Brolton Group Pty Ltd v Hanson Construction Materials Pty Ltd

1. [1]

   MEAGHER JA: I agree with Gleeson JA.

2. [2]

   GLEESON JA: This appeal concerns the validity of an adjudication determination made under s 22 of the Building and Construction Industry Security of Payment Act 1999 (NSW) (the Act) in favour of the appellant, Brolton Group Pty Ltd (Brolton), in the sum of $2,877,052.75.

Background

1. [3]

   There is no dispute as to the material facts. Brolton is the contractor under a construction contract with the first respondent, Hanson Construction Materials Pty Ltd (Hanson), dated 13 September 2017. The contract related to the construction of a quarry processing plant at Bass Point, near Shellharbour. Among other matters, the contract provided for (a) a Guaranteed Maximum Price of $85 million (excluding GST), as adjusted by additions or deletions made pursuant to the contract; (b) monthly progress payments, with a reference date of the last Tuesday of each month: cl 11.4; and (c) the Contractor’s entitlement to simple interest at a rate of 5 per cent per annum for any delayed payment.

2. [4]

   Clause 12 dealt with termination. It provided for termination for default by the Contractor (cl 12.1.1), for default by the Principal (cl 12.1.2) and for insolvency (cl 12.1.3). Clause 12.2 also provided for termination by the Principal for convenience.

3. [5]

   Clause 12.3 was in the following terms:

4. [6]

   The contract was terminated by Hanson on 3 October 2018.

5. [7]

   On 28 August 2019, Brolton served a payment claim on Hanson in the amount of $6,300.962.64 inclusive of GST. The claim was described as “Progress claim No: September 2018” and was expressed as made pursuant to “cl 11.4 ‘Interim Payments’ …. for work completed up to September 2018”. The reference date for the claim was not expressly stated. The claim included a number of subcontractor invoices which covered work performed by the relevant subcontractors between the period from 25 September 2018 to 10 October 2018 and a claim for interest under the contract in the amount of $272,768.95. Senior counsel for Brolton accepted in this Court that these amounts comprised about $600,000 or $700,000 of the payment claim.

6. [8]

   Hanson responded on 10 September 2019 by serving a payment schedule which specified the amount Hanson intended to pay as “Nil”. Two reasons were given by Hanson. One was that Brolton had exceeded the Guaranteed Maximum Price under the contract. The other was that Hanson was entitled to liquidated damages of $1,625,000 up to the date of termination of the contract.

7. [9]

   On 20 September 2019, Brolton lodged an adjudication application, to which Hanson served an adjudication response on 30 September 2019.

8. [10]

   On 29 October 2019 the adjudicator issued an adjudication determination, which was corrected on 31 October 2019, for an adjudicated amount in favour of Brolton of $2,877,052.75 inclusive of GST. In making that determination, the adjudicator found that, given the parties’ entitlements under cl 12.3 of the contract, Brolton’s payment claim was supported by a reference date of 23 October 2018.

9. [11]

   Hanson commenced proceedings seeking a declaration that the determination was void and ancillary relief. At trial, Brolton conceded that 23 October 2018 was not an available reference date, and that the adjudicator’s finding on that matter was wrong. Brolton submitted that the adjudicator’s error in that respect was within jurisdiction and sought to support the determination by relying on a reference date of 25 September 2018, which the adjudicator had explicitly rejected.

10. [12]

    Hanson’s response was that the error by the adjudicator was a jurisdictional error for two reasons. The first reason was that since Brolton was not entitled to a progress claim under the Act “on and from” the purported reference date of 23 October 2018, the adjudicator did not embark on the task he was required by s 22(1) of the Act to undertake. And, given the decision in The Trustee for Allway Unit Trust (t-as Westside Mechanical Contracting Pty Ltd) v R & D Airconditioning Pty Ltd [2018] SASC 46 (Allway), it was not open to Brolton to support the determination by reference to a different reference date from that addressed by the adjudicator.

11. [13]

    The second reason was that the adjudicator’s decision involved a denial of natural justice or procedural fairness because the adjudicator determined the dispute on a basis for which neither party had contended without giving the parties an opportunity to make submissions on the matter

12. [14]

    The primary judge (Ball J) accepted both of Hanson’s submissions and concluded that the determination was void, made a declaration to that effect and granted ancillary relief: Hanson Construction Materials Pty Ltd v Brolton Group Pty Ltd [2019] NSWSC 1641.

13. [15]

    The appeal by Brolton against that decision challenges both of the reasons given by the primary judge for concluding that the determination is void. For the reasons that follow, the appeal should be dismissed with costs.

Relevant legislative provisions

1. [16]

   The relevant provisions of the Act, at the time of the contract in this case, are in the following terms. These provisions, specifically ss 8 and 13, were subsequently amended with effect from 21 October 2019 (Building and Construction Industry Security of Payments Amendment Act 2018 (NSW), Sch 1 [4], [9]-[15]).

2. [17]

   Sections 8, 9 and 10 are contained in Pt 2 of the Act.

3. [18]

   Section 8 creates an entitlement to a progress payment by reference to a specified date under a construction contract as follows:

4. [19]

   The quantification of the amount of the progress payment is to be ascertained in accordance with s 9, which provides:

5. [20]

   Where s 9(b) applies, s 10(1) is also relevant for the valuation of construction work and related goods and services.

6. [21]

   Sections 13, 14, 17, 20 and 22 are contained in Pt 3 of the Act.

7. [22]

   Sections 13 and 14 provide for the making of a payment claim and a response by way of a payment schedule, relevantly as follows:

8. [23]

   Where a payment schedule has been served indicating an amount less than the claimed amount in the payment claim, s 17 provides for adjudication of the amount of the progress payment, relevantly as follows:

9. [24]

   Section 20 deals with the prescribed time for and content of an adjudication response by a respondent to a claim, which is only permitted where a payment schedule has been provided: s 20(2A). In addition, the adjudication response cannot include reasons for withholding payment unless those reasons were included the payment schedule: s 20(2B).

10. [25]

    The jurisdiction of an adjudicator is set out in s 22, which provides in part:

The requirement of jurisdictional error

1. [26]

   It is now well established that judicial review of an adjudicator’s determination is available, but only for jurisdictional error on the part of the adjudicator: Probuild Constructions (Aust) Pty Ltd v Shade Systems Pty Ltd (2018) 264 CLR 1; [2018] HCA 4 at [52], affirming Brodyn Pty Ltd v Davenport (2004) 61 NSWLR 421; [2004] NSWCA 394.

2. [27]

   The concept of “jurisdictional error” was explained in the joint reasons of Kiefel CJ, Gageler and Keane JJ in Hossain v Minister for Immigration and Border Protection (2018) 264 CLR 123; [2018] HCA 34 (Hossain) at [23]-[24]:

3. [28]

   Any precondition which a statute requires to exist in order for the decision-maker to embark on the decision-making process is often described as a “jurisdictional fact”. In Icon Co (NSW) Pty Ltd v Australia Avenue Developments Pty Ltd [2018] NSWCA 339, Basten JA (Meagher and Leeming JJA agreeing) identified two uses of the expression “jurisdictional fact” at [13]:

4. [29]

   In the present case, service by the claimant of a payment claim which answers the description in s 13(1) of the Act falls into the first category of jurisdictional fact. That follows from the High Court’s remarks in Southern Han Breakfast Point Pty Ltd (in liq) v Lewence Constructions Pty Ltd (2016) 260 CLR 340; [2016] HCA 52 (Southern Han) at [44] and [47]:

5. [30]

   In Southern Han the High Court held that the existence of a reference date under a construction contract is a precondition to the making of a valid payment claim under s 13(1) and that service of a valid payment claim is an essential precondition to taking subsequent steps in the adjudication procedure set in Pt 3 of the Act. The court explained at [61]-[62]:

6. [31]

   Thus, the precondition which enlivens the exercise of the adjudicator’s statutory power under s 22 is the existence and service of a “valid” payment claim – namely one made by a person entitled under s 8 of the Act to a progress payment “on and from” the reference date in respect of which the payment claim is made.

Reference date

1. [32]

   The primary judge noted that the facts in Allway were similar to the present case. Allway involved a payment claim dated 8 December 2017 which did not nominate a reference date for the claim; the respondent served a payment schedule asserting that the payment claim was invalid because there was no valid reference date supporting the claim; in its adjudication application, the claimant nominated a reference date of 23 December 2017; and the adjudicator accepted that as the relevant reference date and dealt with the claim on that basis, despite the fact that it occurred after service of the payment claim. In proceedings challenging the adjudicator’s determination, the claimant submitted that even if 23 December 2017 was not an available reference date, the payment claim could still be supported by the reference date that arose on 23 October 2017.

2. [33]

   Given Brolton’s challenge to the decision in Allway, it is necessary to refer to the reasons given by Doyle J for rejecting the claimant’s submission.

3. [34]

   First, after observing that the ‘failure’ to identify any particular reference date in the payment claim did not invalidate that payment claim, referring to Southern Han at [27], Doyle J observed at [121]:

4. [35]

   Second, at [122]-[126], Doyle J explained that under the South Australian equivalent of the Act, the reference date is not merely a temporal precondition to the entitlement to serve a payment claim and gave a number of reasons why the identification of the reference date is also critical other aspects of the legislative scheme. Doyle J continued at [127]:

5. [36]

   Third, after referring to the facts, Doyle J found that the adjudicator fell into jurisdictional error, giving the following reasons at [129]-[131]:

6. [37]

   The primary judge agreed with that conclusion of Doyle J at [130] in Allway, giving the following reasons at Judgment [39]-[40]:

7. [38]

   Brolton submitted that the primary judge erred in finding that the adjudicator’s determination involved jurisdictional error essentially for three reasons:

   1. (1)

      the primary judge erred because the payment claim served by Brolton was a valid payment claim which enlivened the adjudicator’s statutory power to embark on the task he was required by s 22(1) of the Act to undertake;

   2. (2)

      the primary judge erred because he failed to identify any express or implicit limitation in the Act, which denies the adjudicator jurisdiction if the adjudicator determines the application with respect to a reference date which does not exist or is not available. Reference was made to Hossain.

   3. (3)

      the primary judge erred in following the ratio in Allway, which is wrong because Allway imposed an unjustified limitation on the adjudicator’s jurisdiction which was inconsistent with Southern Han.

8. [39]

   Hanson sought to uphold the reasoning of the primary judge. In addition, Hanson submitted by way of notice of contention that Brolton’s purported payment claim was not a valid claim for a progress payment on or from a reference date of 25 September 2018, because it included amounts not referable to any entitlement to a progress payment that Brolton had (or purported to have) on that date. This was a reference to subcontractors’ invoices for work performed in the period 25 September 2018 to 10 October 2018, and the claim for interest to August 2019.

9. [40]

   Brolton submitted in reply that the finding of the primary judge (at Judgment [28]) that the inclusion of work performed after the reference date does not invalidate the payment claim, was correct and supported by the analogous decision of Bergin J (as her Honour then was) in Paynter Dixon Constructions Pty Ltd v JF & CG Tilston Pty Ltd [2003] NSWSC 869 at [39] where her Honour found that a payment claim that included non-construction work was not rendered invalid. Reference was also made to Walter Construction Group Pty Ltd v CPL (Surry Hills) Pty Ltd [2003] NSWSC 266 at [67]-[68]; Leighton Contractors Pty Ltd v Campbelltown Catholic Club Ltd [2003] NSWSC 1103; and Barclay Mowlem Construction Ltd v Estate Property Holdings Pty Ltd [2004] NSWSC 649 at [16].

Decision

1. [41]

   It is convenient first to address Brolton’s submissions on the assumption most favourable to it, that contrary to ground 1 of the notice of contention, the inclusion of work performed after the available reference date of 25 September 2018 and interest up to August 2019 did not invalidate the payment claim in the present case.

2. [42]

   On this assumption, the argument advanced by Brolton involved three related propositions:

3. [43]

   The first part of proposition 1 can be accepted; the existence of a valid reference date is an objective fact to be found by the Court where necessary: Southern Han at [44]. The balance of the propositions should be rejected. The difficulty with these propositions is that they ignore the difference between the task the adjudicator was authorised and required by s 22(1) to undertake, and the task which the adjudicator in fact undertook and performed in this case.

4. [44]

   The task the adjudicator was authorised and required by s 22(1) to undertake was to determine the amount of the progress payment (if any) to which Brolton was entitled pursuant to its payment claim under s 13(1), that entitlement arising on and from the available reference date in respect of which the payment claim was made. As was observed by the Court in Southern Han at [62], s 13(1) operates “to require that each payment claim be supported by a reference date” and produces the result that “a document purporting to be a payment claim that is not in respect of a reference date is not a payment claim under the Act”.

5. [45]

   It is common ground that the purported reference date of 23 October 2018 addressed by the adjudicator was not an available reference date under the contract. The contract had been terminated by Hanson on 3 October 2018 and the entitlement to progress payments under cl 11.4 did not survive termination of the contract. It should also be observed that the last Tuesday in October 2018 was 30 October, not 23 October 2018.

6. [46]

   Contrary to Brolton’s submissions, it is not to the point that there was an available reference date of 25 September 2018 under the contract. The adjudicator did not embark upon the determination of the amount of the progress payment (if any) to be paid by Hanson to Brolton on the basis that the payment claim was supported by a reference date of 25 September 2018. Instead, he determined the progress payment to which Brolton was purportedly entitled on the basis that the payment claim was made in respect of a reference date of 23 October 2018. As that was not an available reference date the payment claim supported on that basis was not a payment claim under the Act and ineffective to trigger the procedure established by Pt 3 (see Southern Han at [62]). It follows that the adjudicator had no authority or jurisdiction to make any determination with respect to Brolton’s payment claim supported and understood in that way. Accordingly, jurisdictional error of the kind grounding relief in the nature of certiorari was established: Quasar Constructions NSW Pty Ltd v Demtech Pty Ltd [2004] NSWSC 116; (2004) 20 BCL 276 at [35] (Barrett J).

7. [47]

   Given that the adjudicator’s determination involved jurisdictional error, the challenge by Brolton to the primary judge’s acceptance of the decision in Allway must fail. In Allway, Doyle J rejected the claimant’s attempt to characterise the adjudicator’s error as to the reference date as being an error within jurisdiction by pointing to an available reference date under the contract which was not the reference date addressed by the adjudicator. The difficulty with the claimant’s submission in Allway, like Brolton’s submission in the present case, is that in each case the adjudicator’s error in making a determination by reference to an unavailable reference date, was not the task the adjudicator was required by s 22(1) to undertake. Accordingly, the determination involved jurisdictional error.

8. [48]

   In summary, Southern Han establishes that a payment claim with an available reference date answering the description in s 13(1) of the Act is a precondition which enlivens the exercise of the adjudicator’s statutory power to embark upon the adjudication. The available reference date under the construction contract serves to define the payment claim which is the subject of the adjudication application referred. If the adjudicator addresses a differently defined or described payment claim, the adjudicator is not exercising the jurisdiction in s 22(1) to determine the payment claim in respect of which the statutory power of adjudication is conferred on the adjudicator. That is what occurred in the present case. Hence, there was no error by the primary judge in finding that the determination is void on the ground of jurisdictional error.

9. [49]

   Grounds 1 and 2 should be rejected.

10. [50]

    In view of the above conclusion, it is not necessary to address the issues raised by Hanson’s notice of contention. However, one further matter should be mentioned for completeness.

11. [51]

    In writing, Brolton submitted that the primary judge should not have exercised the discretion to set aside the determination. The submission was not pressed in oral argument and should be treated as having been abandoned. First, there is no ground of appeal challenging the primary judge’s exercise of discretion.

12. [52]

    Second, Hanson objected to Brolton raising this submission as a new point on appeal. That objection was well made. The argument sought to be raised differs from the contention advanced by Brolton at trial, that the primary judge should only grant conditional relief, the condition contended for by Brolton being that Hanson pay Brolton what was said to be the unaffected component of the adjudicated amount relating to work after 25 September 2018 and interest up to August 2019. The primary judge rejected that contention and there is no appeal from that part of the decision. Brolton did not point to any exceptional circumstances why the new point should be permitted on appeal: Metwally v University of Wollongong (1985) 59 ALJR 481 at 483.

Natural justice

1. [53]

   It is not in dispute that primary judge correctly stated the relevant principles at Judgment [41]:

2. [54]

   His Honour found that Hanson had been denied natural justice, giving the following reasons at Judgment [42]-[43]:

3. [55]

   Brolton submitted that the primary judge erred in finding that Hanson had been denied natural justice essentially for two reasons:

   1. (1)

      Hanson had the opportunity but failed to put submissions before the adjudicator when it could and should have, if it wished to rely upon a deduction from the amount due to Brolton under cl 12.3 of the contract, such as a claim of over $7.2 million relating to the costs to complete the works after 3 October 2018, as referred to in the Affidavit of Mr Sellers;

   2. (2)

      alternatively, even if there was a denial of natural justice, it was neither material nor substantial. Reference was made to the remarks of Gleeson CJ in Re Minister for Immigration and Multicultural Affairs; Ex parte Lam (2003) 214 CLR 1; [2003] HCA 6 (Lam) at [37].

Decision

1. [56]

   The conclusion above in relation to the reference date is dispositive of the appeal. Nonetheless, I will briefly address Brolton’s challenge to the primary judge’s finding concerning denial of natural justice.

2. [57]

   The scope of the controversy before the adjudicator was delineated by the terms of the payment claim, the adjudication application and the adjudication response. On a fair reading, each proceeded on the express basis that the payment claim was made under cl 11.4 of the contract. Neither party had notified the other nor contended that the payment claim was made under cl 12.3 of the contract, or that Brolton was entitled to make the payment claim with a reference date of 23 October 2018, being after the contract had been terminated.

3. [58]

   In its adjudication application, under the heading “Reference dates under the subcontract”, Brolton made express reference to cl 11.4 of the contract and extracted part of its terms (par 47), acknowledged that it had submitted payment claims in August and September 2018 that were invalid because they did not provide a supporting statement (par 48) and then stated (in par 49):

4. [59]

   Although Brolton did not contend in the adjudication application for any particular reference date under the contract, two things can be said. First, when read in context, the words “the reference dates available for … use” in par 49 should be understood as a reference to the dates mentioned in par 48, that is, August 2018 and September 2018. Second, Brolton did not contend that there was an available reference date in October 2018.

5. [60]

   The aspect of natural justice or procedural fairness in issue before the primary judge is the right of a party to be given an opportunity to be heard. That includes in the present context prior notice of the issues to be addressed, an opportunity to make submissions and the right to have those submissions considered by the adjudicator. That did not occur in the present case.

6. [61]

   In oral argument, Brolton submitted that Hanson should have understood that the payment claim was a “wash-up” claim under cl 12.3 of the contract. The submission continued that Hanson had prior notice that the issues to be addressed included a reference date of 23 October 2018, and had availed itself of the opportunity to make submissions on that issue by submitting that 25 September 2018 was the “last” available reference date under the contract, given its termination on 3 October 2018. Hanson objected to Brolton raising a new point on appeal. Again, that objection is well made.

7. [62]

   First, the new point is not within the grounds of appeal, in particular ground 3.

8. [63]

   Second, the new point is inconsistent with Brolton’s acceptance below and in this Court that the available reference date under the contract was 25 September 2018.

9. [64]

   Third, the new point involves an argument neither pleaded nor run below, and Brolton has not established that it could not possibly have been met by evidence: Suttor v Gundowda Pty Ltd (1950) 81 CLR 418 at 438; [1950] HCA 35. Further, as the High Court said in Metwally v University of Wollongong at 483:

10. [65]

    If it were necessary to address this new argument, a finding should be made that on an objective assessment of the terms of the Brolton’s payment claim and the adjudication application, Hanson had no reason to believe that cl 12.3 was relied upon by Brolton or was in any way relevant to a reference date relied upon by Brolton to support the payment claim it had served.

11. [66]

    Brolton’s second argument that any denial of natural justice was not material should be rejected. It is uncontroversial that in the context of procedural fairness or natural justice, the concept of fairness is not abstract but practical. As Gleeson CJ remarked in Lam, “the concern of the law is to avoid practical injustice”.

12. [67]

    Importantly when assessing materiality, McDougall J cautioned in Watpac Constructions v Austin Corp [2010] NSWSC 168 at [147] that:

13. [68]

    The adjudicator’s decision to proceed on the basis of a 23 October 2018 reference date was plainly material insofar as it substantially affected the quantum of the determination which the adjudicator purported to make. As the primary judge observed at [43], the choice of the later reference date provided an answer to Hanson’s submissions that Brolton’s payment claim included claims for work done after a 25 September 2018 reference date, as well as claims for delay costs due to extensions of time which had not been the subject of any variation application made before that earlier reference date.

14. [69]

    Furthermore, addressing the later purported reference date, it is not in dispute that any payment to which Brolton was entitled under cl 12.3 upon termination of the contract is subject to a deduction in relation to the costs to complete the works after termination: cl 12.3(c). The evidence at trial was that Hanson’s claim against Brolton for the costs to complete the works is for an amount in excess of $7.2 million. In these circumstances, there was no error by the primary judge in finding that the submissions that could have been put by Hanson to this effect in answer to a “wash-up” claim under cl 12.3 of the contract, might have had some prospect of changing the adjudicator’s mind on this point: Watpac at [147]; Pinnacle Construction v Dimension Joinery [2018] NSWSC 894 at [40]-[41].

15. [70]

    Ground 3 should be rejected.

Conclusion and orders

1. [71]

   The appeal has failed and there is no reason why costs should not follow the event: Uniform Civil Procedure Rules 2005 (NSW), r 42.1.

2. [72]

   Accordingly, I propose the following orders:

   1. (1)

      Appeal dismissed.

   2. (2)

      Appellant pay the respondents’ costs of the appeal.

3. [73]

   PAYNE JA: I agree with Gleeson JA.