Supreme Court

New South Wales

Case Title: Lahey Constructions Pty Limited v Newbold Bulk Haulage Pty Limited

Medium Neutral Citation: [2013] NSWSC 215

Hearing Date(s): 15 March 2013

Decision Date: 15 March 2013

Jurisdiction: Equity Division - Technology and Construction List

Before: Pembroke J

Decision: Decision of adjudicator void

Catchwords: BUILDING AND CONSTRUCTION - adjudication - absence of natural justice - absence of procedural fairness - determination void

Legislation Cited: Building and Constructions Industry Security of Payment Act 1999 (NSW)

Cases Cited: Bauen Constructions v Westwood Interiors [2010] NSWSC 1359

Brodyn Pty Ltd trading as Time Cost and Quality v Davenport [2004] NSWCA 394

Cardinal Project Services Pty Ltd v Hanave Pty Ltd [2010] NSWSC 1367

John Holland Pty Ltd v Cardno MBK (NSW) Pty Ltd [2004] NSWSC 258

Leighton v Arogen [2012] NSWSC 1323

Musico v Davenport [2003] NSWSC 977

Pacific General Securities Ltd v Soliman & Sons Pty Ltd [2006] NSWSC 13; (2006) 196 FLR 388

Procorp Civil Pty Ltd v Napoli Excavations & Contracting Pty Ltd [2006] NSWSC 205

Category: Principal judgment

Parties: Lahey Constructions Pty Limited - plaintiff

Newbold Bulk Haulage Pty Ltd

Representation

- Counsel: Counsel:

S Goldstein - for the plaintiff

B DeBuse - for the defendant

- Solicitors: Solicitors:

Moray & Agnew Lawyers - for the plaintiff

Watson & Watson - for the defendant

File Number(s): 2012/00373271

EX TEMPORE JUDGMENT

Introduction

1 This is an application by the plaintiff for a declaration that the adjudication determination dated 6 November 2012 made by the second defendant pursuant to the Building and Construction Industry Security of Payment Act 1999 (NSW) (the Act) is void and should be quashed and set aside.

2 The application arises in the context of a contract which effectively provided that the financial risk associated with Site Conditions that were materially adverse and unforeseen lay with the subcontractor, namely, the first defendant.

The Contract

3 The contract incorporated the terms of the GC21 Subcontract, of which Clause 41 provided as follows:

41 Site Conditions

.1 The Subcontractor agrees that it has no other entitlement arising out of or in connection with Site Conditions other than as referred to in this clause 41.

.2 If the Contractor encounters, in the execution of Subcontract Works (including when obtaining Further Site Information ), Site Conditions which are materially adverse in comparison to the Site Conditions which the Subcontractor should have reasonably foreseen at the Date of Subcontract, having regard to the warranty in clause 40.2, the Subcontractor must notify the Contractor in writing forthwith and in any event within 7 days of encountering these Site Conditions (and prior to making any related Subcontractor's Claim ), giving full details of:

.1 the Site Conditions encountered;

.2 the manner in which they are said to be materially adverse (having regard to the warranty in clause 40.2), together with information supporting this contention;

.3 the effect on the Subcontract Works;

.4 subject to clause 41.8, the estimated additional cost (if any) of dealing with the Site Conditions encountered and the additional work and resources involved;

.5 the delay (if any) to progress of the Subcontract Works; and

.6 any other relevant matters.

.8 Notwithstanding anything in clause 41, when specified in Contract Information Item 41 that the Subcontract is to bear the full risk of encountering and dealing with materially adverse Site Conditions:

.1 the Subcontractor is not entitled to the costs of dealing with materially adverse Site Conditions ; and

.2 notwithstanding clause 54, if the Subcontractor is or will be delayed in reaching Completion as a result of dealing with materially adverse Site Conditions, the Subcontractor will not be entitled to an extension of time for Completion .

.9 If a Variation is instructed or agreed as a result of Site Conditions, the parties' rights and obligations are not affected by clause 41.8.

The Subcontract Information Item 41 was as follows:

Site Conditions

Is the Subcontractor to bear the full risk, including cost and time implications, of encountering and dealing with materially adverse Site Conditions? Yes.

The definition of Site Conditions was as follows:

Any physical conditions of the site (including sub-surface conditions, but excluding weather conditions or physical conditions which are a consequence of weather conditions) encountered in the execution of the Subcontract Works.

The Obstruction

4 The subcontractor encountered an obstruction on the building site which consisted of the remains of an earlier building. It had to excavate further and deeper than originally contemplated and then had to refill to the required level. On 21 May 2012 it wrote to the plaintiff and said:

We supplied Lahey with a quote dated 2nd March 2012 with a schedule of rates & prices to perform the variation. Discussions were held with Neil Ussher where we agreed to a discount of $10 per hour on the plant hire in return for early payment promise. Our quote was accepted & we were instructed to proceed with the variation to remove the structure, break up concrete, cart debris to the waste management facility, supply, deliver, place & compact gravel into the hole to required compaction, as detailed.

5 I am afraid to say that the response of the plaintiff was uncompromising. It said by letter dated 22 May 2012:

Your variation claims relating to the removal of an in-ground structure have been rejected on the basis that you are required under the Subcontract to bear the risk of all Site Conditions (refer to clause 41.8).

In contrast to your letter, we do not consider that any amounts are payable in relation to this work [and] we deny that there is an agreement to pay for this work contrary to the provisions of the Subcontract.

6 In other words, despite what may have been said, promised or implied, the plaintiff was insisting on its strict contractual rights which were to the effect that by reason of clause 41.8, the additional costs associated with the extra work were to be borne by the first defendant.

Adjudication Application

7 The result of this impasse was that the first defendant made an adjudication application under the Act dated 29 October 2012. It stated that it entered into an agreement with the plaintiff on the basis that it would be paid on agreed rates for the work. It said specifically, in relation to the underground structure work, that although the plaintiff contended that the work was not a variation under clause 41.8, that clause had no role to play. That is because, the first defendant alleged, the plaintiff effectively waived the relevant contractual provisions and agreed to a variation for the first defendant to do the work.

8 The first defendant submitted that that being so, clause 41.9 came into play providing that, if a variation were instructed and agreed as a result of Site Conditions, the parties' rights and obligations were not affected by clause 41.8.

9 The adjudication application went on to say:

The claimant submits that the schedule of rates at Attachment F, the signed daysheets, and subsequent contemporaneous e-mails, the Respondent's payment of tip fees, and part payment of gravel all support the contention that there was an agreement that this was a variation for which the claimant would be paid. It is therefore submitted that clause 41.9 makes the work a valid variation under the contract. (emphasis added)

10 In that way, the adjudication application made quite clear the legal basis on which the first defendant contended that it was entitled to be paid.

Adjudication Response

11 The adjudication response by the plaintiff was also clear and was also confined to the same issue. It stated:

4.1.3 On 5 March 2012 the Respondent verbally instructed the claimant on site to remove the structure and backfill the area to the finished levels required under the Subcontract.

4.1.4 The Respondent does not dispute: (a) that the existence of the underground structure was not known to either party prior to its discovery; or (b) that the Claimant subsequently removed the underground structure and backfilled the excavation to achieve the levels required under the Subcontract.

4.1.6 The Claimant claims to be entitled to those payments on the basis that the works are a variation to the Subcontract.

4.2.7 The Claimant does not dispute that the underground structure and the associated removal works constituted "material adverse site conditions" as defined in the subcontract.

4.2.10 The Claimant relies upon clause 41.9 of the Subcontract and alleges that a Variation was instructed or agreed which displaces the prima facie position.

12 As I said, the adjudication application was clear as to the legal basis upon which it relied and the adjudication response was equally clear in responding to the validity of that legal basis.

Adjudication Determination

13 The adjudicator's determination was made pursuant to section 22 of the Act. Section 22 obliged the adjudicator, in determining the application, to consider certain matters. They included the provisions of the Act, the provisions of the construction contract from which the application arose and '(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', and '(d) the payment schedule 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'.

14 Despite the clear delineation of the parties' respective positions, the adjudicator has, in my view, failed to comply with her statutory obligation to consider the matters which she is obliged to consider by section 22. She stated that the first defendant 'in essence asserts that the above works are variation works for which it is entitled to payment as agreed according to an agreed schedule of rates. The respondent allows nil based on clause 41.8 of the contract and Item 41 of the Contract Information'.

15 The adjudicator acknowledged that the claim in relation to the works involving the underground structure was expressed as a claim for variation work in the payment claim. From that point however, the adjudicator appears to have taken a different course to that which was outlined in the submissions of the parties and in the payment claim and the responding payment schedule to which the application relates. She took the view that the real, albeit unstated, issue was not whether a variation was agreed for the purpose of clause 41.9, but whether the extra works were within or without the scope of works defined in the contract.

16 She said as follows:

Rather than address that issue in the adjudication application and response, the parties have instead addressed whether the parties previously agreed that the works constitute a variation and, if they did, whether the respondent should now be permitted to depart from that agreement. In taking this approach the claimant effectively presses an entirely new claim.

17 She added:

Furthermore, even though the respondent does not object to the claimant in taking this approach, it means that neither the submissions made in support of the new claim nor those countering it, can properly be said [to be] in support of the payment claim and payment schedule respectively and I am accordingly precluded from considering them.

18 I am afraid this is difficult to follow and equally difficult to justify. The adjudicator went on to say:

Because I perceive this part of the claim to have been pressed on a new basis unwittingly I understand that the claim as originally made should nevertheless be determined. The obvious problem in this regard is the almost complete lack of submissions, both as to what the relevant issues are, and in relation to those issues. Doing the best that I can without the benefit of submissions, it seems to me that, unless the works the claimant was instructed to carry out (namely, "to excavate around the structure, completely remove the structure and backfill to the subcontract finished levels") are part of the original scope of works, then they are variation works, for which the claimant is entitled to payment.

19 The adjudicator added, almost by way of postscript, that she had not failed to take account of clause 41, but that it had no bearing on whether particular works are contract works or variations.

Denial of Natural Justice

20 Although I can see why the adjudicator might have wished to reach a decision in favour of the first defendant, I am afraid to say that she has transgressed, and that there has been a denial of natural justice. This results in the decision being void: Brodyn Pty Ltd trading as Time Cost and Quality v Davenport [2004] NSWCA 394 at [55]; Cardinal Project Services Pty Ltd v Hanave Pty Ltd [2010] NSWSC 1367 at [20] - [21] per McDougall J.

21 In arriving at the conclusion that the claim had been brought on a new basis 'unwittingly', the adjudicator did not disclose her reasoning for doing so. It is difficult to see why she reached that conclusion. She then proceeded to determine what she called 'the claim as originally made' on the basis that:

(a) unless the works the claimant was instructed to carry out ... are part of the original scope of works, then they are variation works, for which the claimant is entitled to payment;

(b) clause 41 in effect allows for additional payment for the contract works in certain situations ... but has no bearing on whether particular works are contract works or variations; and

(c) in circumstances where the respondent effectively alleges that the subject works are contract works, it is for the respondent to establish that.

22 I accept the submission that that approach was not agitated by either the plaintiff or the first defendant. In proceeding on that basis the adjudicator breached the requirements of natural justice. That is because, in circumstances where she had formed a view on the resolution of the claim that she knew had not been raised by either party, she was obliged to seek further submissions from the parties: Musico v Davenport [2003] NSWSC 977 at [107]-[108]; John Holland Pty Ltd v Cardno MBK (NSW) Pty Ltd [2004] NSWSC 258 at [13]; Procorp Civil Pty Ltd v Napoli Excavations & Contracting Pty Ltd [2006] NSWSC 205 at [10]. An adjudicator, but not necessarily a judge, breaches the requirements of natural justice where a material issue is determined on a basis not advanced by either party.

23 As has been pointed out by McDougall J in Musico v Davenport at [107] - [108]:

... what an adjudicator is required to do is to decide the dispute between the parties. Under the scheme of the Act, that dispute is advanced by the parties through their adjudication application and adjudication response (which, no doubt, will usually incorporate the antecedent payment claim and payment schedule). If an adjudicator is minded to come to a particular determination on a particular ground for which neither party has contended then, in my opinion, the requirements of natural justice require the adjudicator to give the parties notice of that intention so that they may put submissions on it ...

It follows, in my opinion, that where an adjudicator determines an adjudication application upon a basis that neither party has notified to the other or contended for, and that the adjudicator has not notified to the parties, there is a breach of the fundamental requirement of natural justice that a party to a dispute have 'reasonable opportunity of learning what is alleged against him and of putting forward his own case in answer to it'. (citing Lord Diplock in O'Reilly v Mackman [1983] 2 AC 237 at 279).

(emphasis added)

24. I am quite satisfied that the denial of natural justice in this case was material and that submissions could have been put that might have had some prospect of changing the adjudicator's mind on the point. Submissions could have been provided in relation to the facts and conditions precedent to a finding that the works amounted to a variation under the contract; whether clause 41 of the contract had any bearing on whether the particular works are contract works or a variation; and the apparent presumption by the adjudicator in favour of the first defendant that the works were a variation and not contract works.

25 It was, I am afraid, inappropriate for the adjudicator to go on to decide the central issue 'without the benefit of submissions' in the circumstances with which she was presented. And although she referred to clause 41 of the contract, her statement that this clause has 'no bearing on whether particular works are contract works or variations' indicates that she failed to consider the plaintiff's submissions, particularly in regard to clause 41.8 and Contract Information Item 41, to which no meaningful reference was made.

No Reasons

26 In addition, in arriving at the conclusion that the first defendant was entitled to the full amount of its claim, the adjudicator appears to have failed to consider the competing contentions. She has certainly failed to expose any reasoning which would justify her acceptance of the first defendant's amounts and rates.

27 Those rates and amounts were in issue. They were not accepted by the plaintiff. The alleged agreement in relation to rates was denied. And the absence of agreement was reflected in submissions made to the adjudicator. The absence of reasons by the adjudicator on this issue is an additional ground for setting aside her decision. Section 22 expressly required her to consider not just the provisions of the contract but the duly made submissions of the plaintiff in support of its payment schedule.

28 She gave no reasons for her adoption of the first defendant's quantification of its claim in circumstances where there was a live dispute as to the reasonableness of the rates, the hours involved and the amounts claimed.

29 Although the reasons of an adjudicator need only be brief they must be sufficient to indicate that she has engaged with the dispute and dealt with it in a principled and reasoned way: Leighton v Arogen [2012] NSWSC 1323 at [94] - [97]; Bauen Constructions v Westwood Interiors [2010] NSWSC 1359 at [23] - [28], [40] - 41].

30 I adopt the following statement by Brereton J in Pacific General Securities Ltd v Soliman & Sons Pty Ltd [2006] NSWSC 13; (2006) 196 FLR 388 at [88] - [89]:

88 Because the adjudicator is obliged to include in the determination the reasons for it, and the reasons reveal no examination of whether the construction work the subject of the payment claim has been carried out, nor of what was its value, there is a compelling case that the adjudicator simply allowed the claim in full in default of any valid submission against it. As I have endeavoured to explain, that is not an adjudication, within the meaning of the Act, of the payment claim.

89 It follows that one of the basic and essential requirements of validity has not been satisfied, since there has not been an adjudication, within the meaning of the Act, of the payment claim, and accordingly the adjudicator's determination is void.

31 For those reasons the plaintiff must succeed. I must find in favour of the plaintiff because that is what the law requires. It may well be that the first defendant will be entitled to make another adjudication application under the Act. That is not a matter for me to determine today.