Supreme Court New South Wales

Case Title: Owners Strata Plan 61172 v Stratabuild Ltd

Medium Neutral Citation: [2011] NSWSC 1000

Hearing Date(s): 23 June 2011

Decision Date: 25 August 2011

Jurisdiction: Equity Division

Before: Associate Justice Macready

Decision: For the reasons I have given I propose to declare that Adjudication Application No. 2011ADJT142 of the second defendant dated 11 April 2011 is void.

The Parties are to bring in short minutes reflecting these reasons and I will then hear argument as to costs.

Catchwords: ADMINISTRATIVE LAW - judicial review - jurisdictional error - natural justice or procedural fairness - relief - declaration - application for review of validity of an adjudication application pursuant to the Building and Construction Industry Security of Payment Act 1999 ('the Act') – declaration sought that the adjudicator's determination was void - application to have the adjudicator's decision quashed – adjudicator failed to consider adjudication respondent's submissions referred to in the reasons of the payment schedule – adjudicator misconstrued the Act and failed to accord procedural fairness to the plaintiff.

Legislation Cited: Civil Procedure Act 2005

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

Supreme Court Act 1970

Strata Schemes Management Act

Cases Cited: Chase Oyster Bar [2010] NSWCA 190

Clarence Street Pty Ltd v Isis Projects Pty Ltd [2005] NSWCA 391

Holmwood Holdings Pty Ltd v Halkat

Electrical Contractors [2005] NSWSC 1129

Kirk v Industrial Court of NSW [2010] HCA 1

Multiplex Constructions v Luikens [2003] NSWSC 1140

Musico v Davenport [2003] NSWSC 977

Perform (NSW) Pty Ltd v Mev-Aus Pty Ltd [2009] NSWCA 157

Timwin Constructions Pty Ltd v Facade Innovations Pty Ltd [2005] NSWSC 548

Texts Cited:

Category: Principal judgment

Parties: The Owners - Strata Plan No 61172 (Plaintiff)

Strata Build Pty Ltd ABN 23 120 624 679 (First Defendant)

Neil Whittle (Second Defendant)

Adjudicate Today Pty Ltd ABN 39 109 605 021 (Third Defendant)

Representation

- Counsel: Counsel

Mr M Christie SC with Mr L Shipway (for the plaintiff)

Mr D Ash (for the Defendant)

- Solicitors: Solicitors

Mills Oakley Lawyers (for the Plaintiff)

MN Lawyers & Associates (for the first defendant)

Mr Philip Davenport (for the second and third defendants)

File number(s): 128541 of 2011

Publication Restriction:

Judgment

1 HIS HONOUR : These proceedings concern the validity of an adjudication application made by the second defendant ('the adjudicator') pursuant to the Building and Construction Industry Security of Payment Act 1999 ('the Act').

2 Hammerschlag J referred the hearing of the proceedings to me on 8 June 2011.

3 The second defendant made an adjudication determination on 11 April 2011, which is described as Adjudication Application No. 2011ADJT142. The plaintiff has filed a summons dated 19 April 2011 seeking a declaration that the adjudication determination is void, or an order in the nature of certiorari, pursuant to section 69 of the Supreme Court Act 1970 quashing the determination. Further orders are sought restraining the first and third defendants from taking steps arising from the adjudication determination or from issuing and adjudication certificate, respectively.

4 The question is primarily whether or not the adjudicator made a jurisdictional error. There is also a question of procedural fairness and error on the face of the record.

Background

5 The following facts, which are adapted from paragraphs 1 to 13 of the plaintiff's amended technology and construction list statement, dated 9 June 2011, are uncontested.

6 The plaintiff is a body corporate constituted under s11(1) of the Strata Schemes Management Act 1996.

7 The second defendant ('the adjudicator), Mr Neil Whittle, is an adjudicator employed by the third defendant, Adjudicate Today and he was the adjudicator in the adjudication determination in issue.

8 The first defendant, Stratabuild, entered into a contract with the plaintiff for it to carry out construction work at a development called Balmain Cove in Rozelle, NSW.

9 On 22 February 2011, Stratabuild served a payment claim on the plaintiff pursuant to the Act.

10 On 8 March 2011, the plaintiff served a payment schedule under the Act upon Stratabuild.

11 On 22 March 2011, Stratabuild served on the plaintiff an adjudication application with respect to the payment claim.

12 On 28 March 2011, the nominating authority, Adjudicate Today, informed the plaintiff that the second defendant had been nominated as adjudicator. Around this time the adjudicator informed the plaintiff and Stratabuild that he had accepted the nomination.

13 On 30 March 2011, the plaintiff lodged an adjudication response pursuant to s 20 of the Act.

The plaintiff's payment schedule and adjudication response

The payment schedule

14 In its response to the first defendant's payment claim, the plaintiff served a payment schedule in which the plaintiff:

(i) stated that the amount payable for this claim was nil; and

(ii) indicated its reasons for withholding payment were because there were defects in painting work carried out by Stratabuild and the likely cost to rectify those defects would exceed the claim.

15 The payment schedule stated:

"1.5 The Respondent says that the works at the time of the Certificate [a progress certificate number 20 dated 29 January 2011 in respect of progress claim 20] had not reached practical completion.

...

2.1 The Respondent says that the works have still not yet reached practical completion.

...

3.2 The Respondent understands that testing has been undertaken in relation to the quality and compliance of said painting works as undertaken. The Respondent understands that the results of that testing are that the said painting works are substantially defective and do not comply with the contract specifications. Specifically, the Respondent understands that the thickness of the said paint application if complying with the specifications would on average be 2.5 times the thickness of the said paint as applied.

...

3.10 The respondent has also relied on the quotation from Skillco Design & Construct annexed and marked A4, which provides a cost for undertaking external building painting works in accordance with the original contract specification in the amount of $260,000.00 for the painting works and an additional $145,000.00 for scaffolding."

The adjudication response

16 The plaintiff relied upon a technical report on paintwork dated 25 March 2011 by Dr Stuart Bayliss of the Coatings Consultancy ('the Bayliss Report') regarding defects in the painting work; and a proposal dated 30 March 2011 by Skillco Design & Construct Pty Ltd ('The Skillco Proposal') regarding the cost to rectify those defects in its adjudication response

17 The Bayliss report, which was annexed to the plaintiff's adjudication response, stated that the painting work was defective and set out the rectification work required (DR-3 at annexure A1, section 4). It states at paragraph 2.21:

"If AcraTex 968 Elastomeric 201 had been applied at the manufacturer's recommended spreading rate and thereby achieving the recommended dry film thickness the paint film thickness would be about 2.5 times the thickness observed on these paint samples."

18 A quotation for the cost of rectification work, dated 30 March 2011 by Skillco Design & Construct Pty Ltd, was also annexed to the adjudication response. It provided the following costs breakdown:

" Cost Breakdown

Scaffolding Schedule: (16-18 weeks) Proposed Budget of $160,000 - $180,000

Site Preliminaries: Site Supervision, Insurances Proposed Budget of $45,000

Skilled Labourer: (16-18 weeks) $18,000

4.1 External Rectification and Painting of Buildings: Estimated 7000m2 for both buildings @ $65m2 budget $390,000

4.2 Timber Doors: area to be determined. Rate @ $250 per door*. Fascia cost at $27 per lm. $25,000 (PC)

$.3 Painting Powder coated Railings Rectifications: Estimated 440 lm at $85 lineal metre budget $38,000

Comments

Prices are not final and are subject to a final inspection and certification by Painting consultant engaged by the Client. A complete contract is required to be drafted and signed with a detailed reports.

Total ESTIMATED COSTS are - Subtotal $696,000.00

GST $69,600.00

TOTAL $765,600.00 "

The adjudicator's decision

19 On 11 April 2011, Adjudicate Today served on the plaintiff an adjudication determination document. It shows that pursuant to section 22 of the Act, the progress payment of $96,802.46 (including GST) is to be paid by the plaintiff to Stratabuild by 8 March 2011, at a rate of interest pursuant to section 101 of the Civil Procedure Act 2005. The plaintiff is liable to pay 100 percent of the adjudication fees, which are $6,776.00 (including GST).

20 In the reasons for his decision, the adjudicator referred to section 20(2B) of the Act, which states:

"(2B) The respondent cannot include in the adjudication response any reasons for withholding payment unless those reasons have already been included in the payment schedule provided to the claimant."

21 The adjudicator stated that he did not take into account the Bayliss Report or the Skillco Proposal when making his determination:

“29. It is common ground the works the Claimant was contracted to do were remedial building repairs and external painting at "Esplanades & escarpments", XXXX, Balmain Cove, Rozelle. It is not in dispute that this was an occupied residential unit estate undergoing building repairs and painting that is to say, the residents that occupied the unit complex never vacated the building during the project period.

30. At paragraph 2.1 of the Payment Schedule, the Respondent submits that it relies upon the Defect Identification / Resolution Register dated 16 February 2011, marked as Annexure A3 in the Payment Schedule. It is argued that by interpretation of Annexure A3, items listed must be rectified for Practical Completion to be reached pursuant to the Contract. Furthermore, the Respondent submits that there has been no further progress since 16 February 2011 in relation to those items. It is also pointed out by the Respondent that the external painting works, which without limitation are substantially defective and prevent Practical Completion and pursuant to the contract until the works are certified by the Project Manager, which has not occurred, Practical Completion cannot be reached.

31. In the Adjudication Application, the Claimant argues that the Respondent is simply relying upon the works being incomplete as a basis for the refusal to issue a Certificate of Practical Completion. It is argued that no other reason has been raised. I agree with the Claimant. More importantly in my view, pursuant to s.20(2B) of the Act, the respondent cannot include in the Adjudication Response, any reasons for withholding payment unless those reasons have already been included in the Payment Schedule provided by the Respondent. I have therefore considered the very detailed and lengthy Adjudication Response that the Respondent has provided and I am of the view that the Respondent has included many additional submissions not raised in the Payment Schedule. They are as follows:

31.1. Full suite of warranties has not been provided;

31.2. Failure to comply with statutory warranties;

31.3 expert report for Dr Stuart Bayliss dated 25 March 2011 ("Technical report on paintwork"); and

31.4 Report by Skillco Design & Construct (premised on opinion of Dr Stuart Bayliss).

32. I am bound by s.20(2B) of the Act I therefore cannot take those submissions and or material into account as valid reasons why payment has been withheld. In my view, s 20(2B) of the Act specifically states that unless the reasons ventilated in the Adjudication Response have already been raised in the Payment Schedule, I must exclude them. The Respondent states the following in the Payment Schedule at paragraph 3.2 regarding the defective painting:

'...the Respondent understands that testing has been undertaken...2.5 times the thickness of the said paint as applied...'

[see [3.2] of the payment schedule excerpted above]

34. In my view, the Respondent makes it quite clear in its submissions in the Payment Schedule that it was well aware that testing had been undertaken in relation to the quality and compliance of the painting works. In my view, such awareness could have only come from the report that the Respondent seeks to rely upon in the Adjudication Response under the hand of Dr Stuart Bayliss. This report is very detailed and should have been made available to the Claimant by the Respondent by including it in the Payment Schedule so that the Claimant was in a position to comment about its authenticity and findings. Of course, the Claimant has been denied that right by the respondent and therefore the report, pursuant to s.20(2B) of the Act, must be excluded in fairness to the Claimant. Furthermore, the main reason for the Respondent arguing that the paint is defective is because it should have been 2.5 times the thickness of the said paint applied. Therefore, in my view the Respondent should have reduced its arguments in the Adjudication Response to those reasons only. It has therefore gone way beyond the scope of s.20(2B) of the Act. In relation to Warranties, the first time the Respondent raises this as a reason for withholding payment from the Claimant is in the Adjudication Response. Again, pursuant to 2.20(2B) of the Act, I must exclude those submissions from my determination as the Claimant has not had an opportunity to respond to the assertions made by the Respondent. In addition, the report (quotation) by Skillco Design & Construct is premised on the of [sic] Dr Stuart Bayliss and is therefore caught by s.20(2B) of the Act.

35. In general, I must point out that an Adjudication Response is not an opportunity for a Respondent to include submissions and or material that cannot be challenged by a Claimant in its Adjudication application. This is the exact reason why the legislature introduced s.20(2B) of the Act.

...

Defective Painting works

60. In the Payment Schedule, the respondent states the following:

'...the Respondent understands that testing has been undertaken...2.5 times the thickness of the said paint as applied...' [see [3.2] of the payment schedule excerpted above]

62. In the Adjudication Application, the Claimant submits that there has been no evidence provided by the Respondent supporting such an allegation of defective works including an absence of the particulars of any testing such as the date and the status of the construction program as at the alleged date of testing. It is further stated that no test results are provided in the Payment Schedule and therefore any allegation of defective paint works cannot be relied upon.

63. I agree with the Claimant that the Respondent has failed to provide any evidence in the Payment Schedule regarding the alleged defective works and any evidence of the test results of the painting works. It must be noted at this stage that I have already ruled out any consideration of the report of Dr Stuart Bayliss that was provided in the Adjudication Response on the basis that the Respondent had knowledge of the test results at the time the Payment Schedule was served on the Claimant but elected not to provide any further details that would have enable the Claimant to appropriately respond to the report in its Adjudication Application.

64. I am therefore of the view that the only reason available to the Respondent is submitted in the Payment Schedule that is to say, the painting works by the Claimant are defective because after testing, the thickness of the paint application did not comply with the specifications and on average should have been 2.5 times the thickness of the paint as applied.

65. Of course, there is no evidence in the Payment Schedule of any test results. ...

66. In support of the painting works not being defective as per the contract, the Claimant has included at Annexure C9 of the Adjudication Application, weekly reports from Mr. Peter Vilcek, Dulux Acratex Representative...

67, Furthermore, the Claimant submits in the Adjudication Application that pursuant to Clause 29.3 of the AS4000-1997 Contract, no notice was ever given by the Project Manager regarding purported defective works and no opportunity has ever been given to rectify any purported defective works. ... "

22 On 16 June 2011, when the matter was fixed for hearing, Stratabuild made an application to adjourn these proceedings so that they could obtain legal representation. The defendant's solicitor had filed a notice of their intention to cease acting on 11 May 2011. There was also a question of an amendment to the plaintiff's statement of claim. Those amendments, which were minor and did not affect the matter in any great substance, were allowed. I granted a short adjournment and ordered the defendant to pay the plaintiff's costs thrown away by the adjournment on an indemnity basis.

The issues

23 The first question is whether the adjudicator's decision not to consider the Bayliss Report and the Skillco Proposal was erroneous. Secondly, if the decision was erroneous, does this amount to a jurisdictional error.

24 The plaintiff contends that the adjudicator did not expressly consider the Bayliss Report or the Skillco Proposal when determining the adjudication application on the bases that:

(i) they constituted "additional submissions not raised in the payment schedule"; and

(ii) the Bayliss Report, "should have been made available to the claimant ... by including it in the payment schedule so that the claimant was in a position to comment about its authenticity and findings";

(iii) he was prevented from taking into account any part of the Bayliss Report because its arguments went "beyond the scope of s 20(2B); and

(iv) the Skillco Proposal was "premised on the [Bayliss Report] and [was] therefore also caught by s 20(2B) of the Act"

25 It is further contended that the adjudicator:

(i) misconstrued the Act, leading to a misconception of his functions, which was a jurisdictional error;

(ii) misapprehended the nature of or limits on his functions and powers, which was a jurisdictional error: Kirk v Industrial Court of NSW [2010] HCA 1 at [72], Chase Oyster Bar Pty ; [2010] NSWCA 190 at [158];

(iii) failed to carry out the task that the Act required to be carried out in the manner the Act required it to be carried out and thus failed to exercise the jurisdiction given to him by the Act: Multiplex Constructions v Luikens [2003] NSWSC 1140 per Palmer J at [81]; Musico v Davenport [2003] NSWSC 977 per McDougall J at [119]; Chase Oyster Bar Pty Ltd v Hamo at [158];

(iv) failed to accord procedural fairness to the plaintiff due to the adjudicator's failure to consider the plaintiff's reports and therefore the determination is void: Timwin Constructions Pty Ltd v Facade Innovations Pty Ltd [2005] NSWSC 548, (2005) 21 BCL 383 at [44].;

(v) failed to comply with section 22(2)(d) of the Act; and

(vi) committed an error of law on the face of the record.

26 The first defendant denies these contentions and submits that the impugned action was not erroneous, however if were found to be erroneous, it did not amount to an error of a "basic and essential requirement" with the constraints of the decision of Brodyn as explained by McDougall J at [146] in Chase Oyster Bar v Hamo Industries :

"[146] The reasoning in Brodyn establishes the following propositions:

(1) certiorari is not available for non-jurisdictional error of law on the face of the record.

(2) The basic and essential requirements for the existence of a valid adjudicator's determination are the five matters identified at 441 [53]; Hickman good faith; and no "substantial denial" of the measure of natural justice that the Security of Payment Act affords.

(3) Other basic and essential requirements may be discovered.

(4) The consequence of absence of a basic and essential requirement is that the determination is void.

(5) Leaving to one side (as from hereon I shall do) fraud in which the adjudicator is complicit, a determination will only be void if a basic and essential requirement for validity is lacking.

(6) If a determination is void, through absence of a basic and essential requirement for validity, relief may be granted by way of declaration and injunction.

(7) It is inconsistent with the legislative intention demonstrated by the Security of Payment Act that relief in the nature of certiorari should be available where there is some element of invalidity falling short of absence of a basic and essential requirement."

27 The basic and essential requirements referred to in Brodyn v Davenport at [53] are:

"[53] What then are the conditions laid down for the existence of an adjudicator's determination? The basic and essential requirements appear to include the following:

1. The existence of a construction contract between the claimant and the respondent, to which the Act applies (ss 7 and 8).

2. The service by the claimant on the respondent of a payment claim (s 13).

3. The making of an adjudication application by the claimant to an authorised nominating authority (s 17).

4. The reference of the application to an eligible adjudicator, who accepts the application (ss 18 and 19).

5. The determination by the adjudicator of this application (ss 19(2) and 21(5)), by determining the amount of the progress payment, the date on which it becomes or became due and the rate of interest payable (ss 22(1)) and the issue of a determination in writing (ss 22(3)(a))."

The legislation

28 Section 20(2B) states:

"20 Adjudication responses

...

(2B) The respondent cannot include in the adjudication response any reasons for withholding payment unless those reasons have already been included in the payment schedule provided to the claimant."

29 Section 22(2)(d) permits a respondent to include "submissions" in its adjudication response:

"22 Adjudicator's determination

...

(2) In determining an adjudication application, the adjudicator is to consider the following matters only:

(a) the provisions of this Act,

(b) the provisions of the construction contract from which the application arose,

(c) the payment claim to which the application relates, together with all submissions (including relevant documentation) that have been duly made by the claimant in support of the claim,

(d) the payment schedule (if any) to which the application relates, together with all submissions (including relevant documentation) that have been duly made by the respondent in support of the schedule,

..."

30 In contrast, s 14(3) makes no reference to "submissions"; it provides (inter alia) that the payment schedule must indicate the "reasons" for withholding payment:

"14 Payment schedules

(1) A person on whom a payment claim is served (the respondent ) may reply to the claim by providing a payment schedule to the claimant.

(2) A payment schedule:

(a) must identify the payment claim to which it relates, and

(b) must indicate the amount of the payment (if any) that the respondent proposes to make (the scheduled amount ).

(3) If the scheduled amount is less than the claimed amount, the schedule must indicate why the scheduled amount is less and (if it is less because the respondent is withholding payment for any reason) the respondent's reasons for withholding payment."

Did the adjudicator misconstrue the Act leading to a misconception of his functions?

31 As discussed, the plaintiff submits that the adjudicator made a legal error by deciding not to take into account the submissions in the reports on the basis that the plaintiff had "included many additional submissions not raised in the payment schedule". It is suggested by the plaintiff that the adjudicator wrongly assumed that the respondent to a payment claim is required to provide "submissions" in its payment schedule, and that section 20(2B) prevents a respondent from including "additional submissions" in its adjudication response. It is suggested that section 20(2B) prohibits additional reasons, not "additional submissions" and for the adjudicator to "exclude those submissions from [his] determination" (at [34]) on this basis is erroneous.

32 The defendant submits that this is a wrong characterisation of the adjudicator's reasons and draws attention to paragraphs 31 and 60 of the determination. Instead, it is suggested that the adjudicator identified Dr Bayliss' report as an additional "reason" given by the plaintiff in the payment schedule. It is submitted that a fair reading of paragraph 31, plus the four preceding paragraphs, provides no support for the plaintiff's complaint that the adjudicator wrongly identified the Dr Bayliss' report as an additional submission. Paragraphs 29 and 30 have been reproduced above. Paragraphs 27 and 28 set out the relevant conditions of the contract that were required to be met in order to reach practical completion.

33 Did the adjudicator view the reports as additional submissions or as additional reasons ? In my view, paragraphs 31 to 34 of the adjudicator's reasons are instructive. The adjudicator stated that he could not "take those submissions and or material into account as valid reasons why payment has been withheld." It is clear he viewed the reports as additional submissions that had not been properly contemplated in the reasons stated in the payment schedule. This conclusion is supported by paragraphs 11, 15 and 18 of the reasons for decision. The adjudicator has clearly set out what he considered were the reasons provided by the plaintiff in the payment schedule:

"11. The respondent has raised several reasons in its Payment Schedule why it believes the Claimant is entitled to $Nil of the claimed amount. Those reasons are as follows:

11.1 Progress Certificate dated 28 January and annexed as A2 of the Payment Schedule, issued by the Superintendent in response to the Claimant's Progress Claim 20, has a proposed payment to the Claimant in the sum of $48,414.72 (including GST);

11.2 The Respondent submits that at the time the Superintendent issued the Certificate, the works had not reached Practical Completion;

11.3 Offset for liquidated damages in the sum of $14,797.50 (excluding GST); and

11.4 Offset for defective painting works in excess of the subtotal balance of $29,215.88 (excluding GST), leaving $Nil owing to the Claimant."

34 At paragraph 15, the adjudicator stated:

"In fact, in my view, the only reason stated by the Respondent in the Payment Schedule as to why it is withholding payment is that the total amount to be set off for the Liquidated Damages (delays) and rectification of purported defective works will exceed the claimed amount in the Payment Claim."

35 At paragraph 18, the adjudicator stated:

"...I am therefore satisfied that the Project Manager breached Clause 37.2(a) of the AS4000-1997 Contract and no valid reasons have been provided by the Respondent why the Claimant is not entitled to the full value of each item as claimed."

36 The plaintiff submits that the payment schedule only needs to state "the essence of 'the reason' for withholding payment", i.e. "to identify the scope of the dispute" and pointed to the decision of Mason P in Clarence Street Pty Ltd v Isis Projects Pty Ltd [2005] NSWCA 391, (2005) 64 NSWLR 448:

"[27] When he turned to address the first issue, the trial judge applied by analogy the reasoning of Palmer J in Multiplex Constructions Pty Ltd v Luikens & Anor [2003] NSWSC 1140 at [76]-[78]. Palmer J had said:

'76 A payment claim and a payment schedule are, in many cases, given and received by parties who are experienced in the building industry and are familiar with the particular building contract, the history of construction of the project and the broad issues which have produced the dispute as to the claimant's payment claim. A payment claim and a payment schedule must be produced quickly; much that is contained therein in an abbreviated form which would be meaningless to the uninformed reader will be understood readily by the parties themselves. A payment claim and a payment schedule should not, therefore, be required to be as precise and as particularised as a pleading in the Supreme Court. Nevertheless, precision and particularity must be required to a degree reasonably sufficient to apprise the parties of the real issues in the dispute.

77 A respondent to a payment claim cannot always content itself with cryptic or vague statements in its payment schedule as to its reasons for withholding payment on the assumption that the claimant will know what issue is sought to be raised. Sometimes the issue is so straightforward or has been so expansively agitated in prior correspondence that the briefest reference in the payment schedule will suffice to identify it clearly. More often than not, however, parties to a building dispute see the issues only from their own viewpoint: they may not be equally in possession of all of the facts and they may not equally appreciate the significance of what facts are known to them. This will be so especially where, for instance, the contract is for the construction of a dwelling house and the parties are the owner and a small builder. In such cases, the parties are liable to misunderstand the issues between them unless those issues emerge with sufficient clarity from the payment schedule read in conjunction with the payment claim.

78 Section 14(3) of the Act, in requiring a respondent to "indicate" its reasons for withholding payment, does not require that a payment schedule give full particulars of those reasons. The use of the word "indicate" rather than “state", "specify" or "set out", conveys an impression that some want of precision and particularity is permissible as long as the essence of "the reason" for withholding payment is made known sufficiently to enable the claimant to make a decision whether or not to pursue the claim and to understand the nature of the case it will have to meet in an adjudication.

[28] To similar effect are the following remarks of Davies AJA (Handley JA and Stein JA concurring) in Hawkins Construction (Aust) Pty Ltd v Mac's Industrial Pipework Pty Ltd [2002] NSWCA 136 at [20]:

[Section 13] should not be approached in an unduly technical manner ... The terms used by subs (2) of s 13 are well understood words of the English language. They should be given their normal and natural meaning. As the words are used in relation to events occurring in the construction industry, they should be applied in a common sense practical manner.

[29] In this Court, the parties were agreed that these principles were generally applicable to the resolution of the first issue.

[30] In Multiplex , Palmer J was considering the requirements for a valid payment schedule. The function of that document is apparent from the statutory scheme to which reference has already been made. Section 14(2) provides that the payment schedule must identify the payment claim to which it relates, and must indicate the amount of the payment (if any) that the recipient of the payment claim proposes to make. Section 14(3) requires the recipient to indicate why payment in full is withheld and the reasons for doing so. The joinder of issue thus achieved sets the parameters for the matters that may be contested if an adjudication under the Act ensues (cf s 20(2A) and (2B)).

[31] I respectfully agree with the principles stated by Palmer J in Multiplex . I would however point to two matters that need to be borne in mind when they are applied to a situation such as the present, ie testing the validity of a payment claim. The first is that a "payment claim" is no more than a claim. It must comply with s 13, but (unlike a payment schedule) it is not its function to identify the scope of a dispute. Many claims will not be disputed, but if they are, it is a matter for the respondent to the payment claim to state the extent and reasons for failing to pay the sum withheld.

[32] Secondly, I draw attention to the fact that Palmer J is referring (at [78] of his reasons) to s 14(3), which states matters that the respondent to the payment claim "must indicate". This is also the language of s 13(2)(b). By contrast, s 13(2)(a) (with which the present appeal is concerned) defines what the claimant "must identify". It is however unnecessary in the present case to consider the difference between identification and indication."

37 The decision was approved by the Court of Appeal in Perform (NSW) Pty Ltd v Mev-Aus Pty Ltd [ 2009] NSWCA 157 per Giles JA:

" [47] Clarence Street Pty Ltd v Isis Projects Pty Ltd was concerned with s 13(2) of the Act and whether a payment claim "identified" the relevant construction work. Section 13(2) also requires that the payment claim "indicate" the amount of the progress payment claimed to be due. The President noted at [29], as to similar effect as the discussion by Palmer J, the remarks of Davies AJA (Handley and Stein JJA agreeing), in Hawkins Construction (Australia) Pty Ltd v Mac's Industrial Pipework Pty Ltd [2002] NSWCA 136 at [20], that s 13 should not be approached in an unduly technical manner and-

The terms used by subs (2) of s 13 are well understood words of the English language. They should be given their normal and natural meaning. As the words are used in relation to events occurring in the construction industry, they should be applied in a common sense practical manner.

[48] So in Multiplex Constructions Pty Ltd v Luikens brief reference to prior correspondence could suffice, and in Coordinated Construction Co Pty Ltd v Climatech (Canberra) Pty Ltd [2005] NSWCA 229 at [42] Basten JA said of "identify" in s 13(2) that, on a purposive construction, a payment claim must be accompanied by such supporting documentation as makes it reasonably comprehensible to the other party "unless it has already been provided".

[49] The same approach should be taken to s 14(3). "Indicate" is an ordinary word, to be applied in a common sense practical manner and often where the provider and the recipient of the payment schedule will have debated a claim to payment in prior correspondence. In Multiplex Constructions Pty Ltd v Luikens Palmer J's discussion was directed to the precision and particularity of the indication, rather than to indication by reference to another document, but it necessarily involved that reference to prior correspondence can indicate the provider's reasons. While it should not be forgotten that the payment claim should be intelligible to the adjudicator as well as the recipient, a sufficient indication between the parties can be explained before the adjudicator by supply of the correspondence. As Mason P said in Clarence Street Pty Ltd v Isis Projects Pty Ltd at [30], the joinder of issue achieved through the payment claim and the payment schedule "sets the parameters for the matters that may be contested if an adjudication under the Act ensues (cf ss 20(2A) and 20(2B))"; but it sets it as between the parties, and primary regard should be had to the parties' communications.

[50] In my opinion, indication within s 14(3) does not exclude what the adjudicator described as incorporation by reference of material extrinsic to the payment schedule. The adjudicator appears to have thought that provision involving physical receipt meant that regard could not be had to anything not physically received with the payment schedule. That can not be so. As a simple illustration, a payment schedule will commonly refer to provisions of the construction contract; it would make no sense that the construction contract, or the relevant provisions, had to be set out in full or attached although known to the parties and the basis for their relationship. It would equally be neither common sense nor a practical application of s 14(3) to deny indication by reference to correspondence in which reasons have been fully set out simply because a copy of the correspondence is not physically attached to or provided with the payment schedule.

[51] The respondent submitted to the effect that the meaning of "indicate" was informed by s 20(2B) in its reference to reasons which have been "included in the payment schedule provided to the claimant". It said that the Act contemplated a single document within which the reasons were included, and that uncertainty in what was included through incorporation by reference was contrary to the "fast track" process for which the Act provided. I do not see textual enlightenment in the reference to inclusion of reasons - they are included because indicated. Questions of certainty come within whether what is done is indication.

[52] It will be a question of fact whether, in the particular circumstances, reference to material extrinsic to the payment schedule is an indication of reasons. Reference to a memorandum internal to the provider of the payment schedule could not indicate reasons for the purposes of s 14(3); reference to a conversation, without giving its substance, is unlikely to do so; reference to a long-past letter not readily to hand might not do so; but there is no reason why reference to a recent and specific letter received by the recipient of the payment schedule should not do so. The recipient is thereby informed, and can decide whether or not to pursue the claim and understand the case it will have to meet in an adjudication, and being informed in that way is well within the meaning of "indicate".

[53] In Pacific General Securities Ltd v Soliman and Sons Pty Ltd [2006] NSWSC 13 ; (2006) 196 FLR 388 at [71] Brereton J was "inclined to accept, without deciding, that a payment schedule may 'sufficiently indicate' reasons for withholding payment by reference to reasons previously advanced in an earlier payment schedule, if appropriately worded ... ". His Honour's inclination was correct, as was his observation that it was not sufficient to incorporate reasons advanced in previous payment schedules, adjudication responses or otherwise so that the claimant could not know whether all or any and if so which of the grounds previously advanced were now relied on. In the present case, in my opinion the March payment schedule indicated as reasons for the $nil being less than the claimed amount and for withholding payment the reasons in the February payment schedule, in substance, the claimed backcharges, at the least as in relation to the $209,968.68 if not as to the entirety of the claimed amount."

38 At paragraph 34 of the reasons, the adjudicator states that the plaintiff had made it quite clear in the payment schedule that testing had been undertaken in relation to the quality and compliance of the painting works and that that awareness could have only come from the Bayliss report. The adjudicator then goes on to state that that report is very detailed and it should have been made available to the defendant in the payment schedule. In fact the plaintiff only had a draft report of Dr Bayliss available when it provided its payment claim on 8 March 2011. The final report, not surprisingly, only became available on 25 March 2011. The adjudicator stated that the plaintiff should have reduced its arguments in its adjudication response to the thickness of the paint and not relied on the reports.

39 The payment schedule states:

"21. The respondent says that the works have still not reached practical completion.

2.2 Without limitation the Respondent relies on the document "DEFECT IDENTIFICATION/RESOLUTION REGISTER" bearing the marking "Last Update: 16/02/11" which is annexed and marked A3.

2.3 Where by interpretation that document indicates that an item must be rectified for practical completion to be reached, the respondent says that said item must be so rectified for practical completion to be reached under the contract.

...

3.2 The Respondent understands that testing has been undertaken in relation to the quality and compliance of said painting works as undertaken. The respondent understands that the results of that testing are that the said painting works are substantially defective and do not comply with the contract specifications. Specifically, the Respondent understands that the thickness of the said paint application if complying with the specifications would on average be 2.5 times the thickness of the said paint applied.

3.3 The respondent also refers to the other deficiencies identifies in Annexure A3.

...

3.7 Considering that the Respondent is of the view that more than 13.76% of those works are defective, and moreover that the deficiencies in Annexure A3 must also be accounted for...

3.9 For the avoidance of doubt, in reaching its conclusions as to the value of defective work in relation to the said painting works, the Respondent has relied on its understanding that the external building paintwork should be on average 2.5 times its thickness as applied.

3.10 The Respondent has also relied on the quotation from Skillco Design & Construct annexed and marked A4, which provides a cost for undertaking external building painting works in accordance with the original contract specification ..."

40 Clearly, 20(2B) prohibits additional reasons, not "additional submissions". T he adjudicator did not allow the report because he apparently believed they raised new issues, reasons or submissions and the defendant did not have an opportunity to respond to the report in its adjudication application.

41 In my view, the payment schedule and in particular its references to Annexure A3, the Skillco quotation, the reference to the testing in paragraph 3.2 were appropriately worded and specific enough to 'sufficiently indicate' the reasons for withholding payment. I do not agree that the Bayliss report contained additional 'reasons'.

42 However, even if the adjudicator was incorrect, had he correctly considered section 20(2B) of the Act at paragraphs 31 to 35 of his reasons? I think the defendant is correct in submitting that one must focus on the substance rather than the form of the adjudicator's statements. The adjudicator expressed his understanding of ss 14(3) and 20(2B) of the Act. The adjudicator's view was that, consistent with the policies of fairness and promptness, the full reports should be included with the payment schedule to allow a claimant to properly articulate an adjudication application and prevent a fresh case being brought about in reply after that application was made. The defendant says that the adjudicator did not misconstrue the Act in a way that led to a misconception of his functions.

43 Unfortunately, the adjudicator did not appreciate how the courts have interpreted the use of the word "indicate" in s 14(3) and the difference between "reasons" and submissions" when used in the legislation.

44 Although the Act's provision for claims and responses has been compared to similar court processes, it is not a complete analogy. Under the Act, there is, firstly, a process for making a claim for payment and receiving a response. The response must be payment, part payment or no payment. In the latter two circumstances reasons must be advanced. The second set of provisions deal with resolving a resulting dispute by an adjudicator.

45 Thus the second set of provisions does not follow a court process format of claim, defence and reply. That is because the earlier processes should have sufficiently alerted the claimant to what were the reasons for nonpayment. The claimant starts with the benefit of knowing already what is the defence to his claim.

46 The circumstances of the present matter illustrate the point. By the time the claimant came to make his adjudication application he knew full well that there was a challenge to the thickness of the coat of paint. It was within his power to include with his adjudication application any expert reports or other material to support his claim that the paint achieved the correct thickness.

47 This then leaves the respondent to reply with his expert material. There is always the residual power of the adjudicator to call for further submissions under section 21(4) of the Act.

48 In my view, the adjudicator has confused the use of reasons and submissions in sections 14(3), 20(2)(1) and 20 (2B) of the Act. As a result he misconstrued the Act.

49 This conclusion means that the adjudicator misapprehended the nature of or limits on his functions and powers, which was a jurisdictional error. The next question for consideration is whether the determination is void on other grounds submitted by the plaintiff.

Was there a breach of procedural fairness?

50 It is suggested that the adjudicator failed to consider the reports and therefore failed to comply with his statutory obligation to consider the plaintiff's adjudication response: Timwin Constructions at [40] and [44], Holmwood Holdings Pty Ltd v Halkat Electrical Contractors [2005] NSWSC 1129 at [49].

51 McDougall J in Timwin Constructions stated:

"[43] I therefore conclude that the adjudicator did not attempt in good faith to exercise the power given to him by the Act because he did not attempt in good faith to consider the submissions put by the parties to understand what, in relation to variations, the real dispute was.

[44] I will note that Timwin did not put its case on the basis of denial of natural justice, but it would follow from what I have said that, in disregarding Timwin's submissions for the reason that he gave, the adjudicator denied it natural justice."

52 In Holmwood Holdings v Halkat, Brereton J stated:

"[ 49] So understood, Brodyn accords with the well-established place in this area of the law of failures to take into account relevant considerations. Indeed, it would be a surprising result that, in the absence of a privative clause, a prescribed relevant consideration could be disregarded without affecting the validity of the decision. Accordingly, it is a condition of validity of a determination that an adjudicator consider the matters specified in s 22(2), although error in considering those matters, so long as they are in fact considered, will not result in invalidity.

[50] However, that does not mean that the requirement in s 22(2)(b) to consider the provisions of the contract has the effect that in each adjudication the adjudicator must consider every provision of the contract - any more than the requirement in s 22(2)(a) to consider the provisions of the Act has the effect that in each adjudication the adjudicator must consider every provision of the Act; both the paragraphs are to be read as requiring consideration of the provisions only to the extent that they are relevant to the adjudication application in question. In other words, the adjudicator is not required to consider provisions of the Act or the contract which have no bearing on, or relationship to, the adjudication application under consideration. This follows from the stated function of the considerations required by s 22(2) - which is, as its opening words express, "in determining an adjudication application" - and from the great inconvenience without utility which any other construction would involve.

[51] Accordingly, I conclude that a failure by an adjudicator to have regard to a provision of the construction contract which is relevant to the adjudication under consideration is jurisdictional error, resulting in invalidity of the determination."

Pursuant to section 22(2) of the Act, the requirement for an adjudicator to consider all submissions (including relevant documentation) that have been duly made by the respondent in support of the schedule leads to a question of procedural fairness.

53 The adjudicator expressly failed to consider the reports that were relevant to the adjudication and therefore failed to comply with his statutory obligations with the result that the adjudicator failed to afford procedural fairness to the plaintiff. The reports provided necessary evidence to support the reasons the plaintiff had provided in the payment schedule in which it proposed to pay $nil. Therefore adjudicator's error invalidates the determination because the reports were material to the result.

54 There was also a submission that there were errors of law arising on the determination based upon the same factual considerations. As the matter was not fully argued and may be contentious, I will not decide the matter on this ground.

Orders

55 For the reasons I have given I propose to declare that Adjudication Application No. 2011ADJT142 of the second defendant dated 11 April 2011 is void.

56 The parties are to bring in short minutes reflecting these reasons and I will then hear argument as to costs.

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