NSW Court of Appeal determines that security of payment adjudications can only be set aside for jurisdictional error
Construction eBulletin - 25 January 2017
In another key decision involving security for payment adjudications, the NSW Court of Appeal unanimously confirmed that adjudications under the Building and Construction Industry Security of Payment Act 1999 (NSW) (Security of Payment Act) can only be set aside by a court if jurisdictional error is established.1 This decision comes just two days after the High Court issued its first ever security of payment decision (which we analysed in a previous bulletin).2
The Court of Appeal overturned a decision of the NSW Supreme Court3 that stated that the Court could set aside adjudication determinations where the written decision included errors of law.
This decision confirms the limited grounds on which a party may challenge an adjudicator's determination. It highlights that principals and contractors involved in security of payment disputes need to engage fully and effectively with the adjudication process, as it will be very difficult to challenge the result if the adjudication is not favourable.
In this eBulletin, we review the decision and look at what it means for principals, developers and contractors.
Probuild Constructions (Aust) Pty Ltd (head contractor) and Shade Systems Pty Ltd (subcontractor) entered into a construction contract for the installation of louvres to the façade of a building.
Shade Systems initially served a payment claim on Probuild seeking payment of about $324,000. Probuild responded by serving a payment schedule certifying that it owed Shade Systems nothing, and said that in fact it was owed more than $1M from Shade Systems in liquidated damages.
Shade Systems sought adjudication of its payment claim under the Security of Payment Act. In determining the application, the adjudicator rejected Probuild's claim for liquidated damages and found that Shade Systems was entitled to $277,755.03 — more than Shade Systems claimed in its adjudication application.
On 29 February 2016, Probuild brought proceedings in the Supreme Court seeking to have the adjudication determination set aside on the basis of:
- jurisdictional error, because the adjudicator's failure to notify Probuild that he was considering awarding an amount greater than the amount claimed by Shade Systems in its adjudication application amounted to a lack of procedural fairness; and
- the adjudicator's failure to properly apply the contractual requirements in relation to Probuild's claim for liquidated damages. This was a non-jurisdictional error of law.
The Supreme Court rejected Probuild's argument that there was jurisdictional error. However, it did agree that the adjudicator had made non-jurisdictional errors of law. It ordered that the adjudicator's decision be set aside, finding that the Supreme Court Act 1970 (NSW) allowed the Court to set aside an adjudicator's decision on the basis of an error of law.
Shade Systems appealed. On the appeal Probuild conceded that there was no jurisdictional error, however it argued that the Court correctly set aside the decision because of the adjudicator's other errors of law. The Court of Appeal unanimously found that a court can only set aside adjudications under the Security of Payment Act on the grounds of jurisdictional error. This decision is consistent with previous decisions about the Court's power to set aside security of payment adjudications.4
The Court of Appeal's decision reconfirms that once an adjudicator has made a determination, the grounds upon which a party may challenge the determination are limited. To have a determination set aside, a party will have to demonstrate jurisdictional error. This might include (among other things) where an adjudicator:
- adjudicates an application that was not permitted to be made; or
- fails to afford the parties procedural fairness, for example by failing to give a party a proper opportunity to make submissions (where a party is entitled by the Security of Payment Act to make submissions).
However, where an adjudicator is empowered by the Security of Payment Act to adjudicate an application, a mere failure to apply the correct law will not be sufficient grounds to enable the Court to set aside the adjudicator's decision.
The Court of Appeal's decision 'closes the door' on the possibility of principals and contractors approaching a court to set aside adjudication decisions merely on the basis that the adjudicator applied the law incorrectly. Principals and head contractors will need to make payments in accordance with adjudication determinations, even if they are of the view that the adjudicator has misapplied the law or misinterpreted the contract. In those circumstances principals and head contractors can only recover those payments if they are prepared to commence ordinary proceedings in court to recover that money. Such proceedings are likely to take an extended period of time to be determined if early settlement with the contractor cannot be achieved.
This decision makes it important for principals and head contractors involved in security for payment disputes to engage fully and effectively with the adjudication process, because it will be very difficult to seek relief from a court if the adjudication is not favourable. This also means including in payment schedules all possible reasons why a payment claim should not have to be paid.
Given that this case was heard by five judges in the Court of Appeal (instead of the usual three), the decision was unanimous, and the High Court recently handed down its only decision in the almost 20 years the legislation has been in force, it is very likely that the Court of Appeal's decision will remain unchallenged. However, we will update you if a special leave application is made to the High Court.
Matthew Cobb-Clark, Lawyer
Natale Ilardo, Lawyer
1 Shade Systems Pty Ltd v Probuild Constructions (Aust) Pty Ltd (No 2)  NSWCA 379
2 Southern Han Breakfast Point Pty Ltd (in liquidation) v Lewence Construction Pty Ltd  HCA 52 (see our earlier eBulletin here)
3 Probuild Construction (Aust) Pty Ltd v Shade Systems Pty Ltd  NSWSC 770
4 Musico v Davenport  NSWSC 977 and Brodyn Pty Ltd v Davenport (2004) 61 NSWLR 421
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