Court of Appeal limits scope of potential challenges to Security of Payment Adjudications

Building & Construction Law, Disputes & Litigation 7/02/2017 by Matthew Bryan

In Shade Systems Pty Ltd v Probuild Constructions (Aust) Pty Ltd (No 2) [2016] NSWCA 379 (23 December 2016), the NSW Court of Appeal unanimously held that the decision of an adjudicator under the Building and Construction Industry Security of Payment Act 1999 (NSW) (“the Act“) is not subject to judicial review other than in cases where jurisdictional error can be established.

In doing so, it overturned a decision of the Supreme Court that was handed down in June 2016 that had the potential to give rise to a significant amount of litigation challenging the decisions of adjudicators under the Act and, on one view, undermine the objective of ensuring that decisions under the Act are made quickly and efficiently in order to promote cash-flow to contractors.

Factual Background

On 14 October 2014 the parties entered into a contract pursuant to which Shade Systems Pty Ltd (“Shade Systems“) agreed to supply and install external louvres to the façade of a property at Chatswood as a subcontractor to Probuild Constructions (Aust) Pty Ltd (“Probuild“).

On 23 December 2015, Shade Systems served a Payment Claim on Probuild pursuant to the provisions of the Act.

On 11 January 2016 Probuild served a Payment Schedule alleging that no money was owing to Shade Systems, primarily on the basis that a greater amount than that claimed by Shade Systems was payable to Probuild as liquidated damages under the contract. The dispute was referred to an adjudicator under the Act on 25 January 2016, and the adjudicator delivered a determination on 15 February 2016 in which he found that liquidated damages were not payable by Shade Systems under the contract.

Having made that finding, the adjudicator allowed Shade System’s claim for a progress payment in the sum of $277,755.00.

Probuild applied to the Supreme Court for a review of the adjudicator’s determination, alleging both a denial of procedural fairness in the adjudication process (which constituted a jurisdictional error) and errors of law which appeared in the adjudicator’s written reasons (which constituted non-jurisdictional errors of law).

The claim of procedural unfairness was rejected, however, the trial judge held that:

1. The supervisory jurisdiction of the Supreme Court was available to review non-jurisdictional errors of law on the face of the record, and

2. Because such an error had been established by Probuild in connection with the adjudicator’s findings in connection with the payment of liquidated damages, the adjudicator’s determination should be quashed.

Shade Systems appealed to the Court of Appeal, asserting that the trial judge did not have the power to intervene in the case because the only errors identified were non-jurisdictional errors of law.

There was no dispute in the Court of Appeal that the adjudicator’s findings concerning the question of liquidated damages:

  1. Did in fact contain non-jurisdictional errors of law on the face of the record, and
  2. Did not constitute a jurisdictional error.

The appeal therefore turned squarely on the question whether the existence of a non-jurisdictional error was sufficient to allow the Court to set aside the award of the adjudicator.

The Court of Appeal’s Findings

On appeal, Shade Systems relied upon a decision of the Supreme Court called Brodyn Pty Ltd v Davenport (2004) 61 NSWLR 421 that had been consistently followed and relied upon as having stood for that principle for more than 10 years. It argued that that decision stood for the proposition that the Supreme Court was precluded from upholding the challenge to the adjudication on the basis of non-jurisdictional error of law.

Probuild denied that Brodyn stood for that proposition and argued that, even if it did, the Court of Appeal should revisit the law in light of Kirk v Industrial Court of New South Wales (2010) 239 CLR 531, an important decision of the High Court in 2010 that held that the legislative power of the State did not extend to conferring immunity from judicial review on a statutory tribunal where jurisdictional error was revealed.

The Act does not contain a specific “privative clause” seeking to exclude an application to the Supreme Court for judicial review of an adjudicator’s decision, and the Court therefore considered the overall structure, individual provisions and purpose of the Act in order to ascertain whether or not a review of a determination of an adjudicator for error of law on the face of the record was permissible.

In doing so the Court noted, for example, that:

1. The Act provides a coherent, expeditious and self-contained scheme for resolving disputes with respect to Payment Claims (including a prohibition on “contracting out” of the effect of the Act),

2. The remedial nature of the legislation is clear and the practical consequence of it well understood, and

3. While the Act confers statutory rights on builders to claim progress payment and have their rights determined quickly and informally, Section 32 of the Act is such as to make it clear that:

(a) the Act does not ultimately prejudice the common law rights of both parties, and

(b) orders for the repayment of an amount paid under the Act can ultimately be made where required.

The Court ultimately held that:

The fact that the inter-relationship with contractual rights and proceedings for enforcement of contractual rights is expressly addressed in the Act is inconsistent with the conclusion adopted by the primary judge that judicial review could lie in order to correct errors in the construction of the contract adopted by the adjudicator. To a significant extent, the coherent and expeditious procedure provided by the Security of Payment Act would be undermined if the determination of the adjudicator were to be subject to judicial review in the supervisory jurisdiction of this Court for any error of law which might be identified in the reasons given by the adjudicator. Indeed, were such relief available, even an arguable error would provide a basis for the respondent to seek a stay of enforcement.”

It follows that relief is not available to quash an adjudicator’s determination on any ground other than jurisdictional error, and that:

“The contrary conclusion would undermine the underlying purposes of the Security of Payment Act, which are manifest in the statement of the object of the legislation (s 3), the scheme revealed by the structure of the Act.”

Conclusion

Subject to the High Court having the opportunity to make a definitive statement on the issue, the case now appears to have reinstated the status quo of sorts that has been in existence since Brodyn, and put an end to the prospect of the proverbial “floodgates opening” in a way that might deluge the Supreme Court with applications seeking to challenge determinations made by adjudicators under the Act.

It also means that non-jurisdictional errors committed by adjudicators when making determinations, which can sometimes occur when they are working within the tight timeframes set out in the Act, will not be subject to judicial review and may need to be addressed in litigation of the type anticipated by Section 32 of the Act.

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