Australia: Construction company fails to overturn adjudication determination in Supreme Court of NSW

In brief - Court upholds payment to electrical subcontractor under Security of Payment Act

The Supreme Court of NSW upheld the payment awarded to an electrical subcontractor in an adjudication determination because the construction company sought to rely on submissions in the adjudication response which were not foreshadowed in the payment schedule.

Construction company challenges payment awarded to electrical subcontractor

In an adjudication determination under the Building and Construction Industry Security of Payment Act 1999 (Act), electrical subcontractor Blacklabel Services Pty Ltd was awarded an amount of $47,173.29 against construction company Maxstra NSW Pty Ltd.

Despite the relatively small amount involved, Maxstra challenged the determination in the Supreme Court of NSW and sought a declaration that the determination be declared void and an order for repayment of the amount it had already paid pursuant to the determination.

In the decision in Maxstra NSW Pty Ltd v Blacklabel Services Pty Ltd [2013] NSWSC 406, handed down on 24 April 2013, the Supreme Court dismissed Maxstra's application.

Blacklabel serves Maxstra with payment claim for electrical design work on service station

Maxstra engaged Blacklabel to undertake the electrical design and trade work on the construction of a service station in Kempsey, NSW.

Construction commenced on 15 March 2012 and, after disputes arose between Maxstra and Blacklabel, the electrical work was completed in late July 2012. On 8 August 2012, Blacklabel served on Maxstra a payment claim for the sum of $47,173.29.

In response, Maxstra issued a payment schedule on 20 August 2012, certifying the amount payable as nil on the basis that the amount claimed exceeded the value of the work performed (Payment Schedule). Relevantly, Maxstra expressed its reason for withholding payment or rejecting payment as:

Amount claimed exceeds value of works performed.
Contractor is not entitled to claim for equipment removed from site by contractor on or about 21/7/12
Contractor caused damage to existing work during removal of fixed equipment
Costs incurred in determining incomplete work due to manner in which work was performed (eg. power points fitted off but not connected)
Extra over cost of completing work following termination of contract, the total amount required to complete the works upon termination of the contract exceeds the total amount claimed
Delay damages due to Maxstra by reason of Blacklabel removing equipment due to subsequent lead times to replace.

On 3 September 2012, Blacklabel made an adjudication application for the payment of moneys owing on account of its design work. On 16 September 2012, the adjudicator determined that Maxstra owed Blacklabel $47,173.29 plus adjudication fees and expenses.

How does the Security of Payment Act work?

The object of the Building and Construction Industry Security of Payment Act is to ensure that a person who undertakes construction (or related services) under a construction contract is entitled to receive, and able to recover, progress payments in relation to that work.

The Act permits a person who claims to be entitled to payment (Claimant) to serve a payment claim on the person liable to make the payment. Amongst other things, the payment claim must identify the construction work to which the payment relates, indicate the amount of the progress payment claimed and state that it is a payment claim under the Act.

A person from whom payment is claimed and on whom a payment claim is served (Respondent) may reply by providing a payment schedule. The payment schedule must identify the payment claim to which it relates, indicate the amount of the payment (if any) that the Respondent proposes to make and if that amount is less than the claimed amount, indicate why the scheduled amount is less.

If the Respondent does not provide a payment schedule within 10 business days after the payment claim is served, it becomes liable to pay the entirety of the claimed amount.

If, amongst other things, the Respondent provides a payment schedule certifying the amount payable as less than the amount claimed, the Claimant is entitled to apply for adjudication of the payment claim.

What does the adjudicator determine?

Where an adjudication application has been made, the adjudicator is required to determine:

  • the amount of the progress payment (if any) to be paid to the Claimant
  • the date on which such payment became or becomes payable
  • the rate of interest payable on any such amount

Adjudicator rejects assertion that amount claimed exceeded value of work performed

The adjudicator reviewed, amongst other things, Blacklabel's payment claim for $47,173.29 and Maxstra's Payment Schedule assessing the value of the work as nil on the basis that the amount claimed exceeded the value of the work performed.

The adjudicator determined that neither Maxstra's Payment Schedule nor adjudication response supported its assertion that the amount claimed exceeded the value of work performed. He stated that, even if the adjudication response did include supporting evidence, the evidence would constitute new material which had not been included in the Payment Schedule and therefore he would be precluded from considering it.

Maxstra challenged this determination on the basis that the failure of the adjudicator to consider its submission as to the value of the work amounted to a jurisdictional error.

Reasons for withholding payment need to be included in payment schedule

In determining whether the adjudicator had erred in his decision to disregard certain submissions made by Maxstra, the Supreme Court looked to the requirements of the Act. In particular the Court looked to:

  • Section 20(2B), which excludes the Respondent including in its adjudication response any reasons for withholding payment unless those reasons have already been included in the payment schedule provided to the Claimant; and
  • Section 22(2)(d), which requires the adjudicator to consider, amongst other things "the payment schedule (if any) to which the application relates, together with all submissions (including relevant documentation) that have been duly made by the respondent in support of the schedule" (emphasis added).

In considering the facts of the case, Rothman J observed that Maxstra, in its adjudication response, submitted that the design work occurred prior to the renegotiated sub-contract price and that "there was no additional design work and there is no basis to claim additional design work".

His Honour noted that Maxstra's Payment Schedule only provided one reason for withholding the payment or rejecting the payment claimed for design works, which was that the amount claimed exceeded the value of the works performed. On these facts, the Court concluded that, because the reasons set out in Maxstra's adjudication response did not arise from the terms of its Payment Schedule, the adjudicator was correct in not considering the adjudication response.

Supreme Court determines that adjudicator was correct

Rothman J held that:

[i]n taking the view that the Adjudicator was not permitted to consider submissions made in the adjudication response, or otherwise, that are not included in the payment schedule, the Adjudicator was correct. No error of law is disclosed in that finding. Nor does it involve an error of jurisdiction, or a denial of procedural fairness.

His Honour observed that the approach of the court when reviewing a decision should be not to apply an overzealous analysis to the determination of an adjudicator, but rather to take a practical approach, concentrating on the effect of the determination and the reasons of the adjudicator.

Payment schedules need to include all relevant documentation and supporting evidence

This case highlights the importance of thorough, properly prepared and well drafted payment schedules. Be alert to the fact that all payment claims have the potential to be referred to adjudication and, if that happens, it is too late to start locating evidence in defence of the payment claim.

Faith Laube
Construction and engineering
Colin Biggers & Paisley

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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