring a party receives a "progress payment" even if the underlying contract does not provide for progress payments. It does not follow that an Adjudicator under the Act is entitled to ignore what that contract does provide concerning the relevant party's entitlements. 58On the contrary, the Act makes clear, in my opinion, that a fundamental matter for consideration by the Adjudicator is the terms of the contract between the parties. 59In that regard: - (a)section 9(a) of the Act provides that the amount of a progress payment is to be "calculated in accordance with the terms of the contract"; (b)section 10(1)(a) of the Act requires that construction work be valued "in accordance with the terms of the contract"; and (c)section 22(2)(b) of the Act states that, where making his or her determination, an adjudicator must consider, amongst other things, "the provisions of the construction contract from which the application arose". 60In Roseville Bridge Marina Pty Ltd v Bellinghaum Marine Australia Pty Ltd [2009] NSWSC 320, Brereton J emphasised the primacy of the contract between the parties (at [43]): - "The Act does not create a right to remuneration for construction work - that right is created by the construction contract. What the Act does is to create and regulate a right to obtain a progress payment. It is inherent in the concept of a progress payment that it be a payment on account of the amount ultimately due. The contract provides the starting point for the determination of rights under the Act [see, eg, s 9(b), s 10(1)(a), s 11(1)(a), s 22 (2)(b)]. ... An agreement between the parties to a construction contract that some "extras" or "variations" will not entitle the builder to additional remuneration, or that a specified sum will be accepted for such works, forms part of the contractual regime according to which their rights under the Act as well as at law are regulated, and is not inconsistent with the rights given by the Act to claim a progress payment." 61Section 3 of the Act provided no basis upon which the Adjudicator could simply ignore the terms of the Subcontract. Clause 40 of the Subcontract provided that Trident was not entitled to claim a variation unless it gave the notices called for by that clause. 62I do not see the Adjudicator's error as being a mere "accidental or erroneous omission to consider a particular provision of the Act or a particular provision of the contract, or a particular submission" of the kind referred to by Hodgson JA in John Holland Pty Limited v Roads and Traffic Authority of New South Wales [2007] NSWCA 19 at [55]. 63In my opinion, the Adjudicator's misapprehension of the role played by s 3 of the Act, and his consequent failure to have regard to the terms of the Subcontract (as he was required to do by reason of s 22(2)(b) of the Act) compel the conclusion that his error was no mere error in the exercise of jurisdiction. It was jurisdictional error. 64In my opinion, for that reason, the Determination is void. Natural Justice 65Neither party submitted to the Adjudicator that he should decide the Bar to Variation point by reference to s 3 of the Act. The Adjudicator did not give the parties notice of his intention to decide that issue on that basis. 66As has been pointed out by McDougall J in Musico v Davenport [2003] NSWSC 977 at [107]-[108]: - "...what an adjudicator is required to do is to decide the dispute between the parties. Under the scheme of the Act, that dispute is advanced by the parties through their adjudication application and adjudication response (which, no doubt, will usually incorporate the antecedent payment claim and payment schedule). If an adjudicator is minded to come to a particular determination on a particular ground for which neither party has contended then, in my opinion, the requirements of natural justice require the adjudicator to give the parties notice of that intention so that they may put submissions on it... It follows, in my opinion, that where an adjudicator determines an adjudication application upon a basis that neither party has notified to the other or contended for, and that the adjudicator has not notified to the parties, there is a breach of the fundamental requirement of natural justice that a party to a dispute have 'a reasonable opportunity of learning what is alleged against him and of putting forward his own case in answer to it'." (citing Lord Diplock in O'Reilly v Mackman [1983] 2 AC 237 at 279) 67In this case, the Adjudicator has behaved exactly as McDougall J described. He has acted in breach of the requirements of natural justice. 68This denial of natural justice was material in the sense discussed by McDougall J in, for example, Watpac Constructions v Austin Corporation [2010] NSWSC 168 at [144]-[147]. Had the Adjudicator alerted the parties to his intention to decide the Bar to Variation Point by reference to s 3 of the Act, it is obvious that "submissions ... could have been put [that] might have had some prospect of changing the adjudicator's mind on the point" (Watpac at [147]). Indeed, it seems inevitable that, had the parties known of the Adjudicator's intention, they would have joined to deflect him from it. 69 For that further reason, the Determination is void. 70I invite the parties to bring in short minutes to give effect to these reasons. ********** Amendments 13 March 2013 - Amended decision Amended paragraphs: Coversheet DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 13 March 2013