Australia: Corrs High Vis: Episode 24 – Australian security of payment legislation – High Court guidance

In our latest Corrs High Vis podcast, we look at two important High Court rulings which provide greater clarity in relation to Australia's security of payment legislation.

The first sets out the scope of review from an adjudicator's determination, while the second provides guidance on when a payment clause will be a prohibited 'pay when paid' clause. Wayne Jocic, Samuel Woff and Todd Spiller consider the implications. The podcast series, brought to you by Corrs, offers analysis and insights to help you make smarter decisions.

The podcast series, brought to you by the Corrs Construction team, offers analysis and insights to help you make smarter decisions.

TEXT VERSION

Samuel Woff: Commentator, Senior Associate at Corrs Chambers Westgarth

Wayne Jocic: Melbourne University Senior Lecturer and Co-Director of Studies in Construction Law

Todd Spiller: Corrs Chambers Westgarth – Senior Associate, Brisbane

SAMUEL: Hello. My name is Samuel Woff, Senior Associate at Corrs Chambers Westgarth and you're listening to Corrs High Vis.

In two important rulings handed down recently the High Court has done two things construction professionals have been waiting on for a while: first, it clarified the scope of review from an adjudicator's determination; second, it has provided guidance on when a payment clause will be a prohibited pay when paid clause. To unpack these decisions and what they mean for our listeners, I'm joined by Wayne Jocic, Co-Director of Construction Law Studies at Melbourne University, and Todd Spiller, Senior Associate from our Brisbane office. Thanks for joining me guys.

In the first decision, Probuild Constructions and Shade Systems, it was alleged the adjudicator made an error in interpreting a liquidated damages clause. Now putting aside for a second the question of whether or not an error was in fact made, the more important question for the High Court was: "What are we going to do about it? Can this be reviewed in any case?". The High Court held, in general errors were not able to be reviewed because the efficient flow of cash through the contractual chain would be blocked whilst applications for review were being held. I say "in general" and of course there are a narrow range of circumstances where review will still be possible but these generally will not be applicable to the majority of cases. So the High Court's decision does provide some clarity, though this may be a small comfort if you're on the wrong side of a losing determination.

Wayne, I know you know a little bit about this so would you mind giving us your views?

WAYNE: Yes. Look, I think it's really easy to get lost in these cases: there are two of them; we know there are security of payment decisions all the time. But I think we can really draw these twin decisions down to two really important points. Now the first one is this question: "Can you appeal from an adjudication". And you'd think the answer would be fairly clear but it's taken us a long time to get High Court guidance on this and the practical answer is: you probably can't, provided the adjudicator has behaved even vaguely sensibly; they've been properly appointed; there's a construction contract. All those basic, essential requirements of the adjudicator to be able to do their job. If they've done that, then you're probably not going to be successful in seeking court intervention, at least until you get to resolving the dispute ultimately under the construction contract. So that I think is the main thing. That's the headline observation that a lot of people are talking about and that's an important one but there's a bit more to say about it later.

The second thing is really quite a compelling reminder. So a lot of us know that security of payment legislation prohibits these pay when paid – these pay if paid clauses. So that you can't make payments, say under a subcontract, contingent on the contractor being paid under the head contract. So we know that the trouble is this decision has reminded us that that goes quite far. So if you are dealing with the subcontract, if you're dealing with one that has back to back obligations, the decision in Maxcon is actually some cause for concern. And that's because if you're trying to avoid inconsistent obligations you might be doing things like having linked claims. You might have provisions that say that determinations that are made under the head contract also apply in the subcontract. You might say that things like a certificate of occupancy under the head contract trigger final payments under the subcontract; and all of those things now are in potential doubt. That they might in effect be pay when paid provisions. So they're the two things I would say: one about whether you can appeal, the short answer is "it's going to be harder than ever"; and then the second one, this reminder that the pay when paid prohibition can really bite.

SAMUEL: I think there are four comments that I'd like to make in relation to that introduction, Wayne, mainly around the first part of the High Court's conclusion. The first thing being that even though the High Court has now drawn the distinction between the basic and fundamental things which you need to get right in an adjudication which, if you do, the rest of the decision is going to be untouchable. The battleground's major shift to whether or not one of those basic and fundamental things has been breached. There's no bright line distinction between when an adjudicator has acted sensibly and within their power versus when they've gone outside their power and breached one of those basic requirements. So I expect there to be some – more litigation as we sort of settle the parameters there.

The second thing is that the High Court emphasise in their decision that one of the reasons why you can't get an appeal or a review of these – for lack of a better way of saying it – more minor errors, even though they might involve a lot of money, is because you can still at the end of the project go to Court as per normal and have these matters dealt before a judge per the normal litigation process or through arbitration or however you've set up the contract. The reality is that there's going to be a certain class of claims where it's simply not economically viable to chase the money in that fashion and so for all intents and purposes the adjudicator's decision on those sorts of more minor amounts is going to be final.

That then leads to the sort of unusual conclusion where you might have an adjudicator's determination – this is the third point – which is for, let's say $500,000, which is a lot of money to make an adjudication on in a very compressed timeframe of only ten days which, for all intents and purposes, is final. And that's quite – that would make it quite a unique and almost remarkable feature of our Australian ecosystem which – legal ecosystem which usually has more checks and balances than nothing for amounts in dispute of that amount.

And the final point to make is that even though many of the eastern seaboard states have enacted similar security of payment legislation, it's to be borne in mind that this decision related to the New South Wales legislation and at least in Victoria there's – without going into the detail – there are unique constitutional provisions in the Victorian constitution which mean that the High Court's reasoning is going to have fairly limited application here in Victoria and so that probably needs to be borne in mind by Victorian building practitioners as they sort of digest the decision. Things in Victoria are a little bit unique. And that actually segues well, Todd, to you up in Queensland. We understand that you've had a look at this and have some comments to make as well from a Queensland perspective.

TODD: Thanks, Sam. In short, the decision in Probuild doesn't fundamentally change the position in Queensland. It simply fortifies the position as it was generally understood that an adjudication decision can only be impugned on the basis of jurisdictional error. The longer answer is this, and it probably requires us to briefly address a quirk of legislative intervention in Queensland, for a long time the proposition arising from the case law in Queensland has been an adjudication application under the [Besive] Act, if I can call it that, may be successfully attacked for jurisdictional error. Now that proposition has an interesting history. You see when the [Besive] Act was introduced, decisions of adjudicators were held to be reviewable under the JRA, the Judicial Review Act. However, in 2007 the JRA was amended with the intention that a provision to the effect that adjudication decisions made under the [Besive] Act were excluded from review under the procedures contained in the JRA. That intention did not hold for long, however. In Kirk and Industrial Court of New South Wales, which was decided in 2011, the High Court held that legislation could deny the availability of relief on non-jurisdictional error of law but that legislation which sought to take away from the State Supreme Court's power to grant relief on account of jurisdictional error was beyond power. Put simply, adjudication decisions could be set aside on the grounds of jurisdictional error but not a non-jurisdictional error of law. However, the supervisory jurisdiction of the Supreme Court remained. For those that are interested in Queensland, this position was confirmed following Kirk in a decision of Justice White, Northbuild Construction and Central Interior Linings.

So as I said, the supervisory jurisdiction of the Court remained but the boundaries of judicial review had not been firmly determined in Queensland and, look, it remained possible or, I suppose, as least faintly arguable, that a decision could be challenged on the basis of an error of law on the face of the record based on an order in the nature of certiorari. Although I should note that the prospects of that were dim, given that there had been decisions to the effect that such errors within jurisdiction were not reviewable. So that was the position. But following the decision in Probuild, we think the position is clear. Queensland courts do not have jurisdiction to quash adjudication determinations for non-jurisdictional error. The purpose of the Queensland legislation is materially the same as New South Wales. Interim and speedy adjudication is designed to, in effect, protect cash flow. And as result, the reasoning of the High Court is applicable. In the absence of the High Court and, I suppose, the Court of Appeal authority in Probuild, it would have been interesting to observe the implication of the decision at first instance on the conduct of parties in Queensland. At first instance in Probuild, it was relevant to Justice Emmett that there was nothing in the New South Wales legislation which contained the Court and no legislative intention to exclude the availability of judicial review in the case of non-jurisdictional error on the face of the record. But in Queensland the amendment to the Judicial Review Act and the decision in Kirk which I described earlier, arguably put the position beyond doubt. In any event, we are where we are with the High Court decision in Probuild and the position is now, I suppose, that the parties are left in Queensland to identify jurisdictional errors or breaches of natural justice if they wish to overturn an adjudication decision. The boundaries of course of jurisdictional error will still be disputed and, look, it would be unsurprising to hear further from Corrs High Vis as cases emerge where those boundaries and those very questions are in issue.

SAMUEL: Thanks for that, Todd. That's a helpful insight. We might just wrap up now. Wayne, I know you had some final thoughts that you wanted to convey.

WAYNE: Yes, look, I think these are cases that you could look at in a Twitter feed and say "yes, got it". But the reality is both of these cases raise some ongoing questions. One of those things is what is a jurisdictional error. And we've got guidance on that in New South Wales in particular, going back through old cases like Chase Oyster Bar, like Broden, and it's just not easy to say "there's going to be more litigation about that". One of the other concerns that we've said is the scope of the prohibition on pay when paid clauses. And the other thing that we haven't mentioned so far is that we know that the Murray review has taken place; we don't know what he's reported, we don't know what the governments will do in response to that and so that's one of the big unresolved questions for 2018.

SAMUEL: And that's all for today's podcast. We here at Corrs will certainly be keeping a close eye on how this decision is applied going forward and should you have any queries please don't hesitate to be in contact with someone from our team.

This podcast is for reference purposes only. It does not constitute legal advice and should not be relied upon as such. You should always obtain legal advice for your specific circumstances.

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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