Probuild Constructions (Aust) Pty Ltd v DDI Group Pty Ltd

This is an application invoking the Court’s supervisory jurisdiction under s 69 of the Supreme Court Act 1970 (NSW). The plaintiff (Probuild) was head contractor for the refurbishment of a hotel in Hunter Street, Sydney. It sub-contracted with the first defendant (DDI) to carry out works which comprised the installation of ceiling and wall plasterboard. Probuild seeks an order quashing an adjudication determination dated 1 December 2015, undertaken by the second defendant (the adjudicator), who has filed a submitting appearance. That determination was made under Pt 3, Div 2 of the Building and Construction Industry Security of Payment Act 1999 (NSW) (the Act) with respect to DDI’s payment claim dated 22 July 2015.

Probuild contends that it was denied procedural fairness in relation to the making of that determination. One reason Probuild relied on for withholding payment of the amount claimed was that it was entitled to liquidated damages for DDI’s delay in completing the sub-contract works, those works having been completed more than three months after the Date for Practical Completion. Probuild argues that the adjudicator rejected that set-off claim on two bases that neither party contended for or notified to the other.

It is not in dispute that the requirements of procedural fairness applied to the decision-making process of the adjudicator. As to what they might require in this statutory context, each party referred to the statement of McDougall J in Musico v Davenport [2003] NSWSC 977 at [108]:

The head contract provided for the refurbishment of an existing 10 level building with works to add levels 11 to 14. The Construction Program allowed discrete blocks of time in which DDI was to undertake its works. The Date for Practical Completion of those works as nominated in the sub-contract was 5 January 2015. Probuild maintains that those works were not completed until 29 May 2015.

On 27 July 2015, DDI served a payment claim under s 13 of the Act. The claim was for $2,175,267 (including GST). That amount represented the contract value ($3,378,970) plus variations ($2,715,243) less payments made by Probuild. Variations V1 to V42 were made for work done in the period 19 May 2014 to 5 January 2015. Variations V43 to V210A were made for work done after 5 January 2015. Variation V210A (described as extra/over labour, profit and overheads on V43-V210) was for the difference between the sum of variations V43 to V210 and the total cost of labour and materials (including profit and overhead) as incurred in relation to all work done after 5 January 2015.

It is convenient to refer at this point to the explanation DDI proffered before the adjudicator for its delay in completing the works undertaken. That explanation is contained in a document titled “Synopsis of issues – Chronology of events”, which formed part of its adjudication application made on 15 October 2015:

It is also convenient at this stage to set out the relevant provisions of the building sub-contract. Clause 41.2 provided that the work under the sub-contract was to be completed by the Date for Practical Completion, 5 January 2015. If DDI failed to complete its works by that date it was liable for liquidated damages at the rate of $15,000 per day (cl 42.1(a)).

The contract provided for DDI to claim extensions to the Date for Practical Completion. Clause 41.6(b) described the circumstances in which DDI was entitled to an extension of time. They included strict compliance with the obligations imposed by cl 41 including that DDI give notice of any delay likely to occur, or which has occurred; that notice also to indicate whether a claim to an extension of time is made (cl 41.5).

Clauses 41.8 to 41.10 provided:

Clause 45 provided that work should not be varied except as directed by Probuild pursuant to that clause. Such variations were to be made by the issue of a Variation Direction. If such a Direction was not issued in circumstances where DDI considered a communication to include a direction to commence works constituting a variation, it could make a Variation Claim to which Probuild was required to respond, including where appropriate by the issue of a Variation Direction (cl 45.3). Clause 45.2 also permitted Probuild to request that DDI prepare a Variation Effect Notice in relation to a proposed Variation. On receipt of that Notice, Probuild could issue a Variation Direction or withdraw any informal direction.

On 30 September 2015, Probuild served its payment schedule in response to DDI’s claim. That schedule addressed each of variations V1 to V210A by stating Probuild’s “assessed value” of the variation (which in many cases was “nil”) and the reasons for the difference between that value and the value claimed. It also claimed $2,328,998 as due from DDI to Probuild. Those set-off claims were identified as items CC1 to CC17. Item CC14 was for $2,160,000 being liquidated damages “for [DDI’s] failure to meet contract programme dates”.

The reasons given in the payment schedule in support of that claim to liquidated damages were:

DDI’s application for adjudication was accompanied by four documents: a document titled “Contract submissions for Adjudication Application”; the “Synopsis of issues” referred to above; a document titled “Reply to Probuild’s payment schedule, 30 September 2015”; and a letter titled “DDI’s Rebuttal to Probuild’s Payment Schedule on 30/09/2015”. On 23 October 2015, Probuild served its Adjudication Response which included “The Respondent’s Submissions”.

DDI’s “Synopsis” responded in part to earlier submissions of Probuild which had been provided in reply to an earlier (and abandoned) adjudication application with respect to the same payment claim:

DDI’s “Reply to Probuild’s payment schedule” set out particular numbered paragraphs from a letter which accompanied Probuild’s payment schedule and then responded to those paragraphs. That reply included the following responses:

Probuild’s submissions before the adjudicator in support of the set-off claims made by its payment schedule addressed the claim to liquidated damages under cl 42.1 and its entitlement under cl 42.2 to deduct that amount from monies otherwise due to DDI. After noting that the sub-contract works had not been completed until late May 2015, the submissions continued:

Those submissions did not otherwise address DDI’s much less focussed submissions to the effect that Probuild’s claim to liquidated damages was not “reasonable” and that it was not possible for it to have completed the works by the original Date for Practical Completion because of changes to the Construction Program and to the scope of the sub-contract works. Nor did they address why, taking account of these matters, Probuild maintained that DDI had not been entitled to an extension of time.

Under Pt 3, Div 2 of the Act, DDI’s adjudication application was required to identify the payment claim and payment schedule (if any) to which the application related and such submissions in support of that application as DDI chose to include: s 17(3)(f), (h). Having provided a payment schedule, Probuild was entitled to respond in writing, including by submissions in support of the schedule, provided that they did not include reasons for withholding payment which were not otherwise stated in that schedule: s 20(2B).

The adjudicator was required to determine DDI’s application as “expeditiously as possible”: s 21(3). The Act provides that in doing so the adjudicator can conduct “proceedings”; that those proceedings “may” involve requesting written submissions from one party and, in that event, “must” involve giving the other party an opportunity to comment on those submissions: s 21(4)(a). That power was to be exercised, if necessary, to enable the parties to be aware of the bases upon which the adjudicator might uphold or reject DDI’s payment claim, so as to provide an opportunity to address them. See generally the discussion in Kioa v West [1985] HCA 81; 159 CLR 550 at 582-585 (per Mason J).

In determining the application, the adjudicator was required by s 22(2) to “consider the following matters only”:

The adjudication determination addresses each of the variations claimed by DDI and each of Probuild’s set-off claims. The adjudicator rejected Probuild’s claim to liquidated damages (payment schedule item CC14).

His reasons for doing so are contained in paragraph 185 of the determination. Paragraph 184 sets out the reasons included in the payment schedule in support of that claim. Those reasons are extracted in [12] above. The determination continued:

Probuild contends that in paragraph 185 of his determination the adjudicator gives two reasons for rejecting its claim to a set-off for liquidated damages. It says that neither of those reasons was contended for by DDI or otherwise notified to or addressed between the parties. In those circumstances it submits that procedural fairness required that the adjudicator invite Probuild to address those possible reasons for the rejection of its claim.

Probuild also submits that in rejecting its claim to liquidated damages, the adjudicator identified a basis on which Probuild might nevertheless have been entitled to claim unliquidated damages caused by DDI’s delay (as “an alternative Respondent position”). The adjudicator did not, however, give it the opportunity to make submissions on that alternative claim.

The two reasons said to have been given by the adjudicator are:

It was suggested that the first conclusion invokes aspects of what was referred to by Brooking J in SMK Cabinets v Hili Modern Electrics Pty Ltd [1984] VR 391 at 395 as the “doctrine of prevention”. That doctrine, in the context of a claim under a liquidated damages clause in a building contract, is said to disentitle the principal from relying on the clause in the face of delay caused by its own acts or omissions. The second conclusion is said to imply that the power of Probuild to grant extensions of time was to be exercised in good faith and reasonably, as the Court of Appeal has suggested might be the position, at least in relation to the exercise of such a power by a superintendent: see Peninsula Balmain Pty Ltd v Abigroup Contractors Pty Ltd [2002] NSWCA 211; 18 BCL 322 at [79]-[81] (Hodgson JA, Mason P and Stein JA agreeing).

Probuild maintains that because the adjudicator did not raise these matters before making his determination, it did not have a fair opportunity to address them by way of submission. Had it been given that opportunity and made further submissions, it is said the adjudicator may well have accepted that it had an entitlement to a set-off in relation to damages for delay.

DDI points out that the adjudicator proceeded on the basis that 80% of the value of the contract variations claimed concerned work directed by Probuild and executed by DDI, in each case after 5 January 2015. The adjudicator also accepted that DDI must have performed those additional works as directed. DDI accepts that neither party specifically addressed the adjudicator as to the consequences of Probuild’s having directed variation work after the original Date for Practical Completion. DDI points out, however, that it denied it was liable for liquidated damages for any such delay, maintaining that Probuild’s claim was “unreasonable”, “disingenuous” and “not … believable”. The facts upon which it relied for its assertion that the claim was unreasonable were obvious and were stated in support of its claimed variations. It had been delayed in completing the works because it was denied the access anticipated by the original Construction Program and directed to undertake additional work, in most cases, after the original Date for Practical Completion.

In my view there was no denial of procedural fairness with respect to the way in which the adjudicator addressed and determined whether Probuild was entitled to a set-off for liquidated damages as claimed. That follows from a consideration of the argument made in support of that claim in the payment schedule, DDI’s response to that argument and the adjudicator’s reasons at paragraph 185. In short, Probuild argued that DDI had not been granted and was not entitled to any extension of time. The adjudicator considered otherwise, concluding that having regard to the “volume of the additional work being directed”, it was “unreasonable” for Probuild not to have granted DDI “additional time”. In so concluding the adjudicator was addressing whether DDI was entitled to the grant of an extension of time under cl 41.9, a matter expressly raised and denied by Probuild in support of its entitlement to liquidated damages.

Probuild’s argument for that entitlement being an answer to DDI’s payment claim (see [12] above) proceeded as follows. First, there was a failure by DDI to complete the sub-contract works by the original Date for Practical Completion. Secondly, DDI had not complied with cl 45.2. It is likely this was intended to be a reference to cl 45.3(a)(iii) which required, in relation to any direction as to additional work which was not the subject of a Variation Direction, that DDI give notice as to any effect the asserted variation would have in delaying the Date for Practical Completion. Thirdly, DDI had not complied with cl 41.5 in relation to the notification of likely or actual delay, that notification being a pre-condition to any entitlement to an extension of time under cl 41.6. Fourthly, DDI had not been granted nor was it entitled to any extension of time. The reference to an extension of time being “granted” is reasonably to be understood as including an extension of time granted under cl 41.9. That clause provides for the grant of an extension in circumstances were no entitlement arises under cl 41.6. Finally, it is said that “DDI is not entitled to any extension of time under Cl 41.10”. That clause is not the source of any power to grant an extension of time. Rather it provides that any delay or failure by Probuild “to grant a reasonable, or any, extension of time shall not cause the Date for Practical Completion to be set at large”. In context this last statement is to be understood as maintaining that DDI was not entitled to any extension of time by reason of any delay or failure on the part of Probuild to grant an extension of time.

By making that argument Probuild acknowledged that it would be an answer to its liquidated damages claim that DDI was entitled to an extension of time. In reply DDI denied that claim was “reasonable”; denied it had delayed the works; denied it was indebted to Probuild for liquidated damages; and asserted that because of the difficulties with access and the variations required it could never have completed the works by the original Date for Practical Completion. Each of those replies was made in documents served on Probuild with the adjudication application.

The adjudicator dealt with Probuild’s argument as made. He noted that DDI had not requested any extensions of time on account of the variations. He considered it unreasonable for Probuild, on the one hand, to direct DDI to perform significant additional work after the original Date for Practical Completion and, on the other, to claim liquidated damages on the basis that those and the other works had not been completed by that date. I do not read the adjudicator’s reasons to this point as indicating any separate or freestanding reason for rejecting the liquidated damages claim. Rather, the conclusion that Probuild’s position was “totally inconsistent and unreasonable” informs the next step in the adjudicator’s reasoning, namely, that it was “unreasonable” of Probuild not to have granted DDI additional time in accordance with its “ability to extend time for any reason”; that being a reference to its power to do so under cl 41.9. That conclusion was also directed to, and rejected, Probuild’s assertion that DDI was not “entitled” to any extension of time.

Thus, Probuild maintained, as part of its argument, that DDI was not entitled to any extension of time, under cl 41.9 or otherwise. It did so seeking to discharge its onus of persuading the adjudicator of its right to a set-off. In response DDI denied that claim, at least partly on the basis that Probuild’s position was unreasonable, although no argument was developed explaining why unreasonableness on the part of Probuild might provide an answer to its assertion that DDI was not entitled to any extension of time under cl 41.9. The adjudicator rejected the set-off claim for reason that DDI was entitled to an extension of time under that provision. There was, in the circumstances, no denial of procedural fairness. Probuild’s argument acknowledged that its set-off claim depended on DDI not having an entitlement to an extension of time under cl 41.9. That set-off claim was denied and Probuild had a reasonable opportunity to put forward its case as to why there was no entitlement under that clause.

The third matter raised by Probuild can be dealt with briefly. The observation that there may have been an “alternative” position which Probuild might have put in relation to unliquidated damages for delay was just that. Probuild did not make any alternative claim or raise an alternative reason for withholding payment in the payment schedule: s 14(3). In the absence of its having done so, Probuild was not entitled to rely upon such a reason before the adjudicator: s 20(2B). Nor was the adjudicator entitled to consider any argument supporting such a reason: s 22(2)(d).

Probuild’s application for an order quashing the adjudicator’s determination should be dismissed with costs. The amount Probuild has paid into Court as security for the unpaid adjudicated amount is $495,473.20. That amount should be paid to the first defendant.