Iskra v MMIR Pty Limited

1. [1]

   BATHURST CJ: I have had the advantage of reading the judgment of Gleeson JA in draft. I agree with the orders his Honour proposes and with his reasons.

2. [2]

   GLEESON JA: This appeal concerns the validity of an adjudication determination by the second respondent (the adjudicator) under s 22 of the Building and Construction Industry Security of Payment Act 1999 (NSW) (SOP Act). The adjudicator determined that the amount due by the first respondent owner, MMIR Pty Limited, to the appellant builder, Mr Iskra, was $159,829.95 including GST. On 29 January 2019, the primary judge quashed the adjudication determination and made consequential orders: MMIR Pty Limited v Iskra [2019] NSWSC 35. The primary judge found that the adjudicator had failed to come to a view as to what was properly payable having regard to the true construction of the contract and the true merits of the claim, and accordingly, had failed to exercise his jurisdiction under the SOP Act, which was a jurisdictional error. On 6 February 2019, the builder commenced an appeal in this Court.

3. [3]

   It is not in issue that the adjudicator determined that the construction work identified in the payment claim had been carried out. The short question raised by the appeal is whether the adjudicator determined its value. For the reasons that follow, the adjudicator addressed the task set by s 22 of the SOP Act; the adjudicator determined the value of the construction work carried out and the determination was within jurisdiction. Accordingly, the appeal should be allowed.

Background

1. [4]

   In about mid-2016, the owner engaged the builder to perform construction work for the upgrade, refurbishment and fit out of the restaurant and function centre at Crown Street, Wollongong. On 4 September 2018, the builder served a payment claim under the SOP Act, s 13(1) for $165,829.95. The claim consisted of a two-page invoice and supporting documents. The progress claim plus GST totalled $615,829.95 for 15 items of work and included a six per cent “project management fee” of $31,689.36. The invoice allowed a credit of $450,000 for amounts already paid, leaving the sum outstanding of $165,829.95.

2. [5]

   In response, the owner, on 14 September 2018, served a payment schedule under s 14(1) certifying $nil as the amount it proposed to pay. This was justified on four bases: (a) the works were not undertaken on the basis claimed by the builder; (b) payment had already been made for some amounts claimed; (c) the claim had not been “progressed”; and, (d) the owner was entitled to a set-off in relation to the works.

3. [6]

   On 27 September 2018, the builder applied for adjudication of its payment claim under s 17(1). Its application asserted that the contract was an oral “do and charge” contract whereby the builder, as the head contractor, received instructions for the works proposed by the owner from time to time and directed the trades and suppliers to perform the works as instructed. The builder also performed some works.

4. [7]

   On 8 October 2018, the owner lodged its adjudication response under s 20 in which it asserted that the construction contract arose from its acceptance of a written quote provided by the builder on about 3 August 2016 for a price of $225,000 (the quote). The owner admitted having paid the builder $450,000 for works performed and stated that it had paid a further $514,200 for further works performed by another builder.

5. [8]

   With respect to the amount of the payment claim, the owner asserted that it had not had the opportunity to properly analyse the builder’s claim, but the amounts claimed may relate to payments not related to the building works and/or are grossly excessive, and the owner will require the obtaining of expert advice and opinion to properly support its response. In addition, the owner asserted that, in making the claim, the builder had either fraudulently claimed, duplicated his claims, inflated his claims, or acted negligently in carrying out the building works.

6. [9]

   On 15 October 2018, the adjudicator issued an 11-page purported determination under s 22(1). The determination recorded that the adjudicator was satisfied that a construction contract existed for the purposes of the SOP Act on the alternative contentions of the builder and the owner (pars 15 and 16).

7. [10]

   The determination identified three issues, namely: (a) whether the works were undertaken on a “do and charge” basis; (b) whether payment had already been made for some amounts claimed; and, (c) whether the claim had been “progressed”. That expression seems to be a reference to an assertion by the owner that it had not had sufficient opportunity or information to consider the claim as made.

8. [11]

   After summarising the owner’s adjudication response (pars 59-62), the determination recorded that the adjudicator was not satisfied, based on the materials before him, that the owner’s allegations had been established (pars 67, 68, 69 and 71).

9. [12]

   The determination recorded that there was ample evidence that “the works as claimed were undertaken” (par 66). Reference was made to the communications between the parties, the statutory declaration provided by the builder and supporting documentation, including an index cross-referencing the underlying subcontractor invoices for all works on the project (par 70).

10. [13]

    Turning to the amount of the progress claim, the determination referred (par 80) to the value of the construction work carried out in accordance with SOP Act, s 9 or, alternatively, s 10, and then recorded (pars 81, 83 and 84):

11. [14]

    The determination concluded that the adjudicated amount owing to the builder was $159,829.95 including GST, after taking into account a deduction of $6,000 including GST which it was common ground that the owner had paid to the builder (par 86). The due date for payment was determined as 25 September 2018 (par 90).

The decision below

1. [15]

   By summons filed on 21 November 2018, MMIR sought a declaration that the determination was void and, in the alternative, an order in the nature of certiorari quashing it. It also sought an interlocutory injunction against the taking of steps to enforce it.

2. [16]

   The owner challenged the adjudicator’s determination on the basis that the adjudicator had failed to perform his statutory function and to consider whether the work the subject of the payment claim had been performed, and if so, to assess the value of the work that he considered had been performed.

3. [17]

   In addressing this contention, the primary judge identified the question in issue as whether the adjudicator had failed to value the construction work in accordance with the terms of the contract: at [19]. The statement of the issue in these terms reflected, as his Honour noted, the builder’s acceptance of the statement by Brereton J (as his Honour then was) in Pacific General Securities Limited v Soliman & Sons Pty Limited [2006] NSWSC 13; (2006) 196 FLR 388 at [86]:

4. [18]

   After noting that the adjudicator had rejected the owner’s contention that there was a fixed price agreed and determined that the contract was a “do and charge” contract, the primary judge made two findings concerning such a contract: at [27]-[29]. First, a “do and charge” contract gives rise to an entitlement by way of quantum meruit to a reasonable payment, referring to the remarks of McDougall J in Krahe v Manfate Pty Ltd [2016] NSWCA 363 at [44]-[45]. Second, that even if the “costs plus” mechanism was appropriate to determine the amount of the reasonable payment, the Court was entitled to consider whether the particular margin claimed, in this case six per cent, was appropriate.

5. [19]

   The primary judge next referred to parts of the determination where the adjudicator had rejected the owner’s contentions, and observed (at [33]):

6. [20]

   The primary judge found that the determination did not consider the value of the work undertaken by the builder having regard to the terms of the contract and the reasonable value of the works undertaken: at [34].

7. [21]

   The primary judge further found that the determination did not consider the reasonableness of the charge made by the builder for the work done by the builder himself, or the “reasonableness” of the claimed margin of six per cent for project management as a “costs plus” mark-up and a proper consideration of the payment claim required this evaluation: at [35]-[36].

8. [22]

   The primary judge concluded that the adjudicator had failed to exercise jurisdiction under the SOP Act because the adjudicator had failed to come to a view as to what was properly payable having regard to the true construction of the contract under the SOP Act and the true merits of the claim, and there had been a jurisdictional error: at [37].

The appeal

1. [23]

   The notice of appeal raised three grounds which were related. Ground 1 asserted that the primary judge erred in concluding that the adjudicator failed to consider the validity and merits of the payment claim submitted by the builder under the SOP Act.

2. [24]

   Ground 2 asserted that the primary judge erred in concluding that the adjudicator had failed to form a view as to what was properly payable by way of a progress claim under the SOP Act because the adjudicator had not had regard to the true construction of the contract and the true merits of the payment claim made by the builder.

3. [25]

   Ground 3 was expressed in general terms and asserted that the primary judge erred in concluding that the adjudicator had committed jurisdictional error.

4. [26]

   For the purpose of the appeal, it is sufficient to set out the terms of s 22 and also ss 9 and 10 of the SOP Act to which reference was made in the determination.

5. [27]

   Section 22 of the SOP Act provides:

6. [28]

   Sections 9 and 10 of the SOP Act provide:

7. [29]

   It was common ground that the appeal raised a short point.

8. [30]

   Counsel for the builder submitted that the primary judge erred in two respects. First, that contrary to the primary judge’s observation at [33] of the judgment (which is set out at [19] above), the adjudicator did not determine the progress claim at the amount claimed simply because he rejected the relevance of the respondent’s material.

9. [31]

   Second, the primary judge erred in finding that the adjudicator had failed to express an assessment of the value of the work carried out by the builder having regard to the terms of the contract. The submission continued that the proper construction of the contract is a matter for the adjudicator and that his Honour erred in making his own findings as to the “true” construction of the contract and then applying that finding when concluding that the adjudicator’s determination was outside jurisdiction.

10. [32]

    The builder further submitted that an adjudication determination is not to be examined with a fine-tooth comb or a requirement of legally correct language, referring to the remarks of Basten JA in Cockram Construction Ltd v Fulton Hogan Construction Pty Ltd [2018] NSWCA 107 (Cockram Construction) at [17].

11. [33]

    The owner sought to uphold the primary judge’s finding that the adjudicator had failed to address the task set by s 22 of the SOP Act. Reference was made to the basis of calculation of the value of the construction work in accordance with s 9 or, alternatively, s 10 of the SOP Act. The owner submitted that the determination recorded no more than that the adjudicator had “seen” the builder’s methodology with respect to the amount claimed, but had not undertaken a process of evaluating the value of the construction work.

The concept of jurisdictional error

1. [34]

   The starting point is 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) 92 ALJR 248; [2018] HCA 4; Brodyn Pty Ltd t/as Time Cost and Quality v Davenport (2004) 61 NSWLR 421; [2004] NSWCA 394 at [44] (Hodgson JA, Mason P and Giles JA agreeing).

2. [35]

   The concept of “jurisdictional error” was most recently explained in the joint reasons of Kiefel CJ, Gageler and Keane JJ in Hossain v Minister for Immigration and Border Protection (2018) 92 ALJR 780; [2018] HCA 34 at [23]-[24]:

3. [36]

   In Goodwin Street Developments Pty Ltd v DSD Builders Pty Ltd [2018] NSWCA 276 at [14], Basten JA (Leeming and White JJA agreeing), added:

4. [37]

   No issue arises in the present case as to the preconditions to the exercise of the adjudication function, such as the existence of a valid payment claim: Goodwin Street Developments Pty Ltd v DSD Builders Pty Ltd at [15]. This case turns on whether the adjudicator exercised the function conferred under s 22(1) of the SOP Act to determine “the amount of the progress claim” which is to be paid and the requirements of s 22(2) that the adjudicator “is to consider the following matters only”, which include “the provisions of the construction contract” and “the payment claim”.

5. [38]

   As mentioned, the owner accepted that there is no dispute that the adjudicator determined that the construction work identified in the payment claim had been carried out, which included the work done by the builder himself and the project management services that were provided. The issue in this case is whether the adjudicator failed to value the work having regard to the terms of the contract.

6. [39]

   In Icon Co (NSW) Pty Ltd v Australia Avenue Developments Pty Ltd [2018] NSWCA 339 (Icon) at [16], Basten JA (Meagher and Leeming JJA agreeing) noted that given the function conferred on the adjudicator by s 22(1) and the requirements of s 22(2) to “consider the following matters only”, the adjudicator is limited to acting upon his or her understanding of the contractual obligations and of the content of the payment claim. Basten JA continued at [16]:

7. [40]

   Basten JA also emphasised in Icon at [15] that the SOP Act does not provide a right of appeal, and accordingly, “the adjudicator’s findings with respect to matters of fact, within jurisdiction, will be unreviewable”. His Honour continued that the SOP Act does not provide review for errors of law on the face of the record and accordingly, “the adjudicator’s determination of legal issues will also be unreviewable”.

8. [41]

   As to the significance of the adjudicator rejecting the respondent’s material, the builder accepted the following remarks of Hodgson JA in Coordinated Construction Co Pty Limited v J M Hargreaves (NSW) Pty Limited (2005) 63 NSWLR 385; [2005] NSWCA 228 (Hargreaves) at [52]-[53]:

9. [42]

   It is convenient to proceed upon this basis, which was common ground.

10. [43]

    It is not necessary to resolve the difference of opinion in Hargreaves between Hodgson and Basten JJA as to whether the adjudicator is entitled to go beyond the terms of the adjudication response in rejecting part or all of the progress claim: Hargreaves at [52] (Hodgson JA) cf [64]-[68] (Basten JA). This issue does not arise in the present case. The adjudication response by the owner which asserted that the builder’s payment claim was “grossly excessive” may be taken to have put in issue the reasonableness of the amount claimed, including for that part of the work carried out by the builder himself and the project management fee.

Application of principles

1. [44]

   On a fair reading of the determination, the adjudicator engaged in a process of evaluation sufficient to warrant the description of the task required by s 22(2). That is, the adjudicator had regard to the matters specified for consideration in the context of assessing the value of the work carried out by the builder: Cockram Construction at [41] (Meagher JA, Barrett AJA agreeing), referring to Weal v Bathurst City Council [2000] NSWCA 88; (2000) 11 LGERA 181 at [80] (Giles JA, Priestley JA agreeing); Azriel v NSW Land & Housing Corporation (2006) 67 NSWLR 256; [2006] NSWCA 372 at [49] (Basten JA, Santow and Ipp JJA agreeing).

2. [45]

   First, the determination expressly stated that the adjudicator had considered all of the owner’s materials and had rejected all of the owner’s contentions in its response. That included the owner’s contention that the amount claimed by the builder was “grossly excessive”.

3. [46]

   Second, having rejected the owner’s contentions disputing the amount claimed in the payment claim, the adjudicator did not simply allow the claim by the builder in full in default of any valid submission against it. The adjudicator expressly directed his attention to the matters specified for consideration by s 22(2) including the provisions of the SOP Act, the terms of the contract and the payment claim. Further, the adjudicator referred to the requirement to value the construction work in accordance with ss 9 and 10 of the SOP Act as applicable.

4. [47]

   The determination identified the materials which had been considered by the adjudicator, including submissions, statutory declarations and correspondence between the parties. And the determination expressly stated that the builder “has demonstrated that it has an entitlement in accordance with the contract and has provided sufficient information and methodology as to how it arrived at the amount for the works claimed” [emphasis added]. Contrary to the owner’s submissions, the process adopted by the adjudicator did not warrant the description that he had done no more than simply make the observation that he had “seen” the builder’s methodology with respect to the amount claimed (Tcpt 9 (5-9)).

5. [48]

   Third, the primary judge’s finding that the adjudicator failed to consider whether the amount claimed was “proper” having regard to terms of the contract and the “reasonable value” of the works performed contains, with respect, two errors.

6. [49]

   One error is that to the extent that this finding turns on the language of the determination, in particular, pars [81] and [83] (set out at [13] above), there is no requirement in s 22(3) of the SOP Act for legally correct language, and a “fine-tooth comb” approach to the reasons of the adjudicator is to be avoided: Cockram Construction at [17] (Basten JA, Barrett AJA agreeing), citing Minister for Immigration and Ethnic Affairs v Wu Shan Liang (1996) 185 CLR 259 at 271-272; [1996] HCA 6. As Basten JA explained in Cockram Constructions at [17], “the language of a decision-maker, who need not be a lawyer, nor legally trained, is not to be viewed through the prism of legal concepts”.

7. [50]

   The other error is that to the extent that this finding is dependent upon the primary judge’s construction of a “do and charge” contract, it was not part of his Honour’s function to determine whether he considered the approach adopted by the adjudicator was erroneous based on his Honour’s construction of the contract, namely, what was the “reasonable value” of the works. Even if the adjudicator’s construction of the contract was erroneous, “it would not constitute jurisdictional error to act upon such an erroneous view”: Icon at [16] and [19].

8. [51]

   Read as a whole, the determination makes plain that the adjudicator considered the amount claimed having regard to the terms of contract and the payment claim, and took into account the requirement to value the construction work in accordance with ss 9 and 10 of the SOP Act as applicable, before determining that the claim by the builder should be allowed in the amount claimed less a credit for $6,000 as acknowledged by the builder.

9. [52]

   Any error by the adjudicator in construing the terms of the contract or in assessing the value of the amount claimed, including for the work done by the builder himself and the charge for the project management fee, involve matters within the adjudicator’s jurisdiction. Any such error does not constitute jurisdictional error and cannot form a basis upon which the adjudication can be quashed.

Conclusion and Orders

1. [53]

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

2. [54]

   I propose the following orders:

   1. (1)

      Allow the appeal.

   2. (2)

      Vacate the stay order made by the Court on 27 February 2019.

   3. (3)

      Set aside orders 1, 2, 3 and 4 made by the primary judge on 29 January 2019 and, in place, order:

   4. (4)

      The first respondent to pay the appellant’s costs of the appeal.

3. [55]

   PAYNE JA: I agree with Gleeson JA.