Australia: Challenging Security of Payment Adjudications – is Brodyn Good Law?

The Building and Construction Industry Security of Payment Act 1999 (NSW) has transformed the legal environment underpinning construction contracts in NSW. The power balance (derived from holding the cash) has shifted significantly from principals to contractors, as contractors are now able to obtain progress payments on an interim basis and principals (rather than the contractors) are faced with the problem of recovering amounts which they consider are owing to them.

This shift in the balance of power was reinforced by the November 2004 decision of the NSW Court of Appeal in Brodyn Pty Ltd v Davenport (2004) 61 NSWLR 421, which significantly restricted the ability of principals to seek judicial review of adjudicators' determinations under the Act.

Prior to Brodyn a trend had developed where principals who were dissatisfied with an adjudicator's determination of a payment claim under the Act would apply to the Supreme Court for, and often be granted, relief in the nature of certiorari to quash the adjudicator's determination on the basis of jurisdictional error of law, denial of natural justice, or fraud.^[1] However, in Brodyn, the Court of Appeal held that relief in the nature of certiorari is not available given the terms of the Act, and that an adjudicator's determination can only be challenged if:

• the basic and essential requirements of the Act for a valid determination are not satisfied;
• the purported determination is not a bona fide attempt to exercise the power granted under the Act; or
• there is a substantial denial of the measure of natural justice required under the Act.

The decision that relief in the nature of certiorari is not available was a bold one - perhaps bolder than it needed to be. The Court of Appeal could have achieved the same outcome by following the Musico v Davenport [2003] NSWSC 977 line of authority but clarifying that a breach of a requirement of the Act will only result in a jurisdictional error of law if the relevant requirement is a "basic and essential requirement of the Act" (to use the language of the Court of Appeal) or an "imperative duty" or "inviolable limitation or restriction" (to use recent language of the High Court).^[2]

It is suggested, with respect, that the Court of Appeal should have directed more attention to the approach to the interpretation of privative clauses developed by Justice Owen Dixon in R v Hickman (1945) 70 CLR 598 and subsequent cases, which has now been accepted by the High Court as authoritative. The Hickman principle requires a prima facie inconsistency between:

(a) a statutory provision which seems to limit the powers of a decision maker (such as an adjudicator); and

(b) a privative clause which seems to contemplate that the decision will operate free from any restriction,

to be reconciled by reading the provisions together and giving effect to each.

The privative clause in the Act is section 25(4) which provides:

(4) If the respondent [ie. principal] commences proceedings to have a judgment set aside, the respondent:

There is a distinction between section 25(4) of the Act and the privative clauses considered in Hickman and the subsequent cases referred to above, in that section 25(4) does not go so far as to actually seek to deprive a principal of access to the courts to have issues determined by the adjudicator reconsidered on their merits. Despite this, it is suggested that the Hickman principle should still be applied to section 25(4) given the significant (and potentially permanent) financial impact which an adjudicator's determination can have on a principal.

So is section 25(4) inconsistent with the other provisions in the Act (such as section 21(1) which defines the matters which the adjudicator has authority to determine, and section 22(2) which defines, in an exhaustive manner, the matters which the adjudicator is to consider in making his or her determination)?

The first point to note about section 25(4) is that it only applies to proceedings to have a judgment set aside. Under the Act, the judgment is constituted by the filing of the adjudication certificate as a judgment debt. Accordingly, during the (usually limited) period prior to the filing of the adjudication certificate it would appear that section 25(4) has no application to proceedings for relief in the nature of certiorari to quash an adjudicator's determination.

However, even after an adjudication certificate has been filed, it is suggested that a distinction should be drawn between:

(a) commencing proceedings to have the judgment set aside; and

(b) commencing proceedings to have the determination on which the judgment is based quashed,

such that section 25(4) does not apply, even on a prima facie basis, to the latter scenario.

While such a distinction seems to be a fine one, it must be remembered that it is a well-recognised legal principle that a person's right of recourse to the courts is not to be taken away except by clear words. Accordingly, privative clauses like section 25(4) are construed "by reference to a presumption that the legislature does not intend to deprive the citizen of access to the courts, other than to the extent expressly stated or necessarily implied".^[3] If the legislature had intended to exclude relief in the nature of certiorari, it could have done so by clear words to that effect.

Even if such a distinction should not be drawn, it is suggested that the words "is not … entitled … to challenge the adjudicator's determination" in section 25(4) should be read to only preclude the principal from challenging the adjudicator's determination on the grounds of non-jurisdictional error of law, and to not exclude relief for jurisdictional error of law. Such an interpretation would be consistent with previous decisions of the High Court^[4] which have held that:

• a clause which merely provides that a decision is final and conclusive will not exclude certiorari for jurisdictional error of law; and
• a clause in State legislation which states that a determination should not be "quashed or called into question" will be effective to oust certiorari for non-jurisdictional errors of law.

To express this another way, it is suggested that the words "is not … entitled … to challenge the adjudicator's determination" in section 25(4) should be interpreted to mean that a principal is not entitled to challenge an adjudicator's determination made in accordance with the Act, as opposed to a purported adjudicator's determination, such that if there has been a jurisdictional error because a "basic and essential requirement" has not been discharged or observed, there is no "adjudicator's determination" made under the Act.

Expressed in this way, it can be seen that, in practical terms, the Court of Appeal in Brodyn could have achieved the same result without having to take the bold and, in the writer's view, unjustified step of excluding the court's ability to grant relief in the nature of certiorari.

It is clear that the intent of the 2002 amendments to the Act was to further restrict the ability of principals to delay payment by challenging an adjudicator's determination, bringing cross-claims or raising defences in relation to matters arising under a construction contract. What is not so clear, however, is whether the legislature intended to exclude the ability of the courts to quash an adjudicator's determination where the adjudicator exceeds his or her jurisdiction or acts without jurisdiction. The Court of Appeal has held in Brodyn that this was the intention. However, the decision sits uneasily with a long line of authority which requires clear words to achieve this outcome. If the legislature had intended to exclude relief in the nature of certiorari for jurisdictional error, it could have done so by much clearer words to this effect.

That said, even if Brodyn is overturned, and relief in the nature of certiorari becomes available again for jurisdictional error of law (but not non-jurisdictional error of law), it is suggested that only violations of "essential requirements" for a valid adjudication under the Act should result in jurisdictional error of law, such that the practical effect which Brodyn has had on challenges to adjudicators' determinations would remain unchanged.

The 2002 amendments to the Act have been effective in achieving the policy objective of ensuring prompt payment of progress claims. They have also resulted in a significant reduction in litigation arising out of construction contracts and Brodyn has reduced the rate of applications for judicial review of adjudicator's determinations. Also, the anecdotal evidence is that most principals are accepting adjudicators' determinations and are not seeking final determinations in relation to the underlying substantive disputes between the parties. This may be because, despite the tight timeframes, adjudicators are generally getting it "about right" or it may be for other reasons. Accordingly, it appears the Act has had a beneficial effect (perhaps not for construction dispute lawyers) in reducing the level of disputation arising out of construction contracts.

However, the Act has the potential to give rise to subjective injustices despite the preservation of each party's rights. In particular, the Act denies the adjudicator the time that may be required to properly consider and determine the adjudication application (particularly in the case of a complex construction dispute) and effectively reverses the risk of insolvency. Accordingly, despite an adjudicator's best efforts to fairly determine an adjudication application, it is inevitable that adjudicators will sometimes make mistakes and that principals may suffer the injustice of obtaining an order for restitution of amounts paid, only to find that the contractor has become insolvent and the money is irrecover-able. This, however, was the clear policy intent of the legislature, and should not be regarded as the product of the way the Act has been interpreted by the courts.

This article is a shortened version of Owen's detailed paper "Challenging security of payment adjudications after Brodyn" which was published in the October 2005 edition of Building and Construction Law.

^{[1] See Musico v Davenport [2003] NSWSC 977 and the other pre-Brodyn cases which followed Musico.}

[2] Plaintiff S57/2002 v Commonwealth (2003) 211 CLR 476; Minister for Immigration and Multicultural and Indigenous Affairs v SGLB (2004) 78 ALJR 992; SAAP v Minister for Immigration and Multicultural and Indigenous Affairs (2005) 79 ALJR 1009.

[3] Public Service Association of South Australia v Federated Clerks' Union of Australia (1991) 173 CLR 132.

[4] See Darling Casino Ltd v NSW Casino Control Authority (1997) 191 CLR 602 and Hockey v Yelland (1984) 157 CLR 124.

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.