Goodwin Street Developments Pty Ltd v DSD Builders Pty Ltd

1. [1]

   HIS HONOUR: On 10 July 2017, the plaintiff (the owner) and the first defendant (the builder) made a contract under which the builder agreed to construct a residential boarding house for the owner. There is no doubt that the contract was a construction contract for the purposes of the Building and Construction Industry Security of Payment Act 1999 (NSW) (the Security of Payment Act).

2. [2]

   The owner purported to terminate the contract in March 2018. The builder served a payment claim on 30 April 2018. That payment claim was referable to a reference date of 15 March 2018. The owner provided a payment schedule which denied liability, claimed instead that the builder owed it a substantial amount of money, and hence stated that the scheduled amount was nil.

3. [3]

   Thereafter the builder made an adjudication application. That was made to the second defendant, who referred it to the third defendant (the adjudicator). The adjudicator accepted the application. However, the owner, although notified of this, failed to lodge its adjudication response within time.

4. [4]

   Accordingly, the adjudicator dealt with the matter on the basis that the relevant dispute was constituted by the payment claim and the payment schedule. She said that she could not take into account the matters alleged in the out of time adjudication response in so far as they dealt with the merits of the claim. She did however deal with (in favour of the builder) jurisdictional arguments either restated or, as she put it, embellished in the adjudication response.

5. [5]

   The adjudicator concluded that the builder was entitled to be paid, in round figures, $265,000 out of the claimed amount of $727,000. In reaching that conclusion and making her determination accordingly, she expressed her satisfaction with the builder's submissions as to the value of work done under the contract, but concluded that the builder had not made good its claim to be paid additional amounts for variations or loss of profit. She also rejected the builder's claim for return of the bank guarantee.

6. [6]

   The adjudicator then considered the owner's offsetting claim in relation to alleged defective and incomplete work. She valued that at nil.

The issues

1. [7]

   The owner seeks orders in the nature of certiorari quashing the determination. The summons, amended summons, and amended list statement raised a number of grounds of suggested invalidity. Only two of those are now pressed. The first ground asserts that the payment claim was invalid because it did not include the supporting statement referred to in s 13(9) of the Security of Payment Act.

2. [8]

   The second suggested ground of invalidity is that the adjudicator did not exercise her statutory function, or did not perform it in good faith, because she did not value the construction work, and reach conclusions on the question of defects, as required by, in particular, s 10(1)(b)(iv) of the Security of Payment Act.

3. [9]

   If those challenges fail, the owner submits that the Court should in any event prevent the builder from enjoying the fruits of its success in the adjudication, on the basis that if the builder does so, the owner may suffer irreparable prejudice by reason of the builder's financial position.

First challenge: supporting statement

1. [10]

   I start with the first ground of challenge. Section 13 of the Security of Payment Act reads as follows:

2. [11]

   As will be seen from subs (9), the form of the supporting statement is something that is dealt with in the Building and Construction Industry Security of Payment Regulation 2008 (NSW) (the Regulation). The form of supporting statement is set out in Sch 1 to the Regulation. I set out that schedule:

3. [12]

   The document relied upon in the present case as a supporting statement states that the builder is the head builder and that it has contracted with BH Australia Constructions Pty Ltd (the subcontractor). It is established that this company is, at least in an informal sense, a related company of the builder. The supporting statement includes a statement by a director of the builder:

4. [13]

   There was no attachment to the supporting statement.

5. [14]

   The submissions for the owner suggested that the subcontractor had to be identified in some form of supporting schedule. I do not agree. When one looks at the form of certificate as it is found in Sch 1 to the Regulation, it is quite clear that two alternatives are provided. The first alternative applies where there is only one relevant subcontract. The second alternative applies where there are multiple subcontracts. They are expressed to be disjunctive.

6. [15]

   In the present case, so far as the supporting statement goes (and there is no evidence to suggest that it is incorrect, if that were a relevant consideration), there was only one subcontract. The supporting statement said so. It identified the name of the subcontractor. It said that no money was owing. That, it seems to me, is all that was required as a matter of form.

7. [16]

   The second part of the submission relied on the parenthesised words in the supporting statement that was annexed to the payment claim. It was submitted that, in the absence of an attachment, there was no identification of whether anything was owing. Again, I do not agree. When one looks at the supporting statement as a whole, it is clear that nothing is said to be owing. That is because any amounts that were owing were to be identified by means of the attachment. In the absence of the attachment, it seems to me to follow necessarily that no amounts were (so far as the certificate goes), said to be owing.

8. [17]

   I reach that conclusion as a matter of construction of the document in context. It seems to me, with great respect to the submission to the contrary, to be a common sense approach to what is essentially a practical matter.

Second challenge: valuation of the progress payment

1. [18]

   The second ground of challenge is more troubling. It draws attention to the essential function that an adjudicator is to perform. That is set out in s 22(1) of the Security of Payment Act. What the adjudicator is "to consider" in performing that function is set out in s 22(2). I set out the whole of s 22:

2. [19]

   The reference to "progress payment" directs attention back to s 9 of the Security of Payment Act. It also directs attention to s 10. The former says what the amount of a progress payment is to be. The latter says, in particular in subs (1)(b) for present purposes, how the valuation of that amount is to be carried out. I set out ss 9 and 10(1):

3. [20]

   In this case, it is common ground that the contract made no express provision for the valuation of construction work. That concession, which in my view was correctly made, appears to reflect the view expressed by the Court of Appeal in John Holland Pty Ltd v Roads and Traffic Authority of New South Wales [1] at, in particular, [38]. I add that there are other authorities, both in the Court of Appeal and at first instance, that express a similar view.

4. [21]

   It follows, cutting through the statutory undergrowth, that in this case the adjudicator was required, in performing her statutory function of determining the amount (if any) of the progress payment to be paid by the owner to the builder, to have regard to the matters set out in s 10(1)(b). The obligation to "[have] regard to" something requires, I think, that the specified considerations be given weight as fundamental elements in the determination; that they be considered as the focal points by reference to which the relevant decision is to be made. See Zhang v Canterbury City Council [2] at [71]-[73] (Spigelman CJ, with whom Meagher and Beazley JJA agreed).

5. [22]

   It is to be noted, by reference to the same authority, that the requirement to "[have] regard to" something is effectively equivalent to the requirement to "consider" something. It seems to follow from this that the obligations to have regard to specified matters in s 10, and to consider specified matters in s 22(2), effectively involve a similar degree of intellectual application; they require the same intellectual exercise.

6. [23]

   The adjudicator dealt with the claim for defective work at [147] to [156] of the reasons for her determination.

7. [24]

   The first of those paragraphs is prefatory and need not be set out. The remaining paragraphs are critical to the argument. I set them out:

8. [25]

   The fundamental problem in this part of the adjudicator's reasons is that it shows that she was well and truly aware of the claim by the owner that the work was in many respects defective, but she made no precise finding on the topic. She referred in one place to "alleged defective work" and in another to "purported defective work and incomplete work". The obligation to have regard to those matters required her to deal with them as a fundamental element of this part of her determination, or as the focal point of her analysis. In Laing O'Rourke Australia Construction Pty Ltd v H&M Engineering and Construction Pty Ltd [3] , I said at [34] 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'".

9. [26]

   Vickery J gave a much more detailed analysis of what was required of an adjudicator in SSC Plenty Road Pty Ltd v Construction Engineering (Aust) Pty Ltd [4] , in particular [101]. I said in Suprima Bakeries Pty Ltd v Australian Weighing Equipment Pty Ltd [5] at [40] that his Honour's observations were directly applicable to determinations made by adjudicators in this State pursuant to the Security of Payment Act. Accordingly, I set out [101] of his Honour's reasons:

10. [27]

    It will be seen that the critical findings that his Honour thought should be made include findings as to whether the construction work had been performed and what was its value. That task requires the adjudicator to assess fairly and weigh the whole of the evidence, including by drawing necessary inferences from it, and arrive at a rational conclusion.

11. [28]

    I do not perceive any difference in principle between the somewhat abbreviated statement I gave in Laing O'Rourke at [34] and the more detailed analysis that Vickery J gave in SSC Plenty. I do however wish to repeat what I said in Southern Cross Electrical Engineering v Steve Magill Earthmoving [6] at [30]. It is not correct to say that the requirements identified by Vickery J must be applied serially and mechanically in every case to see if what purports to be a determination is in law capable of meeting that description. There is, in my respectful view, 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. That is why, in some ways, I prefer the simpler and less ornate description of the fundamental requirement of good faith that I gave in Laing O'Rourke.

12. [29]

    There was a substantial body of material before the adjudicator that dealt with the question of defects. That included what was said to be an instruction to the “contractor” (i.e. the builder) dated 15 January 2018. That document, which was signed on behalf of the owner but which apparently had been sent by the "Achitect" [sic] under the contract in his role as administrator of the contract, set out in very considerable detail defects that were said to exist as at its date. I think that this is what the adjudicator was dealing with at [153] of her reasons where she referred to "earlier certificates" that "included photographs of purported defective work and incomplete work".

13. [30]

    There is a real question as to whether the so-called instruction complied with the contractual prerequisites. It would appear from what the adjudicator said that she did not think that it did. But she did not deal with it on that basis. She said, quite clearly, that there was no clear evidence that the purported defective and incomplete work shown in that earlier certificate remained defective or incomplete as at the date of the payment claim.

14. [31]

    The question is really whether the adjudicator dealt with this in a way that shows that she grappled with the underlying factual issue. That is a very difficult question. I am not being critical of the adjudicator, but it would have been helpful had she expressed a clear view in clear terms as to what she found and why.

15. [32]

    The task has been complicated because the adjudicator gave reasons that are not entirely logical for apparently downplaying the significance of the claim for defective work. I refer for example to what she said at [150]. It does not seem to me that the question, whether rectification work has actually been carried out in the reference period or as at the reference date, is relevant to the statutory task set out in section 10(1)(b)(iv). Nonetheless, if that were the only error, it is very hard to see how it could be jurisdictional.

16. [33]

    I suspect that one of the problems that the adjudicator had was that she was dealing with the matter on the basis of the payment claim, payment schedule and adjudication application only. She had directed herself, correctly in my view, that it was not open to her to take into account the "merits" submissions made in the adjudication response, because that had been served out of time.

17. [34]

    In the material that the adjudicator did have, there was a commentary from the builder that responded to the various complaints made in the so-called instruction of 15 January 2018. That response started with the proposition that the instruction was contractually invalid. Nonetheless, it turned to the merits of the matters, and dealt individually with each item. That I think is the foundation of the adjudicator's reasoning process at [153] where she referred to the lack of clear evidence to show that the position as to defects asserted in the earlier certificate remained current two months later, at the date the payment claim was to be valued.

18. [35]

    In looking at adjudicators’ determinations, it is essential to take into account the extremely compressed time frame within which they have to work and the subsequent pressure that this generates, and to take into account also the unhelpful way in which, all too often, material is put before them. In many cases, that includes provision of voluminous amounts of material, much of which may be irrelevant, and to which no clear key or guide is given.

19. [36]

    In this case, it seems to me, when one reads the relevant part of the adjudicator's reasons as a whole and in context, she has shown a process of reasoning and she has reached a conclusion. It is obvious, and she proceeded on the basis, that it was the owner's "onus" – evidentiary, not legal – to satisfy her of the amount of any offsetting claim. Of course, it is the builder's responsibility to prove the value of the work comprised in its claim. If the owner challenges that valuation, then the builder's evidence must be sufficient to persuade the adjudicator that it should be accepted (either in whole or with modifications). But where an owner alleges, as a separate matter, that it has an offset for defective work, that I think is something for which the owner bears, as it were, the evidentiary onus.

20. [37]

    To the extent that this may be thought to be inconsistent with the approach taken by Vickery J in SSC Plenty, I do not agree. Although his Honour did say that the adjudicator should not impose an onus on either party to establish a sufficient basis for payment or sufficient basis for withholding payment, that observation must be read in context. The context is that if the party who raises an issue adduces no evidence on it then it may be, as Vickery J recognised, appropriate for the adjudicator to draw inferences from the absence of supporting material. I think that is what the adjudicator tried to do in this part of her reasons.

21. [38]

    Looking at the adjudicator's reasons in their entirety, and without any predisposition to find error or want of attention in them, I conclude that she did deal with the dispute put before her, and did in substance both say that she was not satisfied that there was defective work and say why.

22. [39]

    There was a separate complaint made in this part of the case. It was in effect that the adjudicator had merely rubber stamped the payment claim. I do not agree. What the adjudicator did was say that the owner's approach, which was based on valuing work to be completed, was not an appropriate way of valuing past performance. In essence, what the owner did, as the adjudicator saw it, was look at the cost to complete the contract works and then use that to arrive at a valuation of the work already done. I do not think that the adjudicator erred in any way that is reviewable by doing so.

23. [40]

    The adjudicator made it plain that she had considered the details provided in the payment claim. There is other material in her reasons that makes it extremely clear that she did so. Looking at the paragraph in a fair and open-minded way, the adjudicator is not simply rubber stamping the amount of the claim. She is saying, in effect, that she has considered the detail given and is satisfied by it.

Irreparable prejudice?

1. [41]

   I turn to the third issue. It is necessary to consider this because I have concluded that each of the jurisdictional challenges must fail. The owner's case is that it has a substantial offsetting claim and that, if the builder is held entitled to recover the adjudicated amount, the owner may be prejudiced because it may not be able to recover the fruits of any judgment that it may get in its favour.

2. [42]

   The relevant principles have been considered very recently by Payne JA in Shade Systems Pty Ltd v Probuild Constructions (Aust) Pty Ltd [7] . His Honour at [26] and following directed himself by reference to the earlier decision of the High Court in the same matter [8] and to the decision of Keane JA in R J Neller Building Pty Ltd v Ainsworth [9] at [39]-[42]. Payne JA pointed out, correctly, that the plurality reasons in Probuild at [51] approved the statement of principle made by Keane JA in R J Neller. I might add that Keane JA’s reasons also obtained the approval of the Court of Appeal in Chase Oyster Bar Pty Ltd v Hamo Industries Pty Ltd [10] .

3. [43]

   I set out what Keane JA (with whom Fraser JA and Fryberg J) said in R J Neller at [39] to [42]:

4. [44]

   His Honour makes two points. The first is that the Security of Payment Act effects, in substance, a statutory transfer of risk pending final determination. Before the Security of Payment Act, the risk of insolvency was borne by the builder. Now, it is borne by the owner. The second point made by his Honour is that a risk that goes no further than the risk inherent in that statutory allocation is not sufficient to justify, without something more, a stay of enforcement of the adjudication. As his Honour said, something more must be found.

5. [45]

   In the present case, the owner pointed to some evidence of the builder's financial position. That evidence did no more than suggest that the builder was modestly profitable and that it had, as at 31 December 2017, net assets of about $470,000.

6. [46]

   I accept that if the owner commences proceedings (so far as the evidence goes, it has not yet done so) and recovers a substantial verdict (and there is no reason to think one way or the other), there is at least a possibility that the builder would be unable to satisfy that verdict. That could happen if, for example, the builder were to use its available assets to defend the claim. But that is precisely the risk that, as Keane JA pointed out in RJ Neller, is something to be borne by the owner pending the final determination of rights and liabilities under the contract.

7. [47]

   There are no additional circumstances in this case that would lead to any different conclusion. There is no evidence that the builder has taken steps to arrange its affairs to defeat any claim that may be made against it. Nor is there any evidence that it has been engaging in delaying tactics. I accept, of course, that those are only two of the matters that may justify the imposition of a stay notwithstanding the statutory allocation of risk to which I have referred. But that really means no more than that they were the only features referred to in any way in this case. In truth, as I have said, there is nothing more than the risk that a judgment, if recovered, may not be enforceable. That is simply a consequence of the statutory risk allocation scheme.

8. [48]

   It follows that I would not order a stay based on the third ground.

Orders

1. [49]

   For those reasons the summons must be dismissed with costs. I so order. The money paid into court together with any interest accrued thereon should be paid out of court to the first defendant. I make no other orders as to costs.

[Counsel addressed.]

1. [50]

   I stay until 5pm on 15 August 2018 the order for payment out of court.