Australia: You got­ta have faith: good faith and deter­mi­na­tions under the SOP Act

Last Updated: 20 March 2019
Article by Sean Greenwood

Building and Construction Industry Security of Payments Act 1999 (NSW)

The Building and Construction Industry Security of Payments Act 1999 (NSW) (SOP Act) provides a statutory entitlement to progress payments which runs parallel to a construction contract.

Under the SOP Act, a party may engage a registered adjudicator to make a decision as to the amount payable to a claimant pursuant to payment claim.

Typically, the court will take the view that an adjudicator's decision is binding on parties irrespective of any error of fact.

That said, however, the courts will, and do, overrule adjudication decisions in circumstances where, for instance, an adjudicator commits a jurisdictional error e.g. where it can be shown that there has not been a bone fide ​'good faith' attempt by an adjudicator to perform his or her appointed function under the SOP Act.

Recently the NSW Court of Appeal:

  1. had to deal with a challenge to an adjudicator's decision on this basis (that is, it was claimed that the adjudicator did not act in good faith), and
  2. helpfully, shed some light on the limited circumstances in which adjudicator's decision may be found to be invalid for lack of good faith. 

The facts

In Goodwin Street Developments Pty Ltd v DSD Builders Pty Ltd [2018] NSWCA 276 (Goodwin Street Developments) the owner and the builder were parties to a construction contract.

On 19 March 2018, the owner purported to terminate the contract.

On 30 April 2018 the builder served a payment claim under the SOP Act on the owner in the amount of $727,256.

On 14 May 2018 the owner served a payment schedule in response of $0, stating that the builder owed it a substantial sum for rectification of defective works and damage, and replacement of stolen items.

The builder applied for adjudication of the payment claim. The adjudicator provided her determination on 15 June 2018, awarding the builder an amount of $265,510.

The owner commenced proceedings in the Equity Division of the Supreme Court of NSW seeking to have the determination quashed on the basis that it was invalid for want of good faith; lack of good faith was said (by the owner) to be established by the adjudicator's failure to apply section 10(1)(b)(iv) of the SOP Act.

The above section provides to the effect that, if the construction contract makes no express provision with respect to the valuation of the construction work carried out or to be carried out under the contract, the work (if it is defective) is to be valued having regard to, among other things, the estimated cost of rectifying any defect(s).

The primary judge dismissed the proceedings and the owner appealed to the Court of Appeal.

The impugned reasoning of the adjudicator 

The owner's challenge to the adjudicator's determination was limited to a discussion in the adjudicator's reasons under the heading ​"The Respondent's off-setting claims". In that regard, it was suggested that the following paragraph of the adjudicator's reasons gave rise to difficulties of interpretation:

"153. I acknowledge that in earlier certificates, the Contract Administrator included photographs of purported defective work and incomplete work. However, there is no clear evidence provided from the Respondent that persuades me that the Claimant was instructed by the architect to correct particular defects or finalise any incomplete work prior to the reference date, the Respondent [claimant?] failed to correct those particular defects or incomplete work, and because it failed to do so, the owner evoked [invoked] its right to use another person to rectify the problem pursuant to Clause N4, and did so, and finally in by doing so, is entitled to off-set the cost of it.

154. Furthermore, I can find no contractual mechanism that would permit the Respondent to offset monies for the replacement of stolen items.

155. Accordingly, I find the Respondent is not entitled to deduct rectification costs and for damage/​replacement of stolen items under the Contract for the applicable reference period.

156. I value the Respondent's off-setting claims in an amount Nil."

However, and as Basten JA of the Court of Appeal noted at [35]:

Once the reference to ​"the Respondent" in the middle of par 153 is corrected to claimant, the reasoning of the adjudicator is tolerably clear. She was saying that there was no evidence provided by the owner to satisfy her that (i) the builder was instructed by the architect to correct particular defects or finalise incomplete work prior to the reference date, (ii) the builder failed to correct those defects or incomplete work, and (iii) because it had failed to do so the owner had invoked its right to use another person and had thereby incurred costs which it was entitled to off-set.

Following on from that, the primary judge's criticism of the adjudicator's reasons ("that she was well and truly aware of the claim by the owner that the work was in many respects defective, but she made no precise finding on the topic...The obligation to have regard to those matters required her to deal with them as a fundamental element of this part of her determination, or as the focal point of her analysis.") were, according to Basten JA, by no means obvious. As his Honour stated at [37]:

The adjudicator was looking for ​"clear evidence" that certain steps had been taken prior to the reference date, absent which, on her view of the contract, there was no entitlement to make an off-setting claim. There can be no obligation on any decision-maker to make a ​"precise finding" on a topic where there is no evidence to support such a finding, or the evidence is insufficient to satisfy the decision-maker that such a finding should be made. Indeed, the finding that there is ​"no clear evidence" is itself a sufficient finding.

At [40] Basten JA also observed that the primary judge had questioned whether the adjudicator had ​"grappled with the underlying factual issue" (that is whether the purported defective and incomplete work shown in that earlier certificate remained defective or incomplete as at the date of the payment claim) and that he (the primary judge) described that as ​"a very difficult question". His Honour, Basten JA, then commented that:

the difficulty may have arisen from imposing a gloss on the statutory obligation to have regard to certain material. So far as the factual assessment was concerned, as the judge correctly noted at [33], the adjudicator was constrained by the need to rely only on the material supplied by the builder and the payment schedule supplied by the owner, the adjudication response being made out of time. So much appears to be accepted at [34].

Accordingly, and after reiterating that the function of an adjudicator is to have regard to the matters, and only the matters, set out in section 22(2) of the SOP Act, Basten JA (with whom Leeming and White JA agreed):

(a) concluded that the adjudicator plainly addressed herself to the relevant mandatory considerations, and properly applied section 10(1) of the Act on her understanding of the building contract: at [34]-[41];

(b) noted that it was not suggested that error in construing the contract would have been a reviewable error: at [42]; and

(c) held that the appeal ought to be dismissed with costs: at [50].

Summary

The decision of Goodwin Street Developments is an important one in that it highlights the following matters:

  1. the obligation on adjudicators to act in good faith should not be conflated with an obligation to ​"grapple with" and form a view on all matters they are required to consider. Such language invites a slide into impermissible merit review; and
  2. although bad faith cannot be comprehensively defined, in the context of adjudication determinations under the SOP Act it at least requires something equivalent to willful blindness or conscious maladministration. As noted above, it was held by the NSW Court of Appeal that there was nothing approaching bad faith on the part of the adjudicator in Goodwin Street Developments; and
  3. an allegation of bad faith on the part of a decision-maker is a serious matter involving personal fault and should not be made by a party lightly.

For further information please contact:

Sean Greenwood, Associate
Phone: + 61 2 9233 5544
Email: stg@swaab.com.au

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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