An adjudicator appointed under the provisions of the Building and Construction Industry Security of Payment Act 1999 (SOP Act) is required to determine, as a minimum, whether the construction work identified in the payment claim has been carried out, and the value of that work.  Failure to do so, under the current state of the law, will potentially jeopardise a determination and the claimant’s prospects of relying on such determination.   In the judgment of Richard Crookes Construction Pty Ltd v CES Projects (Aust) Pty Ltd (No.2) [2016] NSWSC 1229, handed down recently, the Supreme Court declared a determination void on account of the adjudicator failing to carry out the minimum content of the statutory task entrusted to him.

Background

The Builder engaged the Subcontractor to carry out fit out works to a residential apartment complex in Newcastle.  The parties fell into dispute over a number of issues. The Subcontractor subsequently submitted a payment claim on the Builder seeking payment of $794,624.30 for contract works completed and $106,000.00 for variations.  The Builder’s payment schedule in response rejected the claim, ultimately leading to the dispute proceeding to adjudication under the SOP Act.

The adjudication claim comprised, amongst other things, a statutory declaration made by the Subcontractor’s contractual representative, a number of drawings and other documents tied to a “multitude of photographs” and a series of invoices as to materials and labour.

 The Adjudicator’s reasons

The Adjudicator, in his determination, made a number of critical observations regarding the claim documentation.  Regarding the photographs, the Adjudicator said that they show “that a significant amount of construction work has been completed”, but were of no assistance “in establishing any evaluation”.

In summary, put simply, this material is far from convincing. All of it appears to have been generated by the claimant. I suggest it would have been better for an independent party to provide supporting evidence for these valuations. For example, a report by an independent quantity surveyor.

Regarding the attached invoices relating to the supply of labour and materials during the Subcontractor’s involvement with the contract, the Adjudicator noted that the Subcontractor “has not totalled these amounts but an examination of them indicates that well over $500,000.00 (excl GST) has been incurred by the claimant in both labour and material costs.”  The Adjudicator went on to observe that some of the invoices were replicated and other tax invoices most likely related to the separate variation claim.  Irrespective, the Adjudicator said that the tax invoices represented “some independent evidence, albeit imperfect” in support of the claimant’s position.

The Adjudicator concluded that, in relation to the claim for contract works, he preferred the Subcontractor’s position and therefore determined that the Subcontractor was entitled to $794,624.30.

Regarding the Subcontractor’s claim for variations in the further sum of $106,000.00, the Adjudicator referred to a statutory declaration by the Subcontractor’s project manager and said that it was “inconsistent with the facts” and, in insignificant parts, “implausible”.  That part of the claim was rejected.

Richard Crookes Construction Pty Ltd v CES Projects (Aust) Pty Ltd (No.2) [2016] NSWSC 1229

The Builder commenced proceedings seeking a declaration that the adjudication determination was void.  Its primary submission was that the Adjudicator, in breach of his fundamental statutory obligation, “had failed to carry out what was said to be an essential function, namely identifying what construction work … had been carried out and what was the value of that work, and giving reasons for his conclusion.”

The Court agreed.

[56] … [I]t appears that the Adjudicator, having decided that the [Builder’s] submissions should be disregarded, simply adopted the subcontractor’s valuation of its claim.  In doing so, he failed to perform the task required: to determine the amount of the progress payment (if any) to be paid having regard to the matters set out in s 22(2) of the Security of Payment Act.

There was, in the view of the Court, no apparent logic to the conclusions reached by the Adjudicator.  Regarding the claim for $794,600.00, the Court observed that the invoices “at best” could support no more than whatever their total was, which according to the Adjudicator was “well over $500,000.00”.

Thereafter, the Adjudicator did not explain how he “moved from whatever the total of those invoices was to the conclusion that, somehow, the whole of this part of the payment claim had been made good.”  The Adjudicator also failed to account for the replicated invoices, by which the Court assumed double dipping, and those invoices “most likely” relating to the separate variations claim.

In these circumstances, the Court observed, the conclusion reached by the Adjudicator that the invoices were sufficient proof for the bulk of the claim – $794,600.00 – was “both counter-intuitive and entirely unsupported by any reasoned analysis”.

The Court referred to the comments of Justice Brereton in Pacific General Securities Ltd v Soliman and Sons Pty Ltd [2006] NSWSC 13 at [86]:

… [T]he absence of relevant material from a respondent does not entitle the adjudicator simply to award the amount of the claim without addressing its merits, which as a minimum will involve determining whether the construction work identified in the payment claim has been carried out, and what is its value.  Adoption of the other approach by an adjudicator – by allowing a claim in full just because a respondent’s submissions are rejected, without determining whether the construction work the subject of the claim has been performed and without valuing it – would bespeak a misconception of what is required of an adjudicator.  In traditional terms, it would be jurisdictional error resulting in invalidity.

The Court held that the Adjudicator’s reasons demonstrated that “he did not carry out the minimum content of the statutory task entrusted to him”.

Observations

It is a fairly entrenched perception in the building and construction industry, not without some justification, that the adjudication process under the SOP Act favours claimants.  Arguably, the tendency of adjudicators is to err on the side of caution or otherwise give claimants the benefit of the doubt in the swift, “rough and ready” system set up under the SOP Act, that would not otherwise be the case in conventional litigation.  However, as demonstrated in this case, carte blanche acceptance of a claimant’s case, without any coherent reasoning, will lead to interference by the courts.

The Court noted, in passing perhaps, that the Adjudicator’s fees in this instance were in excess of $45,000, which the Adjudicator determined that the Builder should pay.  Given the inexplicable and inadequate reasoning contained with the determination, the Builder was, to put it politely, troubled by the quality and price of justice under the SOP Act.