The current shape of adjudication under the various security of payment regimes in Australia reflects the nature of its beginnings and its public perception as a ‘weapon put into the hands of the little guy’.
There is no doubt that the ‘pay now argue later’ mantra still dominates current thinking in the building and construction industry towards adjudication. However, this line of thought has been diluted recently by two cases in New South Wales and Queensland which have sought to redress the imbalance in the adjudication process away from the Contractor.
John Holland Pty Ltd v Roads and Traffic Authority of New South Wales [2007] NSWCA 140
The short version:
The NSW Court of appeal has affirmed that adjudication decisions under the Building and Construction Industry Security of Payment Act 1999 (the NSW Act) are interim. As such and provided the contract permits, the Principal is entitled to withhold or set-off amounts otherwise due to the Contractor including recovering an adjudicated amount previously paid by the Principal.
Facts
John Holland (JH) contracted with the Roads and Traffic Authority of New South Wales (RTA) for the construction of roadworks, providing security as required under the contract. While carrying out works, disputes arose over payment and JH made three separate adjudication applications arising from payment claims under the NSW Act. In each case the adjudicator determined in favour of JH.
Upon practical completion, the RTA refused to release half of the security on the basis that JH had no entitlement as a result of substantial disputes set out in payment schedules issued by the RTA.
JH claimed the nature of such actions were void under the NSW Act. JH was initially unsuccessful in the Supreme Court and appealed to the Court of Appeal.
The Court of Appeal
The Court of Appeal agreed with the RTA and found:
- The NSW Act allowed for interim payments in the interests of progressing the works.
- The Superintendent was able to come to different determinations from that of the adjudicator.
- The position decided upon by the adjudicator remains but is interim and is ‘subject to a different position being established ...contractually or in proceedings’.
What does this mean?
- Adjudication decisions are interim progress payments on account.
- A Superintendent can take into account when issuing a final certificate amounts the Principal claims to be entitled to under the contract, including recovery of previous adjudication amounts and not offend an adjudicators determination.
- The withholding of security to recover amounts owed to a Principal in a progress certificate or a final certificate is permissible and does not offend the contracting out provisions of the NSW Act.
Implications
Principals
Principals can overturn adjudication determinations through the contract and have the ability to use progress certificates and final certificates to thwart the adjudication process. For instance, by issuing a final certificate, a Superintendent can overturn an adjudicator’s determination and certify in favour of the Principal, entitling the Principal to draw down upon security to ‘claw back’ the determination. Provided that there is no ability to issue another payment claim, the only recourse available to the Contractor after this is to commence costly and time consuming litigation.
Contractors
Contractors, on the other hand, need to be acutely aware of this development. There are two immediate strategic courses to take. One is for the Contractor to not make payment claims under security of payment legislation during the course of the project but make the payment claim, the final claim under the contract and adjudicate on that claim. The Principal’s payment schedule in response to the claim will ordinarily be the final certificate. Following this, the adjudicator will determine the claim. This tactic will obviously preclude the Principal, after the adjudication has been decided from using the certification procedure to set-off against such a determination.
The second strategy is for Contractors to use as security retention monies rather than bank guarantees. Retention monies can form part of a payment claim under security of payment legislation, bank guarantees cannot. If a Contractor receives a successful adjudication determination during the course of a project, the prudent tactic would be to include the return of retention monies in the final claim under the contract (and make it a payment claim under the relevant Security of Payment Act). If the Principal seeks to overturn the determination in the final certificate, then the Contractor can refer the final payment claim (including the retention) to adjudication. Given that under SOP legislation an adjudicator is bound by a previous adjudication determination (unless there is subsequent evidence that the value of work has changed), it is extremely likely that the subsequent adjudication determination will be in the Contractor’s favour.
Doolan and Anor v Rubikcon (Qld) Pty Ltd and Ors [2007] QSC 168
The short version:The Queensland Supreme Court has held that a second or subsequent payment claim under the Building and Construction Industry Payments Act (the Qld Act) cannot be identical to any previous payment claim. Identical payment claims are not capable of founding the jurisdiction of the adjudicator and consequently any determination will be invalid.
Facts
The adjudication application arose out of a building contract between Rubikcon and Doolan for the construction of eleven townhouses at Scarborough. Rubikcon sought payment of a ‘final’ claim for an amount of $43,533.82. The amount of the final claim had been previously claimed as a ‘final’ claim. Apart from the date, the second invoice was identical to the first. Doolan did not pay that claim.
Rubikcon sought adjudication of the payment claim and the adjudicator determined that Doolan should be liable to Rubikcon for the claimed amount.
There is a rule in the Qld Act that a Contractor cannot issue two payment claims in relation to the same reference date ie the date under the contract upon which a Contractor can issue a payment claim. There is a written rule that amounts in previous claims can be included in new claims. The adjudicator’s response on the issue of two identical payment claims was that the Contractor had not served two payment claims in relation to the one reference date and accordingly the claim was valid.
The Supreme Court
Doolan sought judicial review of the adjudicator’s decision on the grounds of an error of law and breaches of the rules of natural justice.
Rubikcon submitted that section 17(5) of the Qld Act provides that a claimant cannot serve more than one payment claim in relation to each reference date. It does not say that a claimant cannot, on multiple reference dates, make the same payment claim.
The Judge found that ‘there is a one to one relationship between the claim made and the reference date on which it is made’. His Honour also said the Qld Act ‘permits ... the inclusion of an amount which has been the subject of a previous claim but that does not mean that a previous claim can be the sole item included in the later claim’.
In this case, the second claim was identical to the first and the Judge held the claim was not capable of founding the jurisdiction of the adjudicator and consequently the order made by him was invalid.
Implications
A Contractor cannot continue to issue successive identical payment claims even if the reference date is different. It is not uncommon for Contractors to issue over and over again the same claim but not refer claims to adjudication.
However, the following claims will be valid:
- A payment claim that includes additional work plus amounts included in a previous claim - there is nothing preventing a Contractor from putting in a cumulative claim.
- A payment claim that includes an amount that was previously omitted from the previous claim.
- A payment claim that additionally includes loss and expense resulting from removal of work by the Principal under section 33 of the Qld Act.
Principals
Principals need to identify in their payment schedules that a payment claim is identical to a previous claim. In particular, Principals can utilise this case to defeat a Contractor who issues payment claims for the same works month after month.
Contractors
Contractors are no longer able to issue the same claim over and over again. It is not possible for a Contractor to keep on issuing claims waiting for an administrative error from the Principal or refining their claims even though work on the project has finished and the claim is essentially the same. Contractors now have one chance to refer a claim to adjudication unless there is further work to be carried out on site or there is something additional to be included in the claim. This severely restricts the ability of Contractor’s to constantly bombard Principals with claims.
Conclusion
The above cases may provide some ability for Principals to resist successive identical payment claims and ‘claw back’ adjudicated amounts in progress and final certificates. Effective and timely legal advice on these and other issues can assist Principals and Contractors in setting up and implementing a plan to get the very best result from the adjudication process.
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