Australia: Adjudication Void: Failure to Bona Fide Exercise Powers and Denial of Natural Justice

Key Points

• The recent decision in Lanskey is rare in that an adjudicator's determination was void on the grounds that the respondent in that case was denied natural justice and the adjudicator did not bona fide exercise his powers.
• The decision however contains little analysis of the meaning of "bona fide exercise of powers".

Following the decision in Brodyn v Davenport [2004] NSWCA 394, dissatisfied respondents under the Building and Construction Industry Security of Payment Act 1999 (NSW) have had limited grounds upon which to challenge adjudication determinations. In Brodyn it was held that in NSW the only circumstances where a determination is void is if:

• an essential pre-condition to the determination or a basic and essential requirement of the Act was not satisfied;
• there was a substantial denial of natural justice (such as a failure to receive and consider the respondent's submissions); or
• the purported determination was not a bona fide attempt by the adjudicator to exercise the power granted under the Act.

In the recent case of Lanskey Constructions Pty Limited v Noxequin Pty Limited (in liquidation) [2005] NSWSC 963, applying the principles set out in Brodyn, Associate Justice Macready declared the determination of an adjudicator void on the grounds that the respondent in that case was denied natural justice and the adjudicator did not bona fide exercise his powers granted under the Act.

There have been a small number of cases where the Supreme Court of NSW has set aside determinations on the basis of denial of natural justice. Aside from Lanskey, however, the only other case where a determination has been declared void on the ground that the adjudicator did not engage in a bona fide exercise of his powers was in Timwin Constructions v Façade Innovations [2005] NSWSC 548.

Noxequin was a formwork subcontractor engaged by a builder, Lanskey, to assist in the construction of apartments in Wollongong. Noxequin made a payment claim under the Act against Lanskey for final payment and release of retention moneys totalling $145,849.40. Lanskey responded with what was described in the judgment as "a highly detailed" payment schedule in which it rejected Noxequin's claims and instead claimed that it was owed $21,481.92. Lanskey's position was that it was entitled to charge some 69 items to Noxequin, including defect rectification works and liquidated damages, and therefore deducted the cost of these 69 items.

Noxequin lodged an adjudication application and Lanskey served its response. Both were described in the judgment as "detailed documents". The adjudicator issued a determination in which he found that Noxequin was entitled to the amount of $160,434.34.

Lanskey commenced proceedings in the NSW Supreme Court seeking orders declaring that the determination was void claiming that the adjudicator failed to engage in a bona fide exercise of power and failed to accord it natural justice. These failures were said to relate to the adjudicator's treatment of Lanskey's claims in respect of deductions and also the question of whether Noxequin's payment claim was served within the 12 month limitation period under section 13(4) of the Act.

Associate Justice Macready considered the measure of natural justice which the Act affords as set out in Brodyn. In Brodyn it was held that the intention of the legislature as set out in sections 17(1) and (2), 20, 21(1), and 22(2)(d) of the Act is that there is a requirement that respondents be given notice and an opportunity to make submissions. Crucially, if there is a failure by an adjudicator to receive and consider submissions which breaches these provisions, the determination will be void.

He then went on to consider the only previous decision (Timwin Constructions v Façade Innovations [2005] NSWSC 548) in which it was held that an adjudicator failed to engage in a bona fide exercise of his powers. In Timwin, Justice McDougall stated that, at its core, this requirement for validity is dependent upon the adjudicator making an effort to understand and deal with the issues in the discharge of his statutory function. Section 22(2) of the Act, for example, requires an adjudicator to "consider" certain matters. Justice McDougall stated that a requirement to "consider" certain matters is equivalent to a requirement to have regard to something.

The adjudicator stated in his deter-mination that while Lanskey had included in its adjudication response its reasons for deducting amounts from what Noxequin may have otherwise been entitled to, he did not consider it necessary for him to "go into each of the 69 claims for set-off". The adjudicator gave his reasons as to why Lanskey's arguments ought not be considered. The subcontract between the parties made provision for a Subcontract Superintendent. Notwithstanding this, the parties did not appoint a Superintendent. His conclusion seemed to be that Lanskey had no right to make its own assessment of its entitlement to set-off, that is, that this was a function to be exercised by the (non-existent) Superintendent. Associate Justice Macready stated that this conclusion was "probably wrong" because the subcontract contained an express right of set-off, which the adjudicator appears not to have noticed. He also appeared to ignore section 10(1)(iv) of the Act, which provides that in valuing construction work carried out or undertaken to be carried out, if the contract makes no provision with respect to the matter, the adjudicator must have regard to the estimated cost of rectifying any defects.

Whether the adjudicator was correct or not on this issue was not critical. The crucial issue was that he considered all 69 items that were deducted as "set-offs". Associate Justice Macready held that there was a real question raised by Lanskey about work that it alleged was incomplete under the subcontract. It was held that the manner in which the adjudicator dealt with all of the 69 items as "set-offs" avoided the necessity for him to consider Lanskey's detailed submissions in respect of each item. This meant that the adjudicator had not considered Lanskey's submissions under section 22 of the Act. This failure amounted to a denial of natural justice.

Lanskey submitted in its adjudication response that it was entitled to deduct the amounts referred to. It referred to an express contractual entitlement (in clause 37.3 of the Subcontract) to make an offsetting claim, however Associate Justice Macready concluded that the adjudicator may not have considered each matter contained in Lanskey's adjudication response, since he made no reference to clause 37.3 at any point in his determination - it appeared in the latter part of the adjudication response document. This led him to conclude that the adjudicator did not bona fide exercise his power to determine the matter.

The omissions of work only amounted to $12,435.39, which was not a substantial proportion of the overall payment claim. It was held that this invalidated the whole determination - the court cannot declare only part of an adjudication determination void. In this regard, Associate Justice Macready followed the reasoning in the decision of Multiplex Constructions Pty Limited v Luikens [2003] NSWSC 1140, where Justice Palmer considered the relevant principles. This case was handed down before (and was not followed in) Brodyn. In Multiplex, it was held that certiorari was available as a remedy where an adjudication was invalid. While that aspect was not followed in Brodyn, the reasoning on this point was found to still be sound, that is, because section 22(1) of the Act requires an adjudicator to produce only three findings - the adjudicated amount, the date upon which the amount becomes payable and the rate of interest payable - the whole of the determination is defective if an error infects any part of it.

Lanskey made a submission in its payment schedule that Noxequin was not entitled to make a payment claim as a period of 12 months had passed after the construction work to which the claim related was last carried out, in violation of the "time bar" in section 13(4)(b) of the Act.

In his determination, the adjudicator stated that in his view, in the 12 months preceding the payment claim, Noxequin, "at least provided some services", and therefore was the claim was within time. This however, was not the basis upon which the parties argued the matter before him. The argument that the parties presented to him was whether the work ceased on the date contended for by Lanskey or as conten-ded for by Noxequin. Associate Justice Macready held that the adjud-icator made no reference to the evidence before him on this point and decided the matter on a basis not put before him - a basis upon which neither party had notice of, nor could they address.

This was also held to be a further denial of natural justice.

While this is a rare case where it was held that an adjudicator, in addition to denying the parties the measure of natural justice which the Act affords, also failed to bona fide exercise his powers under the Act, it is unlikely that this decision will embolden respondents in a new raft of challenges under the Act. Associate Justice Macready appears to have treated the failure to consider the respondent's submissions regarding the items set off against the claimant as constituting both a denial of natural justice and a failure to bona fide exercise his powers. The decision however contains little analysis of the meaning of "bona fide exercise of powers". In that respect, Lanskey provides no further advance on the principles applied in Timwin.

Lanskey confirms that since Brodyn, the position in NSW is that where only part of an adjudication suffers from a defect that renders it void, the whole of the determination is void and it is not open to the court to declare only part of an adjudication determination void. While this might be an inconvenient result in some cases, it is a result dictated by the legislature.

In Lanskey, the adjudicator seriously erred. Essentially, this was due to his failure to properly consider all submissions. It is clear in NSW that such failure will render a determination void.

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.