Hawkesbury City Council v The Civil Experts Pty Ltd trading as TCE Contracting

In these proceedings, the plaintiff, Hawkesbury City Council (the Council), seeks an order quashing an adjudication determination dated 20 June 2023 of the third defendant (the Adjudicator) by which the Adjudicator determined that the Council was liable to pay the first defendant, The Civil Experts Pty Ltd trading as TCE Contracting (TCE), the sum of $3,302,792.19 (including GST) in respect of a payment claim dated 20 March 2023 for $4,957,324.32 (including GST) and made under the Building and Construction Industry Security of Payment Act 1999 (NSW) (the Act). The Council had already paid the balance of the payment claim at the time the Adjudicator made his determination.

In substance, the Council advances three grounds for setting aside all or part of the adjudication determination. First, it claims that TCE engaged in misleading and deceptive conduct in submitting the payment claim in contravention of the Australian Consumer Law (ACL). Second, it submits that part of the amount claimed by TCE and allowed by the Adjudicator did not relate to construction work or related goods and services and therefore was not a claim that could be adjudicated under the Act. Third, the Council claims that in calculating the amount that was payable in respect of the payment claim and, in particular, the amount that was payable in respect of offsite overhead costs, the Adjudicator acted so unreasonably or capriciously that the determination or part of it was not in accordance with the Act.

On 31 March 2022, the Council and TCE entered into a construction contract by which TCE agreed to design and construct urgent repair works to a broken sewer line that serviced the township of Windsor, New South Wales. The contract price was described as “Cost + 25%”. The day after the contract was signed, TCE provided the Council with a schedule setting out the rates that would be charged for persons working on the job and for plant and equipment used on the job.

Prior to March 2023, TCE submitted a number of progress claims none of which was expressed to be a payment claim under the Act. Those claims were dealt with in accordance with the procedure set out in the construction contract which involved certification by the Superintendent under the contract and payment by the Council of the certified amount.

On 20 March 2023, TCE sent Mr Lachlan McClure, the Superintendent under the contract and the Manager, Project Delivery for the Council, and a number of other employees with the Council, an email which relevantly said:

The attached spreadsheet contained a large number of tabs. On opening the spreadsheet, it is necessary to scroll left to find the tab marked “Summary FEB23”. A copy of the contents of that tab is Annexure A (249031, pdf) to this judgment. Scrolling left again, the next tab is marked “Summary TOTAL”. A copy of the contents of that tab is Annexure B (181929, pdf) to this judgment.

The Council did not serve a payment schedule in response to that claim.

On 10 May 2023, TCE wrote to Mr McClure stating:

Mr McClure replied to that letter on 17 May 2023. In that reply he said:

On 31 May 2023, TCE, through its solicitors, lodged an adjudication application with the second defendant.

In relation to the claim for offsite overheads and preliminaries, the adjudication application stated:

In a statutory declaration sworn on 31 May 2023, Mr Mohamad El-Khaled explained how he calculated the amount for overheads for the periods 1 July 2021 to 30 June 2022, 1 July 2022 to 31 December 2022 and 1 January 2023 to 31 March 2023. In substance, he extracted from TCE’s accounting software the total amount incurred by TCE in respect of all overheads including all office expenses, insurance, bank fees, software subscriptions and the salary and allowances paid to senior management and accounts payable personnel during each period. In the case of senior management, he only took 70 percent of their costs on the basis that 30 percent of their time related to specific projects. He then calculated the percentage of TCE’s total turnover which comprised of income from the Council project and applied that percentage to the total overhead costs to arrive at a figure for outside overheads attributable to the work done under the contract.

The Adjudicator considered whether all TCE’s costs were properly included. He concluded:

In relation to quantum, the Adjudicator said:

The Council submits that the payment claim was misleading in two respects. First, it says that it was misleading because it did not clearly state that it was a payment claim under the Act in circumstances where no previous payment claim under the Act had been made. Second, it submits that it was misleading because it did not clearly state that the amount of the claim included a claim for offsite overheads (including the 25 percent margin) of $1,949,674.58.

In my opinion, both submissions must be rejected. Section 13(2)(c) of the Act states that a payment claim “must state that it is made under this Act”. That requirement has been interpreted as a requirement that the payment claim must include a notice that objectively makes it clear that the claim is made under the Act: see Walter Construction Group Ltd v CPL (Surry Hills) Pty Ltd [2003] NSWSC 266 at [82]-[83] per Nicholas J.

In the present case, the covering email to the payment claim clearly drew the reader’s attention to the Summary TOTAL tab and the Summary FEB23 tab. The contents of both those tabs were immediately visible when displayed electronically. Both pages state that the claim is a payment claim under the Act. On the printed versions attached to this judgment, the print is small and difficult to read. But it is easier to read in the electronic version. Each page contains a limited amount of information. In that context, it seems to me that the statements are sufficiently clear to come to the reader’s attention.

In any event, as TCE points out, nothing turns on this issue. It was clear from TCE’s correspondence dated 10 May 2023 that the progress claim made on 20 March 2023 was a payment claim for the purposes of the Act. In view of the Council’s failure to respond to the claim, TCE elected to make an adjudication application under s 15(2)(a)(ii) of the Act. As a consequence of that election, under s 17(2)(b) of the Act, the Council was entitled to serve a payment schedule within 5 business days after receiving the correspondence dated 10 May 2023. It chose not to do so. Consequently, any loss it suffered arose from that failure and not any misleading or deceptive conduct on the part of TCE.

As to the second point raised by the Council, the covering email to the progress claim clearly directed the Council’s attention to the Summary TOTAL tab and the Summary FEB23 tab and explained that the total claim to date was included in the former tab and the latter tab showed “the costs for February 2023 only”. Moreover, on the Summary FEB23 tab, next to the amount claimed, was a note that stated “*Note – refer to ‘Summary TOTAL’ tab for total claim for this month”. Read together, a reader could not reasonably have believed that the total amount claimed was the amount shown in the Summary FEB23 tab.

The Council submits that the work in respect of which the offsite overheads were charged – such as accounting and administrative services, insurance and office supplies – were not construction work or related goods or services, with the result that the charges for the provision of those services were not capable of adjudication under the Act.

In my opinion, that submission rests on a misconception. It was open to the parties to agree how TCE would be remunerated for the construction work that it did. Any amount that is properly characterised as a payment for that work may form part of a payment claim under the Act. As Sackville AJA (with whom Leeming, Payne and White JJA and Emmett AJA agreed) explained in Seymour Whyte Constructions Pty Ltd v Oswald Bros Pty Ltd (in liq) (2019) 99 NSWLR 317; [2019] NSWCA 317 at [228]:

In the present case, the Council agreed to pay “Cost + 25%” for the construction work. As the adjudicator observed, “cost” was not defined in the contract. In the absence of any submissions from the Council to the contrary, the adjudicator interpreted the reference to “cost” as a reference to all the costs incurred by TCE (other than legal fees) in carrying on its construction business. Whether that is the correct interpretation of the construction contract or not, it was an interpretation open to the adjudicator and is not reviewable by this Court: see Probuild Constructions (Aust) Pty Ltd v Shade Systems Pty Ltd (2018) 264 CLR 1; [2018] HCA 4. The result of that interpretation is that the Council agreed to pay a proportion of all TCE’s costs for the construction work that TCE agreed to do. Those costs, therefore, properly formed part of the payment claim.

The Council put this ground of challenge to the adjudication determination in various ways, but essentially what was alleged that the adjudicator acted so unreasonably or irrationally in quantifying the amount of offsite costs that were recoverable under the construction contract that he failed to carry out his statutory task.

I cannot accept that submission. As I have said, the adjudicator concluded that, on the correct interpretation of the contract, TCE was entitled to recover all its costs, including offsite costs, that were reasonably referable to the construction work under the contract. That necessarily required the adjudicator to apportion the offsite costs between different projects carried out by TCE. In the absence of any submissions from the Council, the adjudicator accepted the method of apportionment contended for by TCE. That method of apportionment was not obviously irrational or arbitrary. On the contrary, it was reasonable to seek to apportion the costs by reference to the proportion that the income TCE earned under the contract bore to its total income. It was obviously necessary to identify the relevant costs to which that proportion should be applied. The adjudicator had an explanation of how that was done by TCE’s accountant and the evidence the accountant gave was supported by an expert report from a quantity surveyor.

It is true that the accountant had to make estimates in order to carry out the apportionment exercise. So, for example, it was necessary to apportion the time of senior management between work that related to all projects or general work relating to the business and work that related to specific ones. The accountant chose to apportion 70 percent of the time to work relating to all projects and general work. He did not give any reasons for doing so. However, in the absence of any other material, it was not irrational for the adjudicator to accept that apportionment in circumstances where it was made by someone who could be expected to have a detailed knowledge of the business.

It may be that there were errors in the method of apportionment or the calculation of the amount to which it should be applied. But it was not for the adjudicator to check each calculation. Rather, the question for the adjudicator was whether he should accept the unchallenged evidence and submissions made by TCE on the issue. On their face, that evidence and those submissions did not appear to be irrational or arbitrary. On the contrary, they appear to represent a reasonable attempt to arrive at an estimate of that proportion of the offsite costs that could be attributed to the project. The fact that there may have been a better method to achieve that result (not that the Council suggested one) and that the method required estimates to be made does not make the approach that was adopted irrational or arbitrary. Consequently, it was not irrational or arbitrary for the adjudicator to accept TCE’s evidence and submissions on that issue.

It follows that the Council’s summons must be dismissed with costs and that the amount held in Court pending the determination of these proceedings should be paid to TCE. The orders of the Court, therefore, are: