MMIR Pty Limited v Iskra

This is an application for review of an Adjudicator’s determination under the Building and Construction Industry Security of Payment Act 1999 (NSW) (to which I will refer as “the Act”).

The plaintiff, MMIR Pty Limited (to which I will refer as “the owner”), challenges the determination by the second defendant, Callum Campbell (to whom I will refer as “the Adjudicator”), in favour of the first defendant, Ganni John Iskra, trading as JI Projex (to whom I will refer as “the builder”), in the amount of approximately $160,000. The owner and the builder have been represented before me by counsel. The Adjudicator has not appeared, and, I was told, submits to any orders the Court may make.

The application arises out of a building project at Wollongong. The work involved the upgrading and refurbishment works of a restaurant and fitness centre. The owner, apparently, began preparatory works on the site in August or September 2016. Work was later undertaken by the builder up until September 2017. In the course of the project, the owner made payments totalling the sum of $456,000 to the builder. The claim in question is for the balance the builder says is owing.

The payment claim in question was dated 4 September 2018, and consisted of a two-page invoice and supporting documents. The invoice contained 15 items of work together with a figure for a six per cent “project management fee”. The 15 work items totalled $528,156.05 (although this figure does not itself appear in the invoice). The “project management fee” was $31,689.36. Adding GST, the total amount claimed for the project was $615,829.95. The invoice allowed a credit for amounts paid of $450,000, leaving an amount payable of $165,829.95.

It is common ground that the amount in fact paid by the owner to the builder was $456,000 not $450,000. Accordingly, the amount due on the payment claim, if the builder were successful, was $159,829.95. This was the amount awarded in the builder’s favour by the Adjudicator.

The payment claim was accompanied by a supporting statement concerning payments to subcontractors, in accordance with the Act. According to an affidavit filed in support of the adjudication application by the builder, most of the work was done by subcontractors, but the builder himself or his employees provided day labour for steel fixing, excavation, removal of waste from the site, collection and delivery of bricks to the site, grease trap works and traffic management. The supporting statement contained an attachment identifying each of the subcontractors on the project and particulars of the invoices issued by those subcontractors.

The payment claim then contained a four-page summary of subcontractor invoices. The total of the invoices was $442,601.44. Then followed the invoices themselves which took up more than 250 pages.

The total value of the work done excluding the “project management fee” was, according to the payment claim, approximately $581,000 inclusive of GST. It is, therefore, clear that the subcontractor invoices, which totalled approximately $423,000, do not cover all of the amount claimed. The difference must represent the amount claimed for the work done by the builder himself. The builder’s affidavit stated that initially demolition works were to be undertaken and a quote was received for approximately $170,000 inclusive of GST. According to the affidavit, the owner thought this figure was too high and it was agreed that work would be undertaken by the builder himself at a cost of “about $100,000”. The other $40,000 or so is presumably attributable to the other costs referred to in the builder’s affidavit.

I should stress that the affidavit was not provided in support of the payment claim. It was sworn and given to the Adjudicator in support of the adjudication application itself.

The owner responded to the payment claim with a payment schedule proposing a nil payment. There followed the adjudication application, to which I have already referred. There was then a response to the adjudication application.

The Adjudicator delivered his decision on 17 October. After recounting the background, the Adjudicator stated the issues as follows:

The Adjudicator continued:

After dealing with the document described as an expense report, which had been put forward by the respondent, the Adjudicator continued:

The Adjudicator dealt with an argument concerning set-off, which has not been the subject of any debate before me. He then addressed the question of the amount due to the claimant. He said:

At [86] the Adjudicator noted the additional payment of $6,000, which had been made by the owner to the builder and reached a final adjudicated sum of $159,829.95.

Counsel for the owner presented the owner’s case on the basis that the Adjudicator had rejected the owner’s argument that there had been a fixed price agreed for the work. Counsel accepted, in the language of the parties and the language used by the Adjudicator, that the contract in question was an oral contract for the work to be done on a “do and charge” basis. Counsel for the owner also accepted, having regard to [66] of the adjudication determination, that the work in question had been completed. The issue was whether it had been properly valued.

Counsel for the owner contended that the Adjudicator had failed to make any rational analysis of whether the amount claimed in the payment claim was justified having regard to the terms of the contract and the value of the works undertaken. Counsel submitted that this case rises to a jurisdictional error because, so it was argued, the Adjudicator had failed to satisfy an essential requirement of conducting an adjudication in accordance with the Act. In Pacific General Securities Limited v Soliman & Sons Pty Limited [2006] NSWSC 13 at [86] Brereton J (as his Honour then was) stated:

This view of what the Act requires is consistent with subsequent authorities. I refer, in particular, to Plaza West Pty Limited v Simon’s Earthworks (NSW) Pty Limited [2008] NSWCA 279 at [58]; SSC Plenty Road Pty Ltd v Construction Engineering (Aust) Pty Limited [2015] VSC 631 at [76]; Richard Crookes Construction Pty Ltd v CES Projects (Aust) Pty Ltd (No 2) [2016] NSWSC 1229 at [16]–[24]; and Laing O'Rourke Australia Construction Pty Limited v Monford Group Pty Limited [2018] NSWSC 491 at [37].

Counsel for the builder accepted the statement of principle which I have quoted from Brereton J above. In particular, counsel accepted that a failure to value the construction work in accordance with the terms of the contract would be not only an error but a jurisdictional error resulting in the invalidity of the adjudication determination. The question for me is whether this principle applies on the facts.

Counsel for the owner argued that the Adjudicator’s reasons showed that he considered that the onus of proof lay on the owner, and, once he concluded that there was nothing to support the assertions the owner had made in the payment schedule and the adjudication response, the Adjudicator had automatically proceeded to award the amount claimed. Counsel submitted that under the terms of the contract the Adjudicator should have considered whether the amounts claimed were justified having regard to the contractual basis for charging and that this had not been done.

Counsel for the builder observed that an argument had not been put to the Adjudicator in these terms. So far as I can see, that is correct. However, I do not understand the principle stated by Brereton J to depend upon an express issue being joined to the debate before the adjudicator before it arises. Rather, I understand his Honour’s statement to be a minimum requirement, which the adjudicator must address whether or not the adjudicator is expressly referred to it by the parties. I put this view to counsel for the builder and as I understood his response, he accepted that that was so.

As I have mentioned, both the Adjudicator and the parties before me referred to the contract in a shorthand way as a “do and charge” contract. It emerged in argument, however, that there was some dispute as to the meaning of this term.

Counsel for the builder argued that a “do and charge” contract is necessarily the same thing as a “cost plus” contract, whereby payment under the contract is the cost to the builder of undertaking the work plus a margin, usually a percentage of that cost, on top. Counsel submitted that there was no occasion to consider the reasonableness of the charges made by the builder. The only question was whether the costs in question had been incurred.

Counsel was bold enough to contend that there could also be no enquiry as to the reasonableness of the percentage which had been charged by the builder; in counsel’s submission, the builder could have charged a mark-up of 300 per cent and it would still have been unnecessary for the Adjudicator to consider the reasonableness of that charge in valuing the amount due under the contract.

In Krahe v Manfate Pty Limited [2016] NSWCA 363 McDougall J, speaking for the Court of Appeal, said at [44]-[45]:

In my view, the present case illustrates the difficulties which can arise when a term such as “do and charge” contract is used by way of shorthand without specifying what the actual term is in the contract. It is not clear to me that the Adjudicator even had any clear idea as to what he meant in making his finding about the terms of the contract. The passage in the adjudication determination at [64], on the face of it, leaves unclear what finding the Adjudicator made as to the precise terms of the contract. All that paragraph states is that a valid construction contract existed under the Act. Having regard to the definition in s 9, which is in extremely broad terms, I accept that that is so, but it does not assist in resolving what the terms of the contract were.

Be that as it may, having regard to the way the case has been propounded by counsel for the owner, I must proceed on the basis that the Adjudicator did in fact reject the contention that there was a fixed price agreed and the contract was, in that sense, a “do and charge” contract as distinct from a fixed price contract. But it does not follow that this is the same thing as a “cost plus” contract where the only issue was whether the costs claimed were incurred.

The passage from Krahe v Manfate to which I have referred treats a “do and charge” contract as a contract made by the parties which they intend to be binding but which does not specify the price. Such a contract is not necessarily a “cost plus” contract. It gives rise to an entitlement by way of quantum meruit to a reasonable payment. It may be that in some circumstances the reasonable payment would be determined as being the costs plus some appropriate margin but that is not necessarily so in every case.

Furthermore, even if in a particular case it was appropriate to determine the reasonable price by the use of a “cost plus” mechanism, that would not insulate the amount later claimed by way of mark-up by the builder from consideration by the Court. The fact is in this case that the six per cent figure appeared for the first time in the invoice issued by the builder after the work had been done (at least so far as the evidence before me indicates). It cannot be correct that in determining the amount of the reasonable price the Adjudicator was required to accept that percentage without any consideration of whether, having regard to the parties’ prior dealings and other relevant factors, it was a reasonable basis for charge.

The written submissions by counsel for the builder describe the adjudication determination as containing “some imprudent language” concerning the burden of proof. Nevertheless, counsel argued that I could infer that the Adjudicator had in fact considered the reasonableness of the charges made by the subcontractors and which were provided with the payment claim, as well as the other evidence provided in connection with the adjudication application.

In this regard, counsel referred to the Adjudicator’s invoice which indicated that he spent sixteen hours determining the adjudication.

I have already set out the relevant paragraphs of the Adjudicator’s decision. The Adjudicator expressly referred in [63] to the owner having an onus of proof concerning its assertions. The Adjudicator said in [67] that the respondent had provided no evidence, submissions or information in support of the position put in its payment schedule. The Adjudicator’s conclusion at [82] likewise asserted that the respondent had the onus of satisfying the Adjudicator as to the validity of the grounds “for withholding payment” and stated that the respondent had failed to satisfy the Adjudicator that such reasons were legitimate.

In my view, the tenor of the adjudication is clear. The Adjudicator treated the issue before him as one which depended upon the owner sustaining the claims and assertions made in the payment schedule and the adjudication response, rather than turning on the validity of the claim made in the payment claim and pursued in the adjudication application.

There is nothing in the adjudication determination which expressly states that the Adjudicator considered whether the amount claimed was a proper one having regard to the terms of the contract and the reasonable value of the works undertaken. Indeed, it is not even clear to me that the Adjudicator appreciated that this is what he needed to do. Certainly, in my view, there is no necessary inference that the Adjudicator did so. The time spent by the Adjudicator, as disclosed in the invoice, may just as well be accounted for by the need to review the very voluminous material supplied to him and to prepare his adjudication determination.

Even if the Adjudicator had considered each of the individual invoices, that would not be enough. There is nothing to suggest that the Adjudicator considered the reasonableness of the charge made by the builder for the work done by the builder himself, whether in terms of cost to the builder or on any other basis of charging. The index to the payment claim referred to in the adjudication determination at [70] referred only to the subcontractor invoices and said nothing at all about the costs charged for the work done by the builder himself.

Furthermore, the adjudication determination contains no consideration of the reasonableness of the six per cent charged by way of “project management fee” or “cost plus” mark-up. In my view, a proper consideration of the claim would require an evaluation of the reasonableness of this margin.

For these reasons I conclude that the challenge made by the owner to the adjudication determination must be sustained. I am satisfied that the Adjudicator failed to come to a view as to what was properly payable having regard to the true construction of the contact under the Act and the true merits of the claim. This may be because of the way the application was conducted before the Adjudicator, but on the authorities to which I have referred, which were accepted by both parties as applicable in this case, there has been a jurisdictional error. There will thus need to be an order quashing the Adjudicator’s decision.

Following the adjudication determination a garnishee notice was issued which resulted in moneys being obtained by the builder from a bank account with Westpac Banking Corporation maintained by the owner. Those moneys will need to be repaid, and the moneys paid into Court (when an injunction was obtained for the purposes of these proceedings) will need to be paid out. I will hear counsel for the parties on the precise form of orders.

The Court: