Goodwin Street Developments Pty Ltd v DSD Builders Pty Ltd

1. [1]

   BASTEN JA: On 10 July 2017, Goodwin Street Developments Pty Ltd (“the owner”) retained DSD Builders Pty Ltd (“the builder”) to construct three three-storey split level residential boarding houses in Jesmond, a suburb of Newcastle. Following the termination of the contract by the owner on 19 March 2018, DSD issued a payment claim under the Building and Construction Industry Security of Payment Act 1999 (NSW) (“Security of Payment Act”). On 15 June 2018 an adjudicator determined an amount to be paid by the owner pursuant to the payment claim. On 22 June 2018 the owner commenced proceedings in the Equity Division seeking to have the determination quashed. On 6 August 2018 McDougall J, delivering an ex tempore judgment, dismissed the application. [1]

2. [2]

   The owner appealed. For the reasons set out below, the appeal must be dismissed with costs.

Background circumstances

1. [3]

   On 2 March 2018 the owner issued the builder with a notice to remedy defaults, pursuant to clause Q1.1 of the contract. On the basis that the defaults had not been remedied, and the builder had failed to show within 10 working days reasonable cause why they could not be remedied, the owner issued a notice pursuant to clause Q1.2 on 19 March 2018 terminating the contract.

2. [4]

   On 30 April 2018 the builder served a payment claim on the owner with a reference date of 15 March 2018, in the amount of $727,256. On 14 May 2018 the owner provided a payment schedule in response, denying liability for the amount claimed and stating that the builder owed it a substantial sum, with the result that the schedule amount was $0.

3. [5]

   On 28 May 2018 the builder applied for adjudication of the payment claim pursuant to s 17 of the Security of Payment Act. The owner failed to lodge an adjudication response within the time fixed by s 20, with the result that the adjudicator was required not to consider the response: s 21(2). The information provided by the owner was therefore limited to the payment schedule dated 14 May 2018, to which were attached certificates of the contract administrator setting out an assessment of the cost of completing the works, and setting out amounts payable to the owner, which included an amount for the “rectification of defective & incomplete works” ($280,000) and an amount for “rectification of damage/replacement of stolen items” ($551,382). These sums were broken up into their constituent elements.

4. [6]

   On 15 June 2018 the adjudicator provided her determination awarding the builder an amount of $265,510. The reasons provided by the adjudicator ran to some 22 pages. In substance, issue was taken with 10 paragraphs (one page) under the heading “The respondent’s off-setting claims”. It will be convenient to set out so much as is necessary from that part of the adjudication determination when considering the substance of the challenge raised by the owner.

Statutory scheme

1. [7]

   As was explained in Probuild Constructions (Aust) Pty Ltd v Shade Systems Pty Ltd: [2]

2. [8]

   It is not necessary for present purposes to make further reference to the statutory provisions, other than those governing the function of the adjudicator. The adjudication procedures are set out in s 21. Relevantly for present purposes, they require the adjudicator “to determine an adjudication application as expeditiously as possible and, in any case … within 10 business days after the date on which the adjudicator notified … acceptance of the application, or … within such further time as the claimant and the respondent may agree”: s 21(3).

3. [9]

   Central to the present dispute is s 22 which provides as follows:

4. [10]

   As may be seen from s 22(4), the central function of determining the value of the claimant’s entitlement turns on the application of s 10. Section 10(1) provides for the valuing of “construction work”; s 10(2) provides for the valuing of “related goods and services”. It is sufficient for present purposes to refer to the former provision, but that must be understood in the context of s 9. Those provisions state:

5. [11]

   As will be noted shortly, the challenge to the adjudication determination was based on the proposition that the adjudicator had not undertaken her function “in good faith”. Lack of good faith was said to be established by a failure to apply s 10(1)(b) in valuing the construction work the subject of the payment claim.

Legal issues

1. [12]

   The High Court confirmed in Probuild Constructions that review of an adjudication determination is only available on the basis of jurisdictional error. In so holding, the Court affirmed the approach consistently adopted by this Court since the decision in Brodyn Pty Ltd t/as Time Cost and Quality v Davenport in 2004. [5] That line of authority had been upheld in Shade Systems Pty Ltd v Probuild Constructions (Aust) Pty Ltd (No 2), [6] which was the subject of the appeal to the High Court in Probuild Constructions.

2. [13]

   The nature of jurisdictional error was recently explained by Kiefel CJ, Gageler and Keane JJ in Hossain v Minister for Immigration and Border Protection: [7]

3. [14]

   It may be accepted that the concept of “authority to decide” must be given content in a specific statutory context. The primary source of that content will be the terms of the statute itself; however, there are likely to be implied constraints, sourced in general law principles.

4. [15]

   There are preconditions to the exercise of the adjudication function, which include, for example, the existence of a valid progress payment claim. However, this case turns upon a quite different constraint, identified as an obligation to act in good faith.

5. [16]

   While it may readily be accepted that the statutory mandate of the adjudicator would not be satisfied by action taken in bad faith, or not bona fide, it is important to acknowledge that these phrases can have a range of meanings. Thus, in Commissioner of Taxation (Cth) v Futuris Corp Ltd, [10] Gummow, Hayne, Heydon and Crennan JJ said:

6. [17]

   In The Queen v Toohey; Ex parte Northern Land Council [18] Aickin J used the term “ultra vires” for the third “soft” meaning of bad faith. Indeed, to use the term “bad faith” (or lack of good faith) in the soft sense without identifying the particular respect in which the decision-maker has exceeded his or her powers may suggest error. It will, in every case, be critical to identify the point of departure from the statutory power, in order to determine that there has in fact been jurisdictional error. Once that exercise has been undertaken it adds nothing to characterise the error as a lack of good faith, with the implications of moral culpability which that language carries.

7. [18]

   This inappropriate step appears to have found its way into the case law regarding the operation of the Security of Payment Act. Thus, in Laing O’Rourke Australia Construction Pty Ltd v H&M Engineering and Construction Pty Ltd, [19] McDougall J stated:

8. [19]

   In the present case McDougall J repeated what he had said in Laing O’Rourke at [34], namely “that the obligation to exercise the statutory function in good faith ‘requires at least that adjudicators should turn their minds to, grapple with and form a view on all matters that they are required to ‘consider’.” [20] In other words, lack of good faith was identified as a failure to comply with s 22(2) of the Security of Payment Act. What is more, it imposed a gloss on the language of s 22(2). Properly understood, the ground must be failure to take into account a mandatory consideration. The flaw in the reasoning occurs in the extract from Timwin Construction which adopts language from Roberts v Hopwood which is said to be “supported by” s 22(2).

9. [20]

   It is also necessary to identify the source of the gloss, namely the reference to Zhang v Canterbury City Council [21] where Spigelman CJ stated:

10. [21]

    If those passages are taken to imply that every matter identified as a mandatory consideration has to be considered as a “fundamental element” in, or a “focal point” of, the decision-making process, [22] that reasoning should not be accepted. Read in context, it is reasonably clear that those passages were not intended to state a legal principle of such general application.

11. [22]

    Basic principles of judicial review refer to a “failure to take into account a relevant [that is, mandatory] consideration”, as explained by Mason J in Minister for Aboriginal Affairs v Peko-Wallsend Ltd. [23] As Mason J further explained, “it is generally for the decision-maker and not the court to determine the appropriate weight to be given to the matters which are required to be taken into account in exercising the statutory power.” [24]

12. [23]

    It is significant that, in the next section of the reasons in Laing O’Rourke, McDougall J addressed the language of s 22(2) and the obligation imposed on the adjudicator by the words “is to consider” the identified matters. Where there is apparently credible and relevant material before the decision-maker, which appears to engage with a mandatory consideration, and there is no reference to that material in the reasons provided by the decision-maker, it may be inferred that no regard was had to it. That may allow for the inference that no regard at all was had to the mandatory consideration. That must be distinguished from the situation where, while there is no reference to the material, it cannot be inferred that the decision-maker must have referred to it, if it had been properly considered. It is well established that judges are not required to refer to all the evidence before the court; so it is true that a decision-maker is not required to refer to all the material supplied by one party before rejecting the party’s claim.

13. [24]

    Furthermore, saying that the decision-maker must “grapple with” particular material reflects statements that the decision-maker must give "proper, genuine and realistic consideration" to such material. As the High Court noted in Minister for Immigration and Citizenship v SZJSS [25] this language can invite a slide into impermissible merit review. [26] Finally, a refusal to give any weight to particular material does not demonstrate that the decision-maker failed to have regard to a mandatory consideration. This was explained in the following passage in SZJSS: [27]

14. [25]

    There may be circumstances in which a particular matter, given the statutory context, can be said to have greater importance than other factors. However, there is a significant danger in imposing an obligation in every case to require that specified considerations be given “weight as fundamental elements in the determination” or be considered as “the focal points by reference to which the relevant decision is to be made”. [30] Nor can invocation of an obligation to act in good faith require “at least that adjudicators should turn their minds to, grapple with and form a view on all matters that they are required to ‘consider’.” [31]

15. [26]

    The more restrictive view of bad faith as a ground of judicial review, which should be adopted in identifying the implied obligation of good faith adjudication under the Security of Payment Act, was adopted by Hodgson JA in Brodyn [32] and in Transgrid v Siemens Ltd. [33] A similar approach to the concept of good faith was articulated by the Full Court of the Federal Court in SBBS v Minister for Immigration and Multicultural and Indigenous Affairs. [34] The Court summarised the relevant principles as follows:

16. [27]

    In Minister for Immigration and Multicultural and Indigenous Affairs v SBAN, [35] Heerey and Kiefel JJ stated:

17. [28]

    In dealing with matters of principle, the primary judge also set out a lengthy extract from a judgment of Vickery J in SSC Plenty Road Pty Ltd v Construction Engineering (Aust) Pty Ltd. [37] That passage purported to establish a set of 11 obligations imposed on the adjudicator making a determination under the relevant Victorian legislation. The primary judge then expressed a view that this lengthy exegesis did not give rise to “any difference in principle” from that which had been said in Laing O’Rourke. [38] However that statement was qualified to deny that the requirements “must be applied serially and mechanically in every case”, noting that there was “a risk that overzealous attention to his Honour’s formulation of the elements of the task that adjudicators are required to perform may lead a court into the error of straying from review of the kind that is permitted (which is essentially confined to aspects of jurisdictional error, want of good faith and the like) and into review on the merits.” [39]

18. [29]

    The qualification should be accepted; the result is that it is inappropriate to make further reference to SSC Plenty Road, at least in this jurisdiction. The function of an adjudicator is to have regard to the matters, and only the matters, set out in s 22(2). These include “the provisions of [the Security of Payment Act]”; they do not include judicial glosses on the statute. Nor are such glosses helpful to judges undertaking the function of judicial review. Finally, if the real question is whether the adjudicator failed to have regard to some matter expressly identified in s 22(2), that should be the ground of review. No question of good faith will normally arise in such circumstances.

19. [30]

    For reasons set out below, there was nothing approaching bad faith in the present case.

Impugned reasoning of adjudicator

1. [31]

   Having satisfied herself that she had jurisdiction to determine the adjudication application, the adjudicator then set out, by reference to s 22(2), the matters required to be considered. Under the heading “Contract Works” she set out the relevant background and the positions of both claimant and respondent. She made a similar summary with respect to “Variations” (of which there were six) and with respect to a claim for “loss of profit” and for “return of bank guarantee”. The fact that there was no challenge to the approach adopted in the first 17 pages of the reasons, and no challenge to the last three pages, demonstrates the absence of merit in the suggestion that the ultimate determination was reached in bad faith.

2. [32]

   The challenge was limited to a discussion under the heading “The Respondent’s off-setting claims”. The adjudicator first referred back to the (correctly) identified documents comprising the payment schedule and noted the items referred to as “deductible” which had already been noted. There was reference to the contract administrator’s assessment of the amount payable; the reasons then continued:

3. [33]

   In the earlier analysis at par 77 the adjudicator had explained the structure of the contractual arrangements, noting that the architect, who was the contract administrator, was to be considered as the owner’s agent for giving instruction to the contractor, but was also to act as assessor, valuer or certifier and was required to act fairly and impartially in those capacities. The reasoning with respect to the off-setting claims continued:

4. [34]

   Up to that point, there could be no complaint that the adjudicator was not addressing herself to the relevant mandatory considerations and only those considerations; nor was there any basis for an allegation of bad faith. As the primary judge noted, there appears to have been a typographical error in par 151, which referred to the respondent (namely the owner) when the sense of the sentence suggests that the intended reference was to the claimant (the builder). It was the next paragraph which was said to give rise to difficulties of interpretation.

5. [35]

   Once the reference to “the Respondent” in the middle of par 153 is corrected to claimant, the reasoning of the adjudicator is tolerably clear. She was saying that there was no evidence provided by the owner to satisfy her that (i) the builder was instructed by the architect to correct particular defects or finalise incomplete work prior to the reference date, (ii) the builder failed to correct those defects or incomplete work, and (iii) because it had failed to do so the owner had invoked its right to use another person and had thereby incurred costs which it was entitled to off-set.

6. [36]

   Having set out paragraphs 148-156 of the adjudicator’s reasons, the primary judge stated:

7. [37]

   The basis of this criticism is by no means obvious. The adjudicator was looking for “clear evidence” that certain steps had been taken prior to the reference date, absent which, on her view of the contract, there was no entitlement to make an off-setting claim. There can be no obligation on any decision-maker to make a “precise finding” on a topic where there is no evidence to support such a finding, or the evidence is insufficient to satisfy the decision-maker that such a finding should be made. Indeed, the finding that there is “no clear evidence” is itself a sufficient finding.

8. [38]

   On the appeal, the appellant sought to rely upon the critical elements of the judge’s identification of a “fundamental problem”.

9. [39]

   After dealing with the authorities as to the nature of the obligations of the adjudicator discussed above, the judge returned to assess the key passage in the adjudicator’s reasons in the following terms:

10. [40]

    With regard to these passages, there is no fault in the reasoning identified in [29] or [30]. At [31] the judge questioned whether the adjudicator had “grappled with the underlying factual issue.” He described that as “a very difficult question.” However, the difficulty may have arisen from imposing a gloss on the statutory obligation to have regard to certain material. So far as the factual assessment was concerned, as the judge correctly noted at [33], the adjudicator was constrained by the need to rely only on the material supplied by the builder and the payment schedule supplied by the owner, the adjudication response being made out of time. So much appears to be accepted at [34].

11. [41]

    In that context, the criticism at [32] appears to be resolved by the subsequent reasoning. In any event, the criticism implicit in [32] is that the exercise the adjudicator was undertaking had to be founded upon s 10(1)(b)(iv) of the Security of Payment Act. However, to engage that obligation there must be a finding that there was relevant defective work, absent which the cost of rectifying the defective work would not arise. The factors addressed by the adjudicator, and identified at [32], related to the timing of certain events which were thought (rightly or wrongly) to be critical, based on the terms of the contract. On that understanding, the adjudicator’s reasons did not lack logic, nor did she “down play” the significance of the claim for defective work. She addressed it on the basis of the available material, including the contractual provisions, and rejected it. An error in construing the contract would not have been a reviewable error, nor was there any suggestion otherwise.

12. [42]

    The primary judge concluded in the following terms:

13. [43]

    In my view, that conclusion was correct.

Grounds of appeal

1. [44]

   The appellant’s written submissions identified the ground on which it had sought to have the determination set aside, which was the only ground pursued on the appeal, as the failure of the adjudicator to “determine the disputed value of [the builder’s] work in good faith”. The submissions further stated that the appeal grounds related to the primary judge’s findings relevant to the appellant’s “good faith challenge to the validity of the Determination.” [40]

2. [45]

   Ground 1 in the notice of appeal alleged that the primary judge erred “in construing the Adjudicator’s reasons for not having regard to the estimated cost of rectifying the defects” as being based on the failure of the adjudicator to be “satisfied on the material before her that the works were defective”. The error was said to arise in the passage at [30] in the judgment below, reasoning which was repeated at [38]. As explained above, that reasoning did not reveal error.

3. [46]

   Ground 2 asserted that the error in construing the adjudicator’s reasons led the judge to reject the appellant’s claim that the adjudicator “did not value the construction works … in good faith” and had not dealt with the appellant’s submissions “in good faith”, referring to the finding at [31] of the judgment below. There are three responses to this ground. First, in so far as it depended upon an error alleged in ground 1, that error was not made out. Secondly, to the extent that there was error in the reasoning at [31], that error favoured the appellant. Thirdly, there was nothing in the adjudicator’s reasons which provided any basis for an allegation that she acted otherwise than in good faith.

4. [47]

   Ground 3 was more complex. It had two limbs, each identifying findings the trial judge should have made. The first was that “the basis of the Adjudicator’s failure to not value [sic] the estimated costs of rectifying defects” was because (i) the defects were “prospective”, rather than “retrospective” – at [150] of the adjudicator’s reasons; (ii) there was no evidence that the owner had engaged anyone else to carry out the work, – at [150] of the adjudicator’s reasons; (iii) the adjudicator had regard to the contract to determine whether it envisaged the valuation of progress claims without deduction for defective works, at [151] of the adjudicator’s reasons, and (iv) because the estimated costs of rectifying defects could not be considered, the owner not having complied with clause N4 of the contract. The second limb of ground 3 asserted that, presumably on the basis of those findings, the adjudicator had failed to have regard to the mandatory requirements of s 10(1)(b), and had failed to value the construction work in good faith.

5. [48]

   The proposed findings as to the basis on which the adjudicator failed to value and then deduct the cost of rectifying defective work may indeed be as the appellant alleged in ground 3; the fact is she did not value the defective work. However, as already noted, she had first to find that there was defective work which entitled the owner to a deduction under the contract. That condition not being satisfied, there was no requirement to value the work or to make the deduction. As the reliance upon lack of good faith appeared to concede, any error in the construction of the contract, or factual error as to the evidence of defective work, would not demonstrate jurisdictional error. In the absence of some legitimate basis to claim lack of good faith, ground 3 lacked substance.

Conclusion

1. [49]

   For the reasons given by the Full Court of the Federal Court in SBBS, an allegation of bad faith on the part of a decision-maker is a serious matter involving personal fault and should not be made lightly. A degree of vacillation in the reasons given by the primary judge may have suggested that there was more substance to the application than was in fact the case. It may also have led to the appeal to this Court, which lacked a sufficient basis to justify an allegation of lack of good faith.

2. [50]

   It follows that the appeal must be dismissed with costs. There is a further issue as to a continuing stay.

3. [51]

   The orders made by the primary judge, as entered, were:

4. [52]

   Senior counsel for the appellant foresaw that, if the appeal were dismissed, the stay on payment out of the money held in court would cease to operate and the money would be immediately payable to the respondent. He said there were proceedings on foot to resolve outstanding contractual disputes and, he submitted, there was doubt as to the capacity of the builder to repay the money should the owner be successful in its contract claims. In the event that the court was minded to dismiss the appeal, the appellant sought an opportunity to make submissions as to the form of any proposed orders. It was foreshadowed that there would be an application to stay any order that the moneys held in court be paid out to the respondent.

5. [53]

   The Court was not prepared to entertain that application, noting that (i) the statutory scheme transferred the financial risks resulting from progress payments from the builder to the owner, and (ii) there was no material before the Court to justify any order which might depart from that statutory scheme. The appellant was left with the opportunity to seek such an order from the court before which the trial is pending. The reasons for dismissing the appeal may be relevant to such an application; nothing in this judgment is intended to foreclose such an application.

6. [54]

   The Court should make the following orders:

   1. (1)

      Dismiss the appeal from the judgment in the Equity Division given on 6 August 2018.

   2. (2)

      Order that the appellant pay the respondents’ costs in this Court, in the case of the second respondent on a submitting basis.

7. [55]

   LEEMING JA: I agree with Basten JA.

8. [56]

   WHITE JA: I have had the advantage of reading in draft the reasons for judgment of Basten JA. I agree with his Honour’s reasons and the orders he proposes.