Australia: Construction contracts: the importance of defining the payment dispute to be adjudicated

The recent Western Australian State Administrative Tribunal (Tribunal) decision in Alliance Contracting Pty Ltd and Tenix SDR Pty Ltd [2014] WASAT 136 is interesting for three reasons. First, it demonstrates the importance of defining carefully what is alleged to be the 'payment claim' and the 'payment dispute' in an application for adjudication under the Construction Contracts Act 2004 (WA) (Act). Secondly, it is an interesting insight into the potentially complex relationship between the adjudication process and the performance security regime common in construction contracts. Thirdly, it touches on the question of the scope of the exclusion from 'construction work' for the purposes of the Act and exposes an interesting anomaly in the Act.

SUMMARY

This decision confirms the proposition that only 'payment disputes' which fall within the circumstances set out in section 6 of the Act can be the subject of an adjudication application. An application for adjudication of a dispute not falling within those circumstances will not have been prepared in accordance with section 26 of the Act and must be dismissed.

A separate aspect of the decision touches on the nature of a plant which processes a "mineral bearing or other substance" in the exclusion from the nature of construction work to which the Act applies. The case exposes (but does not resolve) an interesting issue as to why certain non resource industry related processing plants are captured by the section 4(3)(c) exclusion while other similar processing plants may not be.

BACKGROUND

Alliance Contracting Pty Limited (Alliance) made an application to the Tribunal for review of an adjudicator's decision which dismissed Alliance's application for adjudication (Application).

There were two issues for the Tribunal (Member Aitken) to consider:

  1. whether Alliance's Application was in respect of a 'payment dispute' for the purposes of the Act; and
  2. whether the subcontract in question was, by operation of section 4(3)(c) of the Act, excluded from the rapid adjudication regime provided for by the Act.

THE FACTS

The respondent, Tenix SDR Pty Ltd (Tenix), engaged Alliance under a subcontract to undertake works for the construction of a wastewater treatment plant in Karratha.

Under the subcontract, Alliance was required to provide Tenix with performance security in the form of two unconditional undertakings for a total of $548,416.46. Both were required to be returned (if not used) at the end of the defects liability period.

Tenix notified Alliance that, because it considered Alliance had failed to achieve practical completion by the required date, Alliance was obliged to pay Tenix liquidated damages (Tenix Notice). In the same notice, Tenix also advised that it had had recourse to Alliance's security to recover, in part, the liquidated damages it considered Alliance was obliged to pay.

By letter on the same day, Alliance advised Tenix that it considered Tenix had no current entitlement to recourse to the security and Tenix's action in doing so was a breach of the subcontract.

Alliance also issued a notice of dispute under the subcontract in which it alleged that Tenix had no legal right to levy liquidated damages against Alliance and consequently had no legal right to recourse to the security.

Alliance subsequently made its Application. Alliance sought an amount equivalent to the value of the two unconditional undertakings which constituted the security.

The adjudicator dismissed Alliance's Application without making a determination on the merits in accordance with section 31(2)(a)(ii) of the Act.

Alliance applied to the Tribunal, under section 46(1) of the Act, for a review of the adjudicator's decision to dismiss its Application.

THE TRIBUNAL'S DECISION

The Tribunal dismissed Alliance's review application on the basis that Alliance had, in its Application, sought to have determined a dispute that was not a 'payment dispute' for the purposes of the Act.

Identifying the relevant 'payment claim' and 'payment dispute'

In its Application, Alliance contended that the Tenix Notice was the relevant 'payment claim' which gave rise to the 'payment dispute' upon which its Application was grounded.

Whilst the Tribunal considered that a claim for liquidated damages from a principal to a contractor was capable of giving rise to a payment dispute for the purposes of the Act, it rejected Alliance's contention that this was the relevant payment claim.

In the Tribunal's view, while the Tenix Notice described a claim for liquidated damages, Alliance had, by describing notice as the relevant 'payment claim', conflated Tenix's claim for liquidated damages with Tenix's recourse to the unconditional undertakings. The Tribunal found that Tenix's recourse to the unconditional undertakings was the 'payment claim' upon which Alliance's Application was actually grounded. Although Tenix's recourse to the unconditional undertakings flowed from its liquidated damages claim, such recourse was a separate and distinct matter from Tenix's liquidated damages claim.

Describing, with precision, the payment dispute and the relief sought

The Tribunal confirmed1, that an adjudicator has the power to determine whether a party, against whom a payment claim has been made, is liable to make the payment claimed. Thus, Tenix's payment claim for liquidated damages could be the source of a payment dispute over which Alliance (the respondent to the payment claim) could bring an adjudication application.

That said, the Tribunal held that the scope of section 31(2)(b) of the Act was limited by the circumstances that are set out in section 6 of the Act. That is, an adjudicator is only empowered to determine whether a party to a construction contract is liable to make a payment which falls within the circumstances set out in section 6 of the Act.

The Tribunal analysed in detail the way in which Alliance had articulated its Application. The Tribunal found that Alliance could have, but did not, bring an adjudication application in respect of the payment dispute arising from Alliance's rejection of Tenix's claim for liquidated damages. The Tribunal found that, rather than seek a determination of Tenix's liquidated damages claim, Alliance's Application sought a determination of one or other of two matters:

  1. whether Alliance was entitled to be paid the equivalent of the value of the unconditional undertakings; or
  2. whether those undertakings were to be 'returned'.

As to the first of these, the Tribunal held that a dispute about whether a party is entitled to be paid the equivalent value of security to which the other party has had recourse, is not an application for the adjudication of a payment dispute under section 26 of the Act.

As to the second, there was no question that the security was not due to be returned at the time Tenix had had recourse. It was not due to be returned until the end of the defects liability period, which was many months off.

Thus, the Tribunal held that it could not have been a payment dispute which enlivened the adjudicator's jurisdiction.

Operation of section 4(3)(c) of the Act

Tenix also argued that the exclusion in section 4(3)(c) of the Act (commonly referred to as the "mining exclusion") applied so the Application should have been dismissed anyway on this ground.

The Tribunal found that the works that Alliance performed under the subcontract (relating to a wastewater treatment plant), were "work constructing a plant" for the purposes of section 4(3)(c) of the Act. The Tribunal distinguished the decision of Re Graham Anstee-Brook, Ex parte Karara Mining Ltd2 and applied the reasoning of the Tribunal in Conneq Infrastructure Services (Australia) Pty Ltd and Sino Iron Pty Ltd3.

The question then was whether that plant was for the purposes of extracting or processing "oil, natural gas or any derivative of natural gas, or [relevantly] any mineral bearing or other substance".

The Tribunal relied on its earlier decision in Conneq in concluding that it was unable to find that the exclusion in section 4(3)(c) applied in this case because, on the evidence before it, it could not conclude that the purpose of the subject wastewater treatment plant was to process a mineral bearing substance and, particularly, it could not conclude that the process involved the extraction of minerals (as had been the case in Conneq).

In Conneq the Tribunal had said:

  1. the phrase "other substance" in section 4(3)(c) does not apply to constructing a plant for the purpose of extracting or processing "any" substance; because
  2. the phrase "other substance" cannot be divorced from the context of the rest of the language in section 4(3)(c) (which is concerned with the resources industry); consequently
  3. "other substance" must be a substance which is processed as part of the resources industry.

The Tribunal therefore accepted that the phrase "mineral bearing or other substance" should be construed contextually and therefore it accepted Conneq's submission that "other substance" could include non-mineral bearing but still mining related substances such as coal. In summary, the Tribunal read down the phrase "other substance" in section 4(3)(c) so as to limit it to substances that were related to the resources industry.

However, the ratio of the Tribunal's decision in Conneq went a critical step further. The Tribunal accepted the proposition that the exception in section 4(3)(c) applies to the extracting and processing of a "mineral bearing substance" outside the context of the resources industry, including a desalination plant. That is, the extraction and processing of salt from salt water amounts to the processing of a mineral bearing substance (salt water) because salt is a mineral.

Indeed, the Tribunal in Conneq went to some length to make clear that it was not making a finding that the desalination plant in that case was captured by the exclusion in section 4(3)(c) only because it was, in that case, associated with the supply of water to an iron ore mining project. Its decision rested wholly on the proposition that the relevant plant was for the purpose of processing salt water, which is a mineral bearing substance.

In essence, therefore:

  1. the ratio of Conneq is that the phrase "processing ... any mineral bearing ... substance" is not restricted to the processing of substances which are processed as part of the mining and resources industry. In other words, the Tribunal gave the phrase "mineral bearing ... substance" a wide meaning and did not restrict it to the resources industry;
  2. however, in its comments on the phrase "processing ... any ... other substance", the Tribunal found that this phrase should apply narrowly, only to any substance associated with the resources industry.

The effect of the Conneq and Alliance decisions, therefore, appears to be this:

  1. a municipal desalination plant (not only one which operates on a mine site, as was the case in Conneq) is excluded because it processes salt water, a mineral bearing substance;
  2. however, a wastewater treatment plant (at this stage at least), even though it has a similar public purpose to a desalination plant, is not excluded;
  3. that said, a wastewater treatment plant may be excluded if wastewater happens to contain minerals (and, perhaps, so long as those minerals are processed in some way).

That, of course, raises this question: why should the construction of a plant that is used for extracting a mineral from mineral-bearing water (to produce fresh water) be treated by the Act any differently from the construction of a plant that is used for extracting waste (including, possibly, minerals) from waste-bearing water, to produce fresh water (and possibly potable water, depending on the plant)?

The Tribunal in the Alliance decision did not consider it necessary to grapple with this question and so this apparent anomaly remains for consideration on another occasion.

CONSEQUENCES OF THE DECISION

The Tribunal's decision establishes that, for the purposes of the Act, a payment claim (and a subsequent dispute of that claim) is related to, but distinct from, a dispute arising from the claimant's recourse to performance security (and a dispute about that recourse). The decision is also interesting in that it highlights an apparent anomaly arising from the Conneq decision. That is timely, given Professor Phil Evans' recently released discussion paper in relation to a review of the Act.4

Footnotes

1The Tribunal appears to have had regard to the recent (and related) Supreme Court decision of Alliance Contracting Pty Ltd v James [2014] WASC 212, although that decision is not expressly referred to in the Tribunal's decision.

2[2012] WASC 129.

3[2012] WASAT 13.

4See Professor Phil Evans, "Discussion Paper: Statutory Review of the (Construction Contracts Act 2004 WA)" (October 2014) available here.

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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