The Resolution of Construction Contract Payment Disputes ...slconf.uaeu.ac.ae/papers/CONF-18/ج3 انكليزي/20- Dr_ Phil... · 438 Dr. Phil Evans to obtain payment for work for

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The Resolution of Construction Contract Payment Disputes

The Resolution of Construction Contract Payment Disputes in the Western Australian Construction Industry Through

Security of Payment Legislation

Submitted By

Dr. Phil Evans

Adjunct Professor, School of Law, Murdoch University Perth Western Australia

Introduction

The construction industry is one of the most dynamic sectors of the Australian national economy. The response of the industry to trends and fluctuations in the market demand is significant. In time of high construction activity, legal claims arise from hasty contract formation, inadequate documentation, poor workmanship and claims for extensions of time and extras. In times of low demand legal claims arise in situations where contractors attempt to generate low profits through claims arising from latent site conditions, variations and extras under the contract.

The resolution of construction disputes, especially those relating to payment claims, are notoriously time consuming and expensive. These disputes are often founded in or exacerbated by misunderstandings between the parties as to their respective rights and obligations. There is also often a significant power imbalance between principal and head contractor or head contractor and sub contractor.

Prior to the introduction of Security of Payment legislation in Australia, when there has been a dispute over payment for construction work done or materials supplied, the person who has done the work or supplied the materials has been at a distinct disadvantage. They were faced with the prospect of a lengthy and time consuming task in attempting

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to obtain payment for work for which they were legitimately entitled by seeking payment under the common law procedures.

In Western Australia the Construction Contracts Act 2004 (WA) (the Act) came into operation on 1 January 2005. It was designed in order to prohibit unfair construction payment practices by principals or head contractors. It provides for security of payment in the construction industry through the use of rapid adjudication processes to determine payment disputes. It applies to both written and oral contracts and provides for implied terms where contracts are silent on terms relating to payment for construction works. The Act further prohibits paid when paid provisions in construction contracts and excessive payment periods. This paper describes the main provisions of and the application of the Act. Security of payment legislation exists in the United Kingdom, New South Wales, Victoria, Queensland and Northern Territory.(1)

Objectives of Security of Payment Legislation

The first state in Australia to introduce security of payment legislation was New South Wales. The Building and Construction Industry Security of Payment Act 46 of 1999 was assented to on 5 October 1999 and came into operation on 26 March 2000. The aims of the legislation were expressed by the Minister for Public Works as follows; (2)

“……the Premier announced the Governments intention to stamp out the un-Australian practice of not paying contractors for the work they undertake on construction. It is all too frequently the case that small subcontractors, such as bricklayers, carpenters, electricians and plumbers do not get paid for their work. Many of them cannot survive financially when that occurs, with severe consequences to themselves and their families. The Government is determined to rid the construction industry of such totally unacceptable practices……”; and further;

(1) See Housing Grants, Construction and Regeneration Act 1996 (UK); Building and

Construction Industry Security of Payment Act 1999 (NSW); Building and Construction Industry Security of Payment Act 2002 (Vic); Building and Construction Industry Payments Act 2004 (Qld); Construction Contracts (Security of Payments) Act 2004 (NT).

(2) See New South Wales Hansard Articles, Legislative Assembly 29 June 1999 (www.parliament.nsw.gov.au)

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“The main thrust of this bill is to reform payment behavior in the construction industry…..”

The object of the security of payment legislation is also referred to by Jacobs (3) in the unpublished paper by the Honorable Justice Robert McDougall who stated in part;

“As construction contracts in NSW have been “notorious” for their extremely tight profit margins (Abigano Ltd v Electricity Commission of NSW (1986) 3 BCL 290), it is essential for the financial survivors of many contractors and subcontractors be properly made and not unreasonably withheld….”

With respect to the statutory framework of security of payment legislation in Western Australia similar objectives were outlined by the Minister for Housing and Works in March 2003 (4) as noted in Match Products Pty Ltd v Arcon (WA) Pty Ltd. (5) where it was stated when referring to the objectives of the Act;

“It was introduced to provide security of payment legislation for the building and construction industry. It applies to contracts for the carrying out of construction work and related services. It provides a rapid adjudication process, having as its primary aim to keep the money flowing in the contracting chain by enforcing timely payment and sideling protracted or complex disputes while retaining the parties’ full rights, if not satisfied, to go to court or use any other dispute resolution mechanism, available under the contract.”

While at firt sight it appears that the legislation was designed initially to protect smaller participants in the construction industry such as small contractors and subcontractors the experience in Western Australia since the introduction of the Act has been that the majority of payment disputes under the Act have occurred between large head contracting organizations

(3) See Jacobs M.S, Security of Payment in the Australian Construction Industry,

Thompson Law Book Company 2006 at page 19. (4) See Hansard, Second Reading Speech, WA Legislative Assembly, 3 march 2004 at

pages 274-275. (5) [2009] WASAT Pty Ltd

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and major construction principals or employers. (6) The statistics relating to the amounts of claims and the construction occupations subject to applications for adjudication up to July 2008 are shown in Appendix B. From this information that the average value of the claims was $A1.14 million and the largest single determination made was for $A 17.9 million thus supporting the contention that the Act has had greater application to the larger construction projects in Western Australia.

The specific objectives of the Western Australian Act

The objectives of the Act are to;

• prohibit or modify certain provisions in construction contracts

• imply provisions in construction contracts about certain matters if there are no written provisions about these matters in the contract; and

• provide a means of rapid adjudication of payment disputes arising under construction contracts

The main provisions of the Act

The Act applies to all contracts for construction work, including goods and services related to construction work, undertaken in Western Australia. Construction work includes site preparation, actual construction, repair, renovation and design, drafting and management. (7) Where the contract is silent with respect to terms regarding payment provisions the Act will imply terms regarding the contractor’s entitlement to be paid. (8)

Not all construction work is included in the Act. Work in discovering or extracting oil or natural gas is excluded as well as the mining for minerals and the constructing of plant for the purpose of extracting oil or minerals. Wholly artistic works are also excluded (9). There is also an exclusion for watercraft (10).

(6) See Report of the Construction Contracts Registrar, 30 June 2008.

http://www.buildingcommission.wa.gov.au. (Accessed 15 January 2010). (7) See ss 4(1), (2). (8) See Division 2-Implied provisions. (9) See s 4(3) (10) See s 4(4).

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The provisions relating to the rapid adjudication process reflect a compromise between expediency on one hand and legal formality on the other. The principal aims of the Act are to keep the money flowing in the contractual chain by insuring timely payment for work completed and avoiding complex protracted litigation.

The process is determined by registered adjudicators with a background in construction contract management and dispute resolution. To date in Western Australia there are 46 individuals registered as adjudicators under the Act. The role of the adjudicator is to review the claim made under the construction contract and the response and, if satisfied that the claim is justified, make a binding determination on the issues.

The Application of the Act

Construction Work

What constitutes construction work is very broadly defined in the Act. It includes all of the activities associated with civil works such as roads railways, waterways, harbours, ports and marinas, pipelines for water gas oil and sewerage. Additionally it includes activities associated with repair restoration, demolition and installation of plant and machinery associated with construction works and activities such as cleaning painting decorating site restoration and landscaping. (11)

Goods and services related to Construction Work

Contracts relating to the supply of plant and materials used in construction work are also subject to the Act. (12) Further contracts for services that are provided by a profession that are related to construction work are subject to the Act. The services include surveying, planning, architectural design, plan drafting, engineering, quantity surveying and project management services. (13)

(11) Section 4(2) (a) to (g) inclusive. (12) Section 5. (13) Section 5(2)(a)(i).

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Work not designated as Construction Work

The Act excludes a number of activities which one might normally associate with construction work. (14) In particular work associated with mining and mineral exploration and extraction. For example;

• Drilling for the purposes of discovering or extracting oil or natural gas

• Constructing a shaft pit or quarry for the purposes of discovering or extracting any mineral bearing or other substance; and

• Constructing any plant for the purposes of extracting or processing oil natural gas or any derivative of natural gas

Other work excluded under the Act is any work associated with wholly artistic works such as sculptures and murals (15) and constructing the whole or any part of watercraft. (16) Accounting, financial and legal services are not considered services that relate to construction work. (17)

Payment Dispute

The Act applies to payment claims made under a construction contract for payment for amounts relating to the performance or non-performance by the contractor of its obligations under the contract. (18) For the purpose of the Act, a payment dispute will arise if, by the time when;

• the amount claimed in a payment claim is due to be paid under the contract the amount has not been paid in full, or the claim has been rejected or wholly or partly disputed.

• any money retained by a party under the contract, the money has not been paid if due to be released; or

(14) Section 4(3)(a) to (e) inclusive. (15) Section 4(3)(d). (16) Section 4(4). (17) Section 5(2)(b). (18) Section 6.

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• any security held by a party under the contract is due to be returned under the contract the security has not been returned. (19)

The phrase “due to be paid” is significant. This presupposes that time for payment is expressly included in the contract. However not all contracts may contain an express term with respect to time for payment. In these cases the Act requires that the time for payment will be 28 days from receipt of the payment claim.(20)

The reference to money retained on security held relates to terms commonly found in construction contracts where there is provision for retention sums to be held by the principal for the purpose of ensuring the due and proper performance by the contractor or subcontractor of the contract. (21)

Construction contracts to which the Act applies

Again the Act construes the definition of a construction contract broadly. Construction contracts are defined to mean a contract or other agreement whether in writing or not under which a person has an obligation to carry out construction work, to supply goods that are related to this construction work or to provide the professional services related to the construction work. (22)

In this respect the form of the contract differs from that required under the Home Building Contracts Act 1991 (WA) which requires that for a contract for home building work must be in writing to be enforceable. (23)

Prohibited provisions

Section 9 of the Act prohibits pay if paid or pay when paid provisions in construction contracts. These provisions provide for the liability of a party to pay money under the contract to the other party contingent on the first party being paid by another person. The typical situation is where a subcontractor will not be paid until the main contractor has been paid by

(19) Sections 6(a),(b),(c). (20) Schedule 1, Division 5, section 7. (21) For example, see General Conditions of Contract (AS 2124-1992), Clause 5. (22) Section 3(a),(b),(c). (23) Section 4 (1)(a).

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the principal or the owner. A discussion of these clauses can be found in Trade Indemnity Australia Ltd v Parkinson Air Conditioning Ltd. (24) and Iezzi Constructions Pty Ltd v Currumbin Crest Development Pty Ltd. (25)

Time for payment

The Act further prohibits terms in construction contracts which require a payment to be made more than 50 days after the payment is claimed. Such terms are now to be read as being amended to require the payment to be made within 50 days after it is claimed. (26)

Implied provisions

Where a construction contract does not contain written provisions with respect to matters such as variations, payment entitlement progress payments or the mode and manner of making payment claims, Part 2, Division 2 of the Act Schedule 1 will imply terms in these situations. For a discussion of implied terms in the context of construction contracts, see Codelfa Constructions v State Rail Authority of N.S.W. (27)

Variations

There are a large number of expressions in building contracts dealing with additions or alterations to the work. These include extras, alterations, additions, changes and substitutions. The most common expression which covers all of these is the term “variation”. (28)

Section 1 of Schedule 1 of the Act provides that the contractor is not bound to perform any variation of its obligations under the contract unless the contractor and the principal have agreed upon the nature and extent of the variation of those obligations and the amount, or a means of calculating the amount to be paid for the variations. This provision will prevent principals from issuing variation orders to the contractor for additional

(24) (1994) 11 BCL 39. (25) (1994) 13 Aust Cons LR 29. (26) Section 10 (27) (1982) 149 CLR 337. (28) See J. Dorter, ‘Variations’ (1990) 6 Building and Construction Law 156.

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works which may fall outside the scope of the original obligations as in Wegan Constructions Pty Ltd v Wodonga Sewerage Authority. (29)

Entitlement to Claim Progress Payments

A progress payment claim in the absence of an express contrary intention, entitles the contractor to be paid for work done and materials supplied even though the whole work is not yet complete. Where a construction contract under the Act does not have a written provision regarding whether or not the contractor is able to make a claim to the principal for a progress payment for the obligations, the contractor has performed, the provisions of Schedule 1 Division 3 entitle the contractor to make one or more claims for a progress payment in relation to those obligations. (30)

Making claims for Payment

Where a contract does not have a written provision about how a party is to make a claim to another party for payment, Schedule 1 Division 4 of the Act provides for the contractor to make a claim at any time after the contractor has performed any of its obligations. (31) A payment claim is defined in Section 3 and means a claim;

(a) by the contractor to the principal for payment of an amount in relation to the performance by the contractor of its obligations under this contract; or

(b) by the principal to the contractor for payment of an amount in relation to the performance or non-performance by the contractor of its obligations under this contract .

This payment claim must be in writing, addressed to the party to which the claim is made, and itemised with a description of the obligations performed by the party making the claim the amount of the claim. (32)

(29) [1978] VR 67. (30) Section 15. (31) Section 16. (32) Schedule 1, Division 4, s 5(2).

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Responding to Claims for Payment

Where the written contract is silent on this issue, and where a party receives a payment claim and believes the claim should be rejected or the whole or part of the quantum of the claim should be disputed, the receiving party must within 14 days of the receipt of the claim give the claimant a notice of dispute. This notice of dispute must also be in writing and include the reasons for the belief that the claim has not been made in accordance with the contract. (33)

Time for payment

Where the construction contract does not have a written provision regarding the time when a payment must be made, within 28 days after a party receives a payment claim the party, where they do not reject or wholly dispute the claim, must pay the whole amount of the claim or pay the amount of the claim that is not disputed. (34)

Interest on Overdue Payments

The Act provides that interest will be payable on any payment that is not made at the time required by the contract. (35) The first edition of the Act stipulated that the rate of interest was that prescribed for that time under the Supreme Court Act 1935, Section 142 . (36) Subsequently section 142 of the Supreme Court Act was deleted. The prescribed arte of interest is now 6% as specified in section 8 of the Civil Judgments Enforcement Act 2004.

Ownership of Goods

In the past, the issue of whether a subcontractor or supplier could recover materials previously delivered to site, and not subsequently paid for by the recipient, involved a legal consideration of when property passes. (37) At common law the property in materials brought to a site

(33) Schedule 1, Division 5, s 7. (34) Schedule 1, Division 5, s 7(3). (35) Section 19. (36) Schedule 1, Division 6, s 8(3). (37) Hewith v Court (1983) 149 CLR 639 at 65).

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passed to the builder or building owner only when those materials were fixed into the construction. (38)

Under the Act, ownership of the goods which are supplied by the contractor will not pass from the contractor until the contractor is paid for the goods or until the goods become fixtures. (39)

Duties as to Unfixed Goods on Insolvency

At common law where a builder becomes insolvent and the subcontractor has delivered materials under a supply and installation of materials subcontract but has not yet received payment a proprietor does not have ownership of the materials until the materials are installed. For example see Aristoc Industries Pty Ltd v R A Wenham (Builders) Pty Ltd. (40) Contracts will often contain retention of goods clauses and may prevent the passing to the builder and limit rights to materials supplied on site. (41)

Where a construction contract does not have a written provision about what is to happen to unfixed goods if either the principal or the person for whom the principal is performing construction work becomes insolvent then the provisions of the Act imply that the principal or the other person must not during the insolvency allow the goods to become fixtures or to fall into the possession of any other person other than the contractor. Secondly the principal must allow the contractor a reasonable opportunity to repossess the goods. (42)

Retention Money

Many standard form subcontracts provide for the principal to deduct from payments otherwise due to the contractor a specified amount as security for proper performance of the contract. (43) The effect of such a

(38) RJ Grills Pty Ltd v Dellias [1988] VR 136 at 139. (39) Schedule 1, Division 7, s 9. (40) [1965] NSWR 581. (41) North Western Shipping and Towage Company Pty Ltd v Commonwealth Bank of

Australia Limited & G G Machine and Steel Construction (in liq) (1993) 118 ALR 45.

(42) Schedule 1, Division 8, s 10. (43) For example, see General Conditions of Contract (AS 2124-1992), Clause 42.3

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provision is to oblige the principal to set aside these retention moneys in a trust fund for the contractor subject to the principal’s entitlement to access these funds in the event of any non- performance of the contractor’s obligations. (44) Where a contract does not have a written provision concerning the status of money retained by the principal for the performance by the contractor of its obligations, the Act prescribes that the principal is to hold the money on trust for the contractor until the happening of a number of specified events. (45) For example, the money is paid to the contractor or the contractor in writing agrees to give up the claim to the money.

Adjudication of disputes

The Act provides for what may be described as a rapid adjudication procedure for payment disputes, by registered adjudicators. Adjudicators must have a degree in a building or construction discipline such as Architecture, Building, Engineering, Quantity Surveying or Building Surveying and at least 5 years experience in the administration of construction contracts or dispute resolution relating to construction contracts. Additionally the adjudicator must have successfully completed an appropriate training course. (46)

Commencing an adjudication

The adjudication process commences by the lodging of an application by either party to the payment dispute. However a party cannot apply if an application has already been made or the dispute is the subject of an order, judgment or other finding by an arbitrator or other person or a court or other body dealing with a matter arising under a construction contract. (47)

Applying for adjudication

Within 28 days after the dispute arises, a party to the contract must prepare a written application for adjudication and serve it on each other

(44) See KBH Constructions Pty Ltd v Lidco Aluminum Products Pty Ltd (1991) BCL

183 at 190. (45) Schedule 1, Division 9, s 11. (46) Construction Contracts Regulations 2004 (WA), s 9. (47) Section 25.

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party to the contract and the adjudicator if the parties have appointed an adjudicator. (48) This application must set out all the information documentation and the submissions on which the party making the application (the Applicant) relies. (49)

Responding to an application

Within 14 days after service of the application the recipient (the respondent) must prepare a written response to the application and serve it on the applicant and the adjudicator. (50) This response must set out the details of the rejection of the dispute and include all the information and documentation on which the respondent will rely. (51)

It is important that both the applicant and respondent fully detail their submissions, as the adjudication will be based on the documents only. There is however provision in the Act for the adjudicator, in order to obtain sufficient information to make a determination to request a party to make further written submissions or request the parties to attend a conference with the adjudicator. (52)

Appointment of an adjudicator

The parties may agree to the appointment of an adjudicator or a party may serve an application for adjudication upon a prescribed appointer. A prescribed appointer is a body registered by the Registrar and prescribed in the regulations as having authorisation to appoint an adjudicator for the adjudication of the payment dispute. (53) There are eight prescribed appointers in Western Australia. They are;

The Royal Australian Institute of Architects, Australian Institute of Building, Master Builders Association of WA, Australian Institute of Quantity Surveyors and the Institute of Arbitrators and Mediators Australia, the Electrical and Communications Association of Western

(48) Section 26(1). (49) Section 26(2). (50) Section 27(1). (51) Section 27(2). (52) Section 32(2). (53) Section 55.

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Australia, the Australian Institute of project Management and the Royal Institute of Chartered Surveyors Australia.

Within 5 days of being served with an application for adjudication the prescribed appointer must appoint a registered adjudicator to adjudicate the payment dispute, send the application to the adjudicator and notify the parties accordingly. (54)

Conflicts of interest

The object of an adjudication of a payment dispute is to determine the dispute fairly, quickly and inexpensively as possible. (55) Concepts of fairness not only involve each party being given the opportunity to prepare its submission and respond to the claim but the adjudication must be conducted by an independent impartial third party. Put simply, not only must justice be done, it must be seen to be done. (56)

Consequently an appointed adjudicator who has a material personal interest in the payment dispute concerned or in the construction contract under which the dispute has arisen will be disqualified from adjudicating the dispute. (57)

Whilst a “material personal interest” is not defined in the Act, some guidance may be obtained from appeals from decisions of arbitrations under the Commercial Arbitration Act 1987 (WA). Section 42 of this Act allows an appeal where there has been misconduct on the part of the arbitrator. Misconduct is defined in section 4 of the Act to include “reasonable apprehension of the possibility of bias”. For example where an arbitrator has failed to disclose that he has run a short course on building contracts for one of the parties, (58) or where an arbitrator failed to disclose that he had been a member of a statutory board which had cancelled the registration of a builder who was now appearing before him as a party to a construction dispute. (59)

(54) Section 28. (55) Section 30. (56) See Ridge v Baldwin [1964] AC 40. (57) Section 29. (58) Giustiniano Nominees Pty Ltd v Minister for Works (1995) 16 WAR 87 (59) Du Toit v Vale (1993) 9 WAR 138.

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The adjudication procedure

The Act requires that the adjudicator must act informally and where possible make the determination on the documents. (60) Secondly the adjudicator is not bound by the rules of evidence and may inform himself in anyway he or she thinks fit. (61) These provisions should however be applied with caution. While the Act provides that the dispute is to be determined informally there will be situations where the rules of evidence will apply. For example where a written contract purports to contain all of the terms of a contract, the parole evidence rule will prevent extrinsic evidence being led to contradict or vary the written terms of the contract. (62).

Also informing oneself in anyway one thinks fit is also subject to the rules of natural justice. Again guidance may be obtained from a consideration of the provisions of the Commercial Arbitration Act. Section 19 of the Act contains a similar provision. However the courts have consistently held that where an arbitrator takes into account matters, that have not been raised by the parties, in determining the award, it is incumbent on the arbitrator to refer these matters to the parties for comment before handing down the award. (63)

The adjudicator may also, in order to obtain sufficient information, request the parties to make further written submissions and request the parties to attend a conference. (64) An adjudicator may also inspect any work or thing to which the payment dispute relates, arrange for things to which the payment dispute relates to be tested, or engage an expert to investigate and report on any matter relevant to the payment dispute, unless all the parties object. (65)

(60) Section 32(1)(a). (61) Section 32 (1)(b). (62) Mercantile Bank of Sydney v Taylor (1891) 12 LR (NSW) 252. (63) Shirley Sloan Pty Ltd v Merril Holdings t/a Airen Constructions [2000] WASC 99. (64) Sections 32(2)(a), 32(2)(b). (65) Section 32(2)(c).

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Prescribed Time

The Act requires the adjudicator to determine the dispute as quickly as possible and prescribes maximum periods for the determination. (66) Within 14 days of the service of the response to the application or if a response is not served within 14 days after the last date on which a response is required to be served, the adjudicator must either dismiss the application or otherwise determine on the balance of probabilities whether any party to the payment dispute is liable to make a payment. (67)

There are a number of situations where the adjudicator must dismiss the application without making a determination of its merits. (68) For example, if the contract concerned is not a construction contract or there has already been an order made on the matter in dispute by an arbitrator, court or other person. The adjudicator may also dismiss the application if satisfied that it is not possible to make a determination within the prescribed time because of the complexity of the matter.

Extension of Time

Where the adjudicator considers it is not possible to determine the application within the prescribed time the adjudicator may with the consent of the parties extend the time for making a determination. (69)

Payment of Interest

Having determined that a party to the dispute is liable to make a payment the adjudicator may determine that interest be paid. Where the payment is overdue under the construction contract the rate of interest will be that specified in the contract. (70) Otherwise the rate shall not be greater than that formerly prescribed in Section 142 of the Supreme Court Act 1935 (WA). (71)

(66) Section 31(1). (67) Section 31(1)(a), 31(1)(b). (68) Section 31(2)(a). (69) Section 32(3)(a). (70) Section 33(1)(a). (71) Section 38(1)(b).

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Cost of the Parties

The usual rule in litigation is that the successful party is entitled to its costs. This is described as “costs follow the event”. However the starting point with costs of adjudication under the Act is that the parties to a payment dispute will bear their own costs in relation to the adjudication.

The term “costs of an adjudication” is described in the Act as the entitlement of the appointed adjudicator and the costs of any testing done or expert engaged by the adjudicator. (72) However where the adjudicator is satisfied that a party to the dispute incurred costs of the adjudication because of unfounded claims or frivolous or vexatious conduct by the other party, the adjudicator may decide that the other party must pay some or all of the costs. (73)

Consequently the Act provides that where the adjudicator makes an order with respect to costs, he or she must decide the amount of the costs, give reasons for the decision and communicate those reasons in writing to the parties. (74)

Form and content of the adjudicator’s determination

Section 36 of the Act prescribes the form and content of the adjudicator’s decision. The adjudicator’s decision must;

• be in writing

• state the amount to be paid and the date on or before it is to be paid; and

• give reasons for the determination

The decision must also identify any information in it of a confidential nature which is not suitable for publication by the Registrar. (75) The decision must then be given to the parties to the adjudication and to the Registrar. (76)

(72) Section 44 (1)(a), 44(1)(b). (73) Section 34(2). (74) Section 34(3)(c). (75) Section 36(a). (76) Sections 36(f), 36(g).

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Effect of determinations

The fact that an adjudication application has been made with respect to the payment dispute does not prevent the parties commencing proceedings on other issues arising out of the dispute before an arbitrator or court. However the adjudicator’s determination of the payment dispute is binding on the parties. (77)

The adjudicator’s determination is also final and the adjudicator cannot without the consent of the parties amend or cancel the determination (78) unless there has been some accidental slip or omission, arithmetic error or material mistake in the description of any person or thing. (79)

Contractor may suspend its obligations

At common law, a contractor is unable to suspend the performance of its obligations where the other party has not paid a progress payment on time unless the contract includes an express right to suspend work for non-payment. (80) This is consistent with the principle that unless there is a breach of a condition, the breach does not discharge the innocent party from performance of its unperformed obligations. However the Act provides a right to the contractor to suspend work if the other party does not pay in accordance with the determination, subject to the issuing of a notice in writing to suspend performance of its obligations. (81)

The Act further provides that a contractor that suspends the performance of its obligations in accordance with the above is not liable for any loss or damage suffered by the principal or any other person claiming through the principal and the contractor retains its rights under the contract. (82)

(77) Section 38. (78) Section 41(1). (79) Section 41(2). (80) See A. May (ed), Keating on Building Contracts (5th ed, 1991)157. (81) Section 42(2). (82) Sections 42 (5)(a), 42(5)(b).

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Determinations may be enforced as judgments

An adjudicator’s determination may, with the leave of a court of competent jurisdiction, be enforced in the same manner as a judgment or order of the court. (83) A court of competent jurisdiction in relation to a determination is defined in Section 43(1) as a court with jurisdiction to deal with a claim for the recovery of a debt of the same amount as the amount that is payable under the determination.

Currently these amounts are; Local Court of WA ($30,000 or less); District Court of WA ($30,000 to $300,000); Supreme Court of WA (over $350,000).

Costs of Adjudications

The costs of adjudication are essentially the costs of the adjudicator at a rate previously agreed between the adjudicator and the parties and the costs of any testing done or expert engaged. (84) The Western Australian Building Commission website contains a list of registered adjudicators. There are currently 48 registered adjudicators in Western Australia. Their rates range from $180 to $350 per hour depending on the amount of payment in dispute. (85) As noted above, the parties involved are liable to pay the costs of adjudication in equal shares and the parties are jointly and severally liable to pay the costs of the adjudication. (86) The costs of the adjudication may be recovered from a person liable to pay the costs in a court of competent jurisdiction as if the costs were a debt to the adjudicator. (87)

Concurrent Proceedings

Concurrent proceedings are proceedings in a court, tribunal or arbitration, dealing with a dispute or other matter arising under the contract between the parties. The Act provides that an adjudication under the Act will not affect concurrent proceedings. (88) These proceedings can continue

(83) Section 43(2). (84) Section 44(1). (85) www.buildingcommision.wa.gov.au (86) Sections 44(5), 44(6). (87) Section 44 (12). (88) Section 45(1).

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at the same time as the adjudication, unless all the parties, in writing, require the adjudicator to discontinue the adjudication. (89)

Consequently, if litigation or arbitration of the dispute has already commenced, the applicant is still entitled to pursue payment under the Act. The Act provides that an arbitrator or court must take into account any amount determined under the Act. (90) Where proceedings have commenced in a court, tribunal or arbitration before the time of the adjudication, the adjudicator may still continue with the adjudication. However the adjudicator cannot have regard to those proceedings. Similarly anything said or done in an adjudication is not admissible before an arbitrator or any other body. (91)

Where a party is dissatisfied with the amount, if any, determined by the adjudicator, the party may still commence proceedings before an arbitrator or other person. (92)

Review of adjudicator’s determination

Whilst the main objective of the security of payment legislation is to provide a means of rapid adjudication of payment disputes arising under construction contracts (with limited grounds for appeal), within the New South Wales jurisdiction since the introduction of the Building and Construction Industry Security of Payment Act 1999 (“the NSW Act”) there has been considerable judicial consideration as to whether a determination of an adjudication is capable of judicial review. (93)

The decision of the NSW Court of Appeal in Brodyn Pty Ltd trading as Time Cost and Quality v Davenport & Anor (“Brodyn”) (94) held that the determinations of an adjudicator made under the NSW Act could be judicially reviewed. However the court limited the grounds for review.

(89) Section 45(2). (90) Section 45(4). (91) Section 45(3). (92) Section 45(1). (93) Musico v Davenport [2003] NSWSC 977, Multiplex Constructions v Luikens and

Anor [2003] NSWSC 1140, Transgrid v Siemans [2004] NSWSC 87. (94) [2004] NSWCA 394 (Unreported Mason ,Giles, Hodgson JJ, 1,3,14 October, 3

November 2004).

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Since the objectives of the NSW Act is very similar to the WA Act it is appropriate to consider the decision in Brodyn.

The facts in Brodyn

In November 2002, Brodyn entered into a contract with Dasein Constructions Pty Ltd (”Dasein”) to undertake concreting work required for the construction of 12 townhouses. The contract included the standard form of AS 4305-1995 “General Conditions of Subcontract for Design and Construction”. On 13 June 2003 Brodyn gave notice to Dasein alleging repudiation of the contract by Dasein and purporting to accept that repudiation. In response on 27 June 2003, Dasein served on Brodyn a payment claim for an amount of $115,340.39 stating it was a “final claim” and a payment claim under the NSW Act and which set out the items in respect of which the payment claim was made.

By way of counterclaim, Brodyn responded alleging that Dasein should in fact pay Brodyn an amount of $125,695.39 by way of unapproved variations and defects in the work done. Brodein also alleged that Dasein was indebted to Brodyn for $86,184.00 being liquidated damages for 56 days delay at $1,539.00 per day.

On 28 August 2003 Dasein served Brodyn with a further payment claim under the NSW Act. This claim was again noted ‘final claim’ and contended that the amount due under the contract was in fact $191,800.78. The next day Brodyn responded in writing asserting that Dasein’s purported claim was invalid and that no payment was due.

On 28 September 2003 Dasein served Brodyn with a third payment claim for $214,744.90 made up of the $191, 800.78 previously claimed, plus $3,421.86 interest. The same day Brodyn served a further payment schedule on Dasein contending, inter alia, that money should be deducted from any money due to Dasein for incomplete work and for the rectification of defects.

On 2 December 2003 Dasein made an application for adjudication under the NSW Act in respect of its claim served on 28 September 2003. The appointed adjudicator, Davenport, determined the claim on 16 October 2003. The determination was that Brodyn was to pay Dasein an amount of

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$180,059.00. In accordance with the provisions of the NSW Act, reasons were given for the decision. However the reasons did not include reference to Brodyn’s contention that money should be deducted from Dasein for incomplete work and for rectifying defects. An adjudicator’s certificate under the NSW Act was issued on 17 October 2003. This certificate was filed in the New South Wales District Court on the same day so as to give it the effect of a judgment, as provided for in section 25 of the NSW Act.

Brodyn then applied to the New South Wales Supreme Court for an order in the nature of certiorari quashing the adjudicator’s determination on the grounds that the relevant payment claim was invalid (on the basis that only one payment claim can be made after the termination of a contract and cessation of work) and the adjudicator’s failure to refer to Brodyn’s submissions that money should be deducted for incomplete work and the rectification of defects in the work amounted to a denial of natural justice. The primary judge considered that certiorari was available if the payment claim was not valid but refused relief in the exercise of his discretion because it could not result in the setting aside of the adjudication certificate as a judgment debt in accordance with section 25 of the NSW Act. Brodyn then lodged an appeal from that decision.

The Court of Appeal decision

The Court of Appeal held, in part, that;

• A District Court judgment constituted by the filing of an adjudication certificate can be set aside on appropriate grounds

• Relief in the nature of certiorari is not available to quash an adjudicator’s determination which is not void. If a determination is void relief is available by way of declaration and injunction. If the basic requirements of the Act are not complied with, or if there is not a bona fide exercise of the adjudicator’s powers, or there has been a substantial breach of the rules of natural justice, then a purported determination will be void and not merely voidable.

• The adjudicator’s failure to refer to Brodyn’s submission that money should be deducted for incomplete work and for rectifying defects

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did not amount to a denial of natural justice nor render the adjudicator’s determination void. Whilst a denial of natural justice could render a determination void it had to be a “substantial “denial.

Reasons for decision

Prior to the decision in Brodyn it was considered that a determination of an adjudication made under the NSW Act was capable of judicial review under the broad definition of jurisdictional error arising from the House of Lords decision in Anisminic Ltd v Foreign Compensation Commission (95) (‘Anisminic’).

For example, in Musico v Davenport (96) (‘Musico’) McDougal J held that;

“If such an administrative tribunal falls into error of law which caused it to identify a wrong issue, to ask itself a wrong question, to ignore relevant material, to rely on irrelevant material, or at least in some circumstances to make an erroneous finding or to reach a mistaken conclusion, and the tribunal’s exercise or purported exercise of power is thereby affected, it exceeds its authority or powers. Such an error is jurisdictional error.”

However the Court of Appeal in Brodyn rejected the broad definition of jurisdictional error as stated in Anisminic. (97) It considered that the position of an adjudicator under the Act was not analogous to that of an administrative tribunal. Nor to that of an inferior court which has authority to decide questions of law as well as questions of fact. Rather, the position of an adjudicator is analogous to that of an expert by whose determination the parties have agreed to be bound as in

A Hudson v Legal & General Life of Aust Ltd. (98) The court held that the scheme of the Act appeared strongly against the availability of judicial review on the basis of non-jurisdictional error of law. It was the intention

(95) [1969] 2 AC 147. (96) [2003] NSWSC 977. (97) [51] (Hodgson JA). (98) (1985) 1 NSWLR 701.

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of the Act to ensure that payment disputes were resolved with a minimum of delay with a minimum opportunity for court involvement.

Hodgson JA stated further (99) for an adjudicators determination to have the legal effect provided by the Act, it must satisfy the conditions established by the Act for a valid determination. However if it does not satisfy the conditions the determination will be void and not merely voidable and a court of competent jurisdiction could grant relief by way of declaration and injunction without the need to quash the determination by means of an order in the nature of certiorari.

The essential conditions for the existence of an adjudicator’s determination were stated by Hodgson JA as follows; (100)

1. The existence of a construction contract between the claimant and the respondent to which the Act applies (ss7 & 8)

2. The service by the claimant on the respondent of a payment claim (s 13)

3. The making of an adjudication application by the claimant to an authorised nominating authority (s 17)

4. The reference of the application to an eligible adjudicator, who accepts the application (ss 18 and 19); and

5. The determination by the adjudicator of this application (ss 19(2) & 21(5)), by determining the amount of the progress payment, the date on which it becomes due or became due and the rate of interest payable (s22(1)) and the issue of a determination in writing (s 22(3)(a)). (101)

His Honour then went on to say that in his opinion the exclusion of judicial review on the basis of non jurisdictional error of law justifies the conclusion that the legislature did not intend that exact compliance with all the more detailed requirement (of the Act) was essential to the existence of a determination. (102)

(99) [52] (Hodgson JA). (100) [53] )Hodgson JA). (101) These sections refer to the NSW Act. They are “mirrored” in the WA Act. (102) [55] (Hodgson JA).

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What was intended by the legislature to be essential was compliance with the conditions above (noting that these were not exhaustive), a bone fide attempt by the adjudicator to the relevant power relating to the subject matter of the legislation and that there is no substantial denial of natural justice.

The approach to an adjudication review in Western Australia

The intention of the Act is that grounds for a review of an adjudicator’s decision be limited. (103) A person who is aggrieved by a decision made under s 31(2)(a) of the Act may apply to the Western Australian State Administrative Tribunal (SAT) for a review of the decision. The SAT came into operation on 1 January 2005 and amalgamated most of the review, civil and disciplinary functions of nearly 50 industry and public sector boards and tribunals and a number of courts. SAT matters are divided into four streams that are appropriate to the matter under review. The forum which considers reviews of decisions of adjudicators is the Commercial & Civil stream which deals with strata title and retirement village disputes, commercial and other commercial and personal matters. Details regarding the operation of SAT can be found on the Tribunals website. (104)

Circumstances where an Adjudication may be Dismissed

Section 31(2)(a) of the Act sets out the circumstances where an adjudication may be set aside by SAT. These are;

• the contract is not a “construction” contract • the application has not been served in accordance with the

provisions of the Act • an order has already been made by another person (court or

arbitrator) about the matter which is the subject of the application; or • the adjudicator fails to make a decision within the time prescribed.

(103) Section 46. (104) See www.sat.justice.wa.gov.au.

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Further, where the adjudicator decides incorrectly that he or she has jurisdiction to hear a dispute the determination may be subject to review by the Supreme Court on the basis of a jurisdictional error of law. This ground for review will also apply where the adjudicator decides that he or she has no jurisdiction to determine the matter when in fact they do. Put simply, a jurisdictional error occurs when a person or tribunal exercises jurisdiction to decide a matter that has not been entrusted to it by statute.

However it is considered that the court will not set aside an adjudicator’s decision where the adjudicator has made a non-jurisdictional error of law. For example, in the application of the law, or in the interpretation of the contract. The court may set aside an adjudicator’s decision if the adjudicator has not acted honestly, has breached the requirements of natural justice. (105) Put simply, the observance of natural justice requires the decision maker to be unbiased and to provide each party with the opportunity to prepare and present its case and respond to any allegations.

An adjudicator should not become involved in the appeal where there is an appeal arising from his or her determination. If they do the adjudicator may end up paying the costs of the review. (106)

Review of WA adjudication determinations

Since the commencement of the Act there have been a number of applications under section 31 to the State Administrative Tribunal for review of adjudicator’s determinations. Details of these decisions are shown in Appendix A to this paper. The principle arising from these determinations is that the SAT, as in the Brodyn decision in New South Wales, will only intervene in an adjudication determination on the basis of jurisdictional issues and will concern itself with any review on the merits of the adjudicators determination.

(105) For a discussion of the requirements of natural justice see Ridge v Baldwin (note 51

supra) and Najjar v Haines (1991) 25 NSWLR 224. (106) See Najjar v Haines at 248.

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Administration of the Act

Part 4 of the Act details a number of administrative provisions. In particular, matters such as the appointment and functions of the registrar, the registration of adjudicators and the publication of adjudicator’s decisions. (107)

Miscellaneous provisions

Part 5 of the Act contains a number of miscellaneous provisions. These include no contracting out, immunity from tortious liability, regulations and review of the Act.

No contracting out

Section 53 prohibits terms in a construction contract that purport to exclude, modify or restrict the operation of the Act. The effect of this provision is that any agreement to modify or exclude rights under the Act will be void. Similarly an adjudicator cannot by agreement vary his or her statutory obligations.

Immunity from Tortious liability

Section 54 provides adjudicators with immunity against an action in tort for anything done in good faith in the performance of a function under the Act. However if an adjudicator attempts to act outside the provisions of the Act, then the adjudicator will leave himself or herself subject to personal liability. The difficulty with this section is the lack of consensus or authority with respect to what exactly is meant by good faith. (108)

(107) Sections 47 to 52 inclusive. (108) See Coal Cliff Collieries Pty Ltd v Sijehama Pty Ltd (1991) 24 NSWLR 1; Perini

Corporation v Commonwealth [1969] 2 NSWLR 530; Renard Constructions (ME) Pty Ltd v Minister for Public Works (1992) 26 NSWLR 234.

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Conclusion

The introduction of the Act has significantly altered the common law rights of parties seeking payment for work performed or materials supplied in connection with construction work in Western Australia. Prior to the introduction of the Act, persons with an obligation to pay contractors for work done or materials supplied had a distinct advantage when a dispute arose, about payments under a construction contract. Large employers or head sub contractors held the money and the contractor was faced with the difficulties of time and cost in trying to lawfully recover payments through litigation or arbitration. The Act now provides for a quick informal and hopefully inexpensive procedure for the resolution of these payment disputes. Additionally, the Act enables an adjudication to be commenced either before or during arbitration or litigation in order to “keep the money flowing”. The Act also abolishes pay when paid provisions in construction contracts and prohibits lengthy times for payment by the owner or principal.

Unfortunately while the principal objective of the Act is to provide a rapid adjudication process for the resolution of construction payment disputes, the NSW experience over the past 5 years since the introduction of similar legislation, is that there has been considerable litigation relating to the quashing of arbitrators decisions on the basis of jurisdictional error. (109) However the decisions to date by the Western Australian State Administrative Tribunal relating to adjudications under the Act indicate that review will only be available on matters relating to jurisdiction and not merits.

While it was clearly the intention of the Act to provide a rapid dispute process for construction payment disputes particularly for smaller contractors in the construction industry, as shown in the statistics provided in the Report of the Construction Contracts Register (to June 2008), the Act has had its major application in construction contract disputes between major employers and large contracting organizations.

(109) K. Tapsell, “Back to the Drawing Board with Security of Payments” Australian Construction Law Newsletter, (2005) #100 January/February 6.

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APPENDIX A

Marine Civil Bauer Joint Venture and Leighton Kumagai Joint Venture [2005] WASAT 269 (4 October 2005)

This was the first appeal from an adjudicator’s decision under the Act. The dispute arose out of the construction of the Perth to Mandurah railway. The adjudicator dismissed the application for adjudication on the basis that the contract was entered into before 1 January 2005 and thus he did not have jurisdiction to determine the dispute. SAT determined that the payment dispute arose out of an agreement which was formed post 1 January 2005 applying the third limb of the Masters v Cameron principle (110) and the matter was referred back to the adjudicator for determination.

Blackadder Scaffolding Services (Aust) Pty Ltd and Mirvac Homes (WA) Pty Ltd [2009] WASAT 133

It was held that a payment claim under the Act is not required to comply with the conditions precedent under the contract. Also issues of waiver and estoppell may be taken into consideration by the adjudicator. A dispute arises when the claim is rejected even though that rejection may occur before the payment is actually due. Section 6(a) provides for two different situations. Firstly where the amount of a payment claim had not been fully paid by the time it due and secondly, where the claim is rejected or disputed. If a claim is clearly rejected or disputed it is not necessary to wait until the date when the payment would have been due.

Match Projects Pty Ltd and Arcon (WA) Pty Ltd [2009] WASAT 134 (13 June 2009)

The SAT held that a merit review is not available under the Act. Strict compliance with respect to section 26 is required under the Act. An adjudicator must consider all of the provisions in the Act regardless of whether a party has raised objections or not. That is, whether the application had been prepared and served in accordance with section 26.

(110) (1954) 91 CLR 353

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Maroney and Anor and Murray River North Pty Ltd [2008] WASAT 111 (20 May 2008)

With reference to section 6 of the Act, a payment dispute occurs the day after the last day when payment is due under the contract. In dismissing an application the adjudicator should consider all of the grounds as per section 31(2).

Silent Vector Pty Ltd t/as Sizer Builders and Squarcini [2008] WASAT 39 (22 February 2008)

An adjudicator cannot dismiss the entire application because the application includes an item which may have been previously submitted to the superintendent for approval under the contract. Further it is possible to submit aggregate payment claims in one application.

Merym Pty Ltd and Methodist Ladies College [2008] WASAT 164 (21 July 2008)

A payment claim may be repeated in a application if it is supported with additional information which would allow the superintendent to come to a different conclusion with respect to that previously made in rejecting the claim.

O’Donnell Griffin Pty Ltd v Davis and Ors [2007] WASC 215

A payment dispute arose between O’Donnell and a main contractor John Holland. John Holland sought to have the matter determined by adjudication and O’Donnell mad e application to the Supreme Court for an injunction restraining an adjudicator from determining the dispute. The application was dismissed. The application was defective in that any chambers application must be accompanied by a memo stating that the parties had attempted to resolve the matters in dispute and in this case there was no memo as required under Order 59 rule 9 of the Rules of the Supreme Court. Secondly Templeman J held that in the circumstance the criteria for the granting of an injunction were not satisfied. While there was a serious issue to be tried damages were an appropriate remedy and on the balance of convenience the application was refused.

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O’Donnell Griffin Pty Ltd v John Holland Pty Ltd and Others [2008] WASC 58

The parties had previously submitted a payment dispute to adjudication and the adjudicator determined that John Holland was to pay O’Donnell $A14,515,018.30 by 21 January 2008. There was a subsequent agreement between the parties that the money would be paid by 16 February 2008 but it was not. Under section 43(2) of the Act, John Holland then sought to have the adjudication enforced as a judgment of the court. John Holland was successful. The principles arising from the decision are that there is a predisposition in favour of enforcing an adjudication decision and leave to enforce a decision will only be refused in circumstances similar to those where leave to enforce an arbitrators award might be refused. Further an application for leave to enforce an adjudicator’s decision is not an occasion to revisit the correctness of the decisions.

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APPENDIX B

1. Applications for Adjudication (1/7/2007-30/6/2008)

Adjudications received 86

Determinations made 47

Number of applications for adjudication dismissed

29

Number of applications for adjudication withdrawn

10

2. Summary of the results of all applications for adjudication made during the reporting period (1 July 2007 - 30 June 2008)

Total number of payment claims 86

Total value of payment claims $98,222,008.65

Mean value of payment claims $1,142,116.38

Largest single payment claim $24,769,409.00

Smallest single payment claim $5,775.00

Total number of determinations 49

Total value of determinations $49,983,516.22

Mean value of determinations $1,135,989.01

Largest single determination $17,921,119.33

Smallest single determination $2,924.95

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Total number of dismissals 27

Total value of claims dismissed $46,844,

Mean value of claims dismissed $1,734,9

Largest single claim dismissed $11,902,596.90

Smallest single claim dismissed $3,199.90

Total number of claims withdrawn 10

Total value of claims withdrawn $158,407.34

Mean value of claims withdrawn $26,401.22

Largest single claim withdrawn $158,407.34

Smallest single claim withdrawn $158,407.34

Construction occupations subject to applications for adjudications for the reporting period (1 July 2007 - 30 June 2008)

Industry Number of claims

% of claims

Architecture 2.33%

Block Paving 1.16%

Building Commercial 40.70%

Building Residential 12.79%

Carpentry 1.16%

Civil Works 2.33%

Concreting 1.16%

Construction 17.44%

Demolition 1.16%

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Earth Works 3.49%

Electrical 1.16%

Fabrication 1.16%

Not CCAct 2.33%

,,, Painting 1.16%

Pipework 2.33%

Plumbing 2.33%

Shop Fitting 3.49%

Tiling 1.16%

Building Window Frames 1.16%

Total 100.00%

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