Supreme Court
New South Wales
Case Title: State Water Corporation v Civil Team Engineering Pty Ltd
Medium Neutral Citation: [2013] NSWSC 1879
Hearing Date(s): 25 and 26 November, further written submissions on 27, 28 and 29 November 2013
Decision Date: 16 December 2013
Jurisdiction: Equity Division
Before: Sackar J
Decision: See paragraphs [131]-[132]
Catchwords: BUILDING AND CONSTRUCTION - Building and Construction Industry Security of Payment Act 1999 - whether adjudicator failed to accord natural justice - whether adjudicator failed to exercise powers in good faith - whether adjudicator committed jurisdictional error.
Legislation Cited: Building and Construction Industry Security of Payment Act 1999
Supreme Court Act 1970
Cases Cited: Bauen Constructions v Westwood Interiors [2010] NSWSC 1359
Blair v Curran [1939] HCA 23; (1939) 62 CLR 464
Broad Construction Services (NSW) Pty Ltd v Vadasz t/as Australasian Piling Co [2008] NSWSC 1057; (2008) 73 NSWLR 149
Chase Oyster Bar Pty Ltd v Hamo Industries Pty Ltd [2010] NSWCA 190; (2010) 78 NSWLR 393
Codelfa Construction Pty Ltd v State Rail Authority of NSW [1982] HCA 24; (1982) 149 CLR 337
Coordinated Construction Co Pty Ltd v Climatech (Canberra) Pty Ltd and Ors [2005] NSWCA 229
Clyde Bergemann v Varley Power [2011] NSWSC 1039
Downer Construction (Australia) Pty Ltd v Energy Australia [2007] NSWCA 49; (2007) 69 NSWLR 72
Dualcorp Pty Ltd v Remo Constructions Pty Ltd [2009] NSWCA 69; (2009) 74 NSWLR 190
Halkat Electrical Contractors Pty Ltd v Holmwood Holdings Pty Ltd [2007] NSWCA 32
Immigration and Ethnic Affairs, Minister for v Wu Shan Liang [1996] HCA 6; (1996) 185 CLR 259
John Holland Pty Ltd v Cardno MBK (NSW) Pty Limited & Ors [2004] NSWSC 258
John Holland Pty Ltd v Roads and Traffic Authority of New South Wales [2007] NSWCA 19; (2007) 23 BCL 205
John Holland Pty Ltd v TAC Pacific Pty Ltd [2009] QSC 205; [2010] 1 Qd R 302
Laing O'Rourke Australia Construction v Handm Engineering and Construction [2010] NSWSC 818
Leighton v Arogen [2012] NSWSC 1323
Maxstra NSW Pty Ltd v Blacklabel Services Pty Ltd [2013] NSWSC 406
Minister for Commerce v Contrax Plumbing (NSW) Pty Ltd [2005] NSWCA 142
Multiplex Constructions Pty Ltd v Luikens [2003] NSWSC 1140
Parkview Constructions Pty Ltd v Sydney Civil Excavations Pty Ltd and Anor [2009] NSWSC 61
Re Refugee Review Tribunal; Ex parte Aala [2000] HCA 57, (2000) 204 CLR 82
Shell Refining (Australia) Pty Ltd v AJ Mayr Engineering Pty Ltd [2006] NSWSC 94
Timwin Construction v Facade Innovations (2005) 21 BCL 383; [2005] NSWSC 548
Trysams Pty Limited v Club Constructions (NSW) Pty Ltd [2008] NSWSC 399
Victims Compensation Fund Corporation v District Court of New South Wales & Ors [2001] NSWCA 241
Watpac Construction (NSW) Pty Ltd v Austin Corp Pty Ltd [2010] NSWSC 168
Texts Cited: -
Category: Principal judgment
Parties: State Water Corporation (Plaintiff and First Cross- Defendant)
Civil Team Engineering Pty Ltd (First Defendant and Cross-Claimant)
Jonathan Sive (Second Defendant)
RICS Australasia Pty Ltd trading as RICS Dispute
Resolution Service (Second Cross-Defendant)
Thomas Wilson (Third Cross-Defendant)
Representation
- Counsel: Counsel:
M Christie SC and V Culkoff (Plaintiff and First Cross-Defendant)
M Rudge SC and F Hicks (First Defendant and Cross-Claimant)
- Solicitors: Solicitors:
Baker & McKenzie (Plaintiff and First Cross- Defendant)
Holding Redlich (First Defendant and Cross- Claimant)
File Number(s): 2013/239686
JUDGMENT
Proceedings
1 By its summons filed on 7 August 2013, State Water Corporation, the plaintiff in these proceedings ( State Water ), seeks that an adjudication determination (numbered RICS-051 and dated 30 July 2013) made by Jonathan Sive, the second defendant in these proceedings ( Mr Sive ), be quashed or alternatively declared void, or alternatively that an injunction be issued preventing the first defendant, Civil Team Engineering Pty Ltd ( Civil Team ), from enforcing it, on the bases that Mr Sive:
(1) failed to accord natural justice to State Water;
(2) did not attempt in good faith to exercise the powers conferred upon him by the Building and Construction Industry Security of Payment Act 1999 ( the Act );
(3) in contravention of s 22(2)(b) of the Act, failed to consider the terms of the relevant contract between the parties;
(4) failed to carry out the task that the Act requires to be carried out, and therefore failed to exercise the jurisdiction given to him by the Act.
2 State Water also submits that a previous adjudication determination, dated 8 April 2013 involving the same parties and the same contract, relevantly gave rise to an issue estoppel.
3 Civil Team opposes the relief sought in State Water's summons, and filed a cross-claim on 23 August 2013, against State Water and others, contending that the earlier determination is void and should be quashed, on the bases that the adjudicator in the earlier determination, Thomas Wilson, the third cross-defendant ( Mr Wilson ):
(1) committed jurisdictional error; and
(2) failed to afford Civil Team natural justice.
4 The first adjudication was not the subject of challenge until State Water challenged the second adjudication determination. This has some significance on the issue of discretion, which I will deal with later. The conduct of Civil Team, in challenging the first adjudication determination, can fairly be seen as reactive to State Water's challenge to the second adjudication. Both challenges were heard concurrently before me. The factual background, giving rise to the adjudication determinations and these proceedings, can be briefly stated.
Factual background
5 Fish undertake migrations for a number of reasons including to spawn, feed and seek refuge. These migrations are also essential to ensure the dispersal of species and maintain genetic fitness within fish communities.
Artificially constructed barriers, such as dams or weirs, hinder the ability of fish to migrate. Fishways, (also known as fish ladders or fish passes), are structures placed on or around constructed barriers to facilitate the natural migration of fish. There are many types of fishways. Most enable fish to pass around the barriers by swimming and leaping up a series of relatively low steps into the waters on the other side. The velocity of the water falling over the steps must be great enough to attract the fish to the ladder, but it cannot be so great that it washes fish back downstream or exhausts them to the point that they are unable to continue their journey upriver.
6 On or about March 2010, State Water and Civil Team entered into a contract (the contract ) for the construction by Civil Team of a fishway at Stevens Weir and Yallakool Weir in Deniliquin, New South Wales. The contract sum was $4,448,963 (including GST), with an original date of completion of 4 November 2010.
7 On or about 4 October 2010, State Water varied the contract by instructing Civil Team to carry out additional work for the value of approximately $3,380,000. By agreement, the date of practical completion was extended to 24 June 2011.
8 Throughout the course of the project, Civil Team suffered extensive delays in the works schedule during the works, due to flooding affecting the site. Certain disputes arose between the parties as a result of which claims were made by Civil Team against State Water for monies said to be due under the contract. Each claim was made pursuant to the Act.
9 As stated in s 3 of the Act and summarised by McDougall J in Chase Oyster Bar Pty Ltd v Hamo Industries Pty Ltd [2010] NSWCA 190; (2010) 78 NSWLR 393 (at [110]), the principal object of the Act is to ensure that those who undertake construction work pursuant to construction contracts, have enforceable rights to progress payments, regardless of the provisions in the construction contract (s 3(1) and (2)). Broadly, the recovery procedure involves, first, the service of a payment claim by the person seeking payment on the person allegedly liable to pay the progress claim (ss 3(3)(a) and 13); secondly, the provision by the person served with the payment claim of a payment schedule to the person seeking payment (ss 3(3)(b) and 14); thirdly, the referral of any disputed claim to an adjudicator for determination (ss 3(3)(c) and Part 3, Division 2); and finally the payment of the progress claim so determined (s 3(3)(d)). The decision of an adjudicator is subject to the supervisory jurisdiction of the Supreme Court ( Chase Oyster Bar Pty Ltd v Hamo Industries Pty Ltd ). The Act specifies clearly the matters that an adjudicator must consider when arriving at his determination (s 22(2)).
10 The strict timeframes imposed by the Act, and the complexity of some of the cases, means adjudicators are often required to make their determinations in an intense, "pressure cooker environment", and therefore considerable latitude should, in my view, be afforded to an adjudicator as to the manner and form of the determination ( Shell Refining (Australia) Pty Ltd v AJ Mayr Engineering Pty Ltd [2006] NSWSC 94 at [25] and [26] per Bergin J, as her Honour then was).
The first adjudication
11 On or about 18 February 2013, Civil Team served a payment claim under s 13 of the Act on State Water in the amount of $5,231,245.97 (including GST). In a letter also dated 18 February 2013 sent to State Water, Civil Team stated that, due to flooding preventing access to, or performance of works, on the site, State Water had directed Civil Team, in early to mid-September 2012, to demobilise and remobilise at a later time to be directed, and that under the relevant terms of the contract, Civil Team is entitled to be paid all costs, expenses and losses suffered as a result of the delays.
12 On or about 20 February 2013, State Water responded to Civil Team's payment claim by sending a letter to Civil Team in the following terms:
In accordance with Clause 42.4 in the General Conditions of Contract, I have assessed the Contractor's Payment Claim No. 27 dated and received on 18 February 2013 and I am proposing the Principal to pay $4,528.42 (GST Inc) to the Contractor.
The amount is less than the amount claimed by the Contractor in the Contractor's payment claim up to and including 8 November 2012 as per attached revised spreadsheet. Issue No. 60 has been rejected, Issue 49 Pt 1 has been paid to the agreed amount of $23,232.25, Issue 87. Pt 1 has been paid to the agreed amount of $156,334.87, Issue 95 has been rejected and Issues Nos 117 & 118 are still being assessed.
13 By an email the following day, State Water confirmed to Civil Team that the letter of 20 February 2013 was State Water's payment schedule for the purposes of the Act.
14 However, on 22 February 2013, State Water sent two further letters to Civil Team. One letter stated:
In accordance with Clause 42.4 in the General Conditions of Contract, I have assessed the Contractor's Payment Claim No. 27 dated and received on 18 February 2013 and I am proposing the Principal to pay $0.00 (GST Inc) to the Contractor.
The amount is less than the amount claimed by the Contractor in the Contractor's payment claim up to and including 8 November 2012 as per attached revised spreadsheet. Issue No. 60 has been rejected, Issue 49 Pt 1 has been paid to the agreed amount of $23,232.25, Issue 87. Pt 1 has been paid to the agreed amount of $156,334.87, Issues 95, 117 & 118 have been rejected.
15 The other letter stated:
Further to the payment schedule issued on 20 February 2013, and in accordance with Clause 42.4 in the General Conditions of Contract, I have assessed the Contractor's Claim on Issues 117 and 118 in Payment Claim No. 27 dated and received on 18 February 2013 and I am proposing the Principal to pay $0.00 (GST Inc) to the Contractor.
The amount is less than the amount claimed by the Contractor for issues 117 and 118 in the Contractor's payment claim up to and including 31 January 2013 as per attached revised spreadsheet.
The Claim is rejected as it is based on the premise that a flood is a latent condition, which is specifically excluded under Clause 12.1.
This letter and the payment schedule issued on 20 February 2013 together represent a payment schedule in response to Progress Claim No. 27, issued under the Building and Construction Industry Security of Payment Act 1999.
16 On 6 March 2013, Civil Team (in accordance with s 17(1)(a)(i) of the Act) lodged an adjudication application with the second cross-defendant, RICS Australasia Pty Ltd ( RICS ), being an authorised nominating authority under the Act (in accordance with s 17(3)).
17 On or about 7 March 2013, RICS referred Civil Team's adjudication application to an adjudicator, Mr Wilson (as required under s 17(6)).
18 On 11 March 2013, Mr Wilson notified Civil Team of his acceptance of its adjudication application (as permitted under s 19).
19 On 15 March 2013, State Water lodged its adjudication response with Mr Wilson (as permitted under s 20).
20 On 22 March 2013, Civil Team sent a two-page letter to Mr Wilson (and a copy to State Water), complaining that State Water's adjudication response, lodged on 15 March 2013, was in breach of s 20(2B) of the Act, on the basis that State Water identified in its adjudication response a number of reasons for withholding payment which had not been included in its payment schedule previously provided to Civil Team. Civil Team identified those "new" reasons (by reference to particular paragraph numbers in State Water's adjudication response) and asked Mr Wilson to either ignore the additional reasons proffered by State Water for withholding payment or request from Civil Team further submissions in response (pursuant to s 21(4)). Section 20(2B) provides:
The respondent [State Water] 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 [Civil Team].
[Own interpolation in square brackets]
21 On the same day, 22 March 2013, State Water wrote to Mr Wilson, stating that Civil Team's letter of 22 March 2013 should be ignored, as neither party was entitled to make further submissions under the Act unless requested by the adjudicator, and that Mr Wilson should make a determination based on the submissions duly made by the parties under the Act.
22 On 25 March 2013, Mr Wilson sent to Civil Team and State Water a request for further submissions. As it is not entirely clear to me what Mr Wilson was requesting, it is best to quote the parts of that request which I consider to be important:
A submission is requested from the parties on the applicable submission should the letter of 20 February be accepted as the payment schedule.
If it is found that the letter from the respondent [State Water] of 20 February which gives reasons for withholding payment against items 117 and 118 as " issues No 117 and 118 are still being assessed " is the payment schedule under the Act then the adjudicator requests the parties submissions on what, should be reasonably understood by this reason and what, if any, submissions have been duly made.
...
From the correspondence claims 118 and 118 were provided with the payment claim on 18 February 2013, the respondent [State Water] issued letters in response on 20 and 22 February. The payment schedule was not due until 4 March.
The adjudicator is cognisant of the need to ensure that natural justice is provided to both parties and is requesting a response on the following if the letter of 20 February is accepted as the payment schedule:
1. What, given the history of the claim, would be reasonably understood given the reason "issues No 117 and 118 are still being assessed" for withholding payment. Based on the foregoing what submissions, if any, would reasonably be expected.
23 Accordingly, on 26 March 2013, Civil Team served on Mr Wilson (and State Water) submissions in response to Mr Wilson's request, in which it included the following paragraph:
The Respondent [State Water] in its adjudication response maintains that the payment schedule served on the 20th February 2013 was not valid and that the only one valid was that served on the 22nd February 2013. If this is to be the schedule accepted by the Adjudicator then the claimant [Civil Team] reminds the adjudicator that the adjudication response included reasons for not paying that were not included in either payment schedule, which pursuant to s 20(2B) of the Act cannot be considered.
24 The following day, on 27 March 2013, State Water served on Mr Wilson (and Civil Team) its submissions in response to Mr Wilson's request of 25 March 2013. Relevantly, it included the following introductory paragraph under the heading "Preliminary Issues":
1.1 The Claimant [Civil Team] sent an unsolicited undated letter to the Adjudicator on 22 March 2013. The Adjudicator has not made specific reference to the issues raised in that letter, but has instead requested submissions on the specific issue referred to in Section 2 of these submissions below. As the Adjudicator has not responded to the issues raised in the Claimant's [Civil Team's] undated letter received 22 March 2013, the Respondent [State Water] has assumed that the Adjudicator has disregarded the content of that letter and has likewise not sought to address those issues, in light of the absence of any entitlement for either party to make further submissions other than on issues specifically requested by the Adjudicator in accordance with s 21(4) of the Building and Construction Industry Security of Payment Act 1999
...
1.2 If the Respondent's assumption stated above is incorrect the Respondent requests the Adjudicator to alert the parties to this position and to allow the Respondent to make further submissions in response.
25 On 28 March 2013, Mr Wilson requested submissions from State Water and Civil Team (pursuant to s 21(4)(a) of the Act):
(1) about the interpretation of clause 12.1(a) of the contract;
(2) identifying whether, and if so explaining the basis on which, previous latent conditions claims were accepted and paid, and whether that has an effect on the interpretation of clause 12.1(a) of the contract; and
(3) clarifying the period and number of days of delay being claimed in the adjudication application.
26 Mr Wilson's request was prefaced by the following "Preliminary Matters":
The adjudicator:
1. Confirms he is in receipt of the unsolicited submission made by the claimant on 22 March and will not require any submissions in response.
2. Further submissions on the Request for Submissions dated 25 March 2013 are not requested or required.
27 Mr Wilson requested that the parties provide their submissions by 5pm, 2 April 2013, and advised that the parties may provide any submissions in reply by 5pm on 3 April 2013.
28 On 3 April 2013, State Water served on Mr Wilson and Civil Team submissions responding to Mr Wilson's request of 28 March 2013. They again commenced with "Preliminary Issues":
1.1 The Respondent [State Water] notes that it is not required to produce submissions in relation to the unsolicited submission made by the Claimant on 22 March 2013.
1.2 The Respondent [State Water] also notes that it is not required to make further submissions in relation to Request for Submissions dated 25 March 2013.
29 Also on 3 April 2013, Civil Team sent to Mr Wilson and State Water its own submissions responding to Mr Wilson's request of 28 March 2013.
30 On 4 April 2013, State Water served on Mr Wilson and Civil Team submissions in response to Civil Team's submissions of 3 April 2013. Later that day, Civil Team sent an email to Mr Wilson and State Water advising that it did not agree with State Water's submissions, but would not be commenting further.
31 On 8 April 2013, Mr Wilson issued an adjudication determination, awarding an amount of $4,528.42 to Civil Team, rather than the amount it sought of $5,028,436.65.
32 Civil Team submits that, since Mr Wilson, in the course of his reasons, determined that State Water's payment schedule, for the purpose of s 14 of the Act, was that which was sent to Civil Team on 20 February 2013, he should not, in arriving at his determination, have given consideration to State Water's reasons for non-payment which appeared for the first time in submissions and not in its payment schedule of 20 February 2013 (ss 20(2B) and 22(2)(d) of the Act). Civil Team therefore contends that, by taking into account a number of reasons advanced by State Water for non-payment which were not included in State Water's payment schedule, Mr Wilson denied natural justice to Civil Team. Civil Team also contends that, by arriving at a number of conclusions which were not advanced by either party (and without providing notification prior to arriving at such conclusions), Mr Wilson denied natural justice to Civil Team. Finally, Civil Team contends Mr Wilson misapprehended the nature of or limits on his functions and powers conferred by the Act.
The second adjudication
33 On 18 June 2013, Civil Team served by email a payment claim on State Water under the Act for a total amount of $6,333,553.76 (including GST) together with an accompanying spreadsheet providing a breakdown of that amount into its components. I note however that the payment claim, and the spreadsheet attached to it, shows a claimed amount of only $5,890,001.36 (due to an arithmetical error in arriving at the total amount of the payment claim).
34 In relation to one particular component of the claim (which appears on the last line of the spreadsheet), named "Variation 1 additional costs", Civil Team provided a letter, dated 18 June 2013, explaining the background to and contractual basis of that particular component. In that explanatory letter, Civil Team alleges that, in correspondence during April and May 2010, State Water instructed Civil Team to obtain insurance for the works (with cover up to $5 million), and that the procurement of such insurance would be treated as a variation to the contract pursuant to clause 40 of the contract. Civil Team then said that State Water subsequently reimbursed Civil Team for the cost of that insurance, but it submits that Civil Team is also entitled to recover any further costs incurred by it under the insurance policy. In particular, Civil Team said that such costs include additional costs incurred by Civil Team as a result of damage caused by flooding, in excess of the costs recovered by Civil Team under the insurance policy. That amount was alleged to be $443,552.40 (inclusive of GST). The apparent basis for this claim is that this sum represented the costs or loss incurred above and beyond what was covered under the insurance policy referred to in Civil Team's letter dated 18 June 2013 to State Water.
35 On 1 July 2013, State Water responded with a payment schedule (pursuant to s 14 of the Act), noting that the payment claim was $5,890,001.36 (including GST) but that State Water is proposing to pay only $173,830.45. State Water also noted that, in arriving at the total amount for its payment claim, Civil Team apparently made an arithmetical error, and failed to include the item of $443,552.40 (which appeared in the spreadsheet that Civil Team provided with its payment claim on 18 June 2013).
36 On 17 July 2013, Civil Team served on State Water an adjudication application (dated 15 July 2013).
37 On 19 July 2013, RICS notified the parties that it had appointed Mr Sive as adjudicator.
38 On 24 July 2013, State Water lodged its adjudication response.
39 On 31 July 2013, Mr Sive issued an adjudication determination awarding Civil Team the amount of $443,552.20 (including GST).
40 State Water contends that an injunction should be issued preventing Civil Team from enforcing Mr Sive's determination, on the basis that a necessary step in Mr Sive's reasoning involved arriving at a conclusion as to the construction of clause 12 of the contract which directly contradicted a previous finding in Mr Wilson's determination, giving rise to an issue estoppel. State Water further contends that, when interpreting clause 12 of the contract, Mr Sive failed to consider the meaning of the clause in the manner required by the Act, as he failed to give intellectual justification, failed to disclose a process of consideration or reasoning or failed to engage with the submissions, and therefore did not in good faith satisfy the requirements imposed by s 22(2) of the Act. State Water further contends that, in breach of procedural fairness, Mr Sive, without giving notice, reached a conclusion in respect of the interpretation of clause 16.2 of the contract which was not advanced by either party. State Water also contends that two of Mr Sive's conclusions, namely, that State Water "elected to go bare and deliberately declined to purchase [the relevant] insurance", and that State Water's direction to Civil Team to purchase insurance arose from the problems suffered by Civil Team, were not advanced by either party and were therefore arrived at in breach of procedural fairness. Accordingly, State Water seeks either a declaration that Mr Sive's adjudication determination is void and further (or in the alternative) an order in the nature of certiorari pursuant to s 69 of the Supreme Court Act 1970 quashing the said purported adjudication determination.
Discussion and principles
The first adjudication determination
41 Civil Team challenges the first adjudication on the alleged basis that, in arriving at his determination, Mr Wilson, contrary to s 20(2B), took into account a number of submissions for non-payment advanced by State Water in its adjudication response, which were not included in its payment schedule. Civil Team identified those impermissibly considered submissions as including submissions as to:
• the relevance of the parol evidence rule to the construction of the contract (at [79] of Mr Wilson's adjudication determination);
• the effect of Codelfa Construction Pty Ltd v State Rail Authority of NSW [1982] HCA 24; (1982) 149 CLR 337 on the permissible use of extrinsic evidence when construing the contract (at [104] of Mr Wilson's adjudication determination);
• the contractual allocation of responsibility for the design of a particular aspect of the project, namely the "cofferdam" (at [82] of Mr Wilson's adjudication determination).
42 It is apparent that these reasons, directly or indirectly, all relate to the proper construction of clause 12 of the contract. The result ultimately reached by Mr Wilson in his adjudication determination was based on his finding that clause 12, properly construed, did not allocate the risk of flooding to State Water.
43 State Water submitted, first, that s 20(2B) was not offended because the submissions which Mr Wilson took into consideration in his adjudication determination were made in response to specific requests (on 25 and 28 March 2013) by Mr Wilson under s 21(4)(a). Secondly, State Water submitted that it is for the adjudicator, not the court, to determine whether submissions have been "duly made", and that Mr Wilson found State Water's submissions to have been duly made (at [43]-[45] of Mr Wilson's adjudication determination), and therefore s 20(2B) was not offended, and therefore the adjudicator was free to take State Water's submissions into account. Thirdly, State Water submitted that even if the submission had not been "duly made", the adjudicator was still permitted to consider the submission provided it was relevant to issues arising under s 22(2)(a) or (b) or both.
44 In my view, State Water's first submission should not be accepted. The provision permitting an adjudicator to request further submissions from the parties (s 21(4)(a)) cannot simply be exercised by an adjudicator to transform a party's submissions which were not duly made (by reason of s 20(2B)) to submissions duly made and capable of being considered by the adjudicator. That would empower adjudicators to defeat the underlying purpose of s 20(2B). There is authority supporting this view ( John Holland Pty Ltd v Cardno MBK (NSW) Pty Limited & Ors [2004] NSWSC 258 at [26] per Einstein J).
45 Whether or not State Water's second submission should be accepted depends on the answers to two propositions; one of fact, and the other of law:
(1) did Mr Wilson find (or determine) that State Water's submissions were "duly made" (in the sense that they were not in violation of s 20(2B))?
(2) if Mr Wilson, incorrectly, found (or determined) that State Water's submissions were "duly made" (in the sense that they were not in violation of s 20(2B)), and took such submissions into account, is such a decision reviewable?
46 Mr Wilson found (at [43]) that State Water's adjudication response complied with s 20(1) of the Act (which specifies the time frame within which an adjudication response must be lodged), and (at [44]) with s 20(2) of the Act (which provides that the adjudication response must be in writing (s 20(2)(a)) and identify the adjudication application to which it relates (s 20(2)(b)), and may contain such submissions relevant to the response as the responded chooses to include (s 20(2)(c))). Finally, somewhat cryptically, Mr Wilson found (at [45]) that State Water's adjudication response was "valid". It is not entirely clear whether Mr Wilson intended by that word to convey that he did not consider State Water's submissions to violate s 20(2B). To my mind, the ambiguity of that word is highlighted by Mr Wilson's referral to specific sections of the Act at [43] and [44], but his failure to refer to any section of the Act in [45]. Nonetheless, I think the better view is that, whatever the adjudicator understood about the relationship between ss 20(2B) and 22(2)(d) and the requirements imposed by those provisions, he was stating that the submissions contained in State Water's adjudication response were capable of being considered, and in effect, compliant with s 20(2B) and "duly made" for the purpose of s 22(2)(d).
47 On the question of law, State Water submits that it is for the adjudicator, not the court, to determine whether submissions have been duly made, and therefore whether submissions comply with s 20(2B). For that proposition, State Water relies on numerous authorities.
48 In Coordinated Construction Co Pty Ltd v Climatech (Canberra) Pty Ltd and Ors [2005] NSWCA 229, Hodgson JA said (at [24]-[26]) indicated that it is for the adjudicator to determine whether submissions made by a claimant were within the parameters of the claimant's payment claim. Presumably, by analogy, it would also be for the adjudicator to determine whether submissions made by a respondent were within the parameters of the respondent's payment schedule. Basten JA, after referring to what Hodgson JA said at paragraphs [24] to [26], said (at [42]):
[44] ... However, it does not follow that the Court should set aside a determination in circumstances where, in its view, the claim does not satisfy those requirements, or the determination goes beyond the parameters of the claim, properly understood.
49 Perhaps the principal authority State Water relies on is John Holland Pty Ltd v Roads and Traffic Authority of New South Wales [2007] NSWCA 19; (2007) 23 BCL 205, where Hodgson JA (with whom Beazley JA agreed) said (at [63]):
[63] ... The legislature plainly entrusts to the adjudicator the role of determining whether submissions are or are not duly made, and thus of determining whether a submission contained in an adjudication response is one that should not be there because of the effect of s 20(2B)...
50 In the same case, Basten JA said that it was a "false premise" (at [71]):
[71] ... that the scope of the payment schedule and the identification of submissions "duly made" by the Respondent in support of the schedule are matters to be objectively determined by this Court. In my view they are not: they are matters to be determined by the adjudicator.
51 In Downer Construction (Australia) Pty Ltd v Energy Australia [2007] NSWCA 49; (2007) 69 NSWLR 72, Giles JA (with whom Santow and Tobias JJA agreed) said (at [86] and [88]):
[86] ... whether a submission had been "duly made" (s 22(2)) was said to be a matter for the adjudicator, whose error in that respect would not invalidate his determination. It was not a matter for objective determination by the Court...
...
[88] There is good reason for leaving determination of the scope and nature of the payment claim to the adjudicator, apart from the purpose of the Act earlier mentioned. The scope and nature of the payment claim will often be, and in the present case was, open to be elucidated and evaluated with the benefit of the adjudicator's specialised knowledge.
52 In Broad Construction Services (NSW) Pty Ltd v Vadasz t/as Australasian Piling Co [2008] NSWSC 1057; (2008) 73 NSWLR 149, McDougall J said (at [37]):
[37] ... it is a matter for the adjudicator to decide, in terms of s 22(2)(d), whether a submission has been "duly made" in support of a payment schedule. It is not a matter for the Court to determine on the basis of some objective test. Thus, unless that decision [i.e. John Holland Pty Ltd v Roads and Traffic Authority of New South Wales ] is to be regarded as incorrect or distinguishable, it governs the outcome of these proceedings.
[Own interpolation in square brackets]
53 In Chase Oyster Bar Pty Ltd v Hamo Industries Pty Ltd [2010] NSWCA 190; (2010) 78 NSWLR 393, McDougall J said at [220]:
[220] ... Whether or not a submission is "duly made" depends on an assessment of the issues raised by a payment claim and payment schedule, and a value judgment as to whether a particular submission falls within the ambit of the payment claim or payment schedule, properly understood. That is, specifically, the sort of matter where expert evaluation, and an understanding of the way in which the parties have dealt with each other, will be of assistance.
54 In Clyde Bergemann v Varley Power [2011] NSWSC 1039, McDougall J said (at [13]):
[13] ... In John Holland Pty Ltd v Roads and Traffic Authority of New South Wales (2007) 23 BCL 205, the Court of Appeal said, although in obiter dicta, that a decision as to whether or not a submission was "duly made" (which is the inquiry that precedes the application of s 20(2B)) fell within the province of the adjudicator to decide...
55 In the present case, it is obvious that State Water's submissions in its adjudication response included reasons for non-payment which were not, by any stretch of the imagination, included in its three-sentence payment schedule (see [14] above). To my understanding, an unqualified acceptance of State Water's submission would lead to the position that an adjudicator could, wittingly or unwittingly, insulate from review his or her acceptance and consideration of parties' submissions, by formulaically including in his or her adjudication determination a statement to the effect that the submissions were valid, or duly made, for the purpose of the relevant provisions in the Act. In other words, I understand State Water's submission to have the effect of placing the adjudicator's exercise of determining whether or not submissions were "duly made", completely beyond the court's review, provided the adjudicator says he or she turned his or her mind to the question of whether the submissions were duly made.
56 However, the true position, which I think emerges from a more fulsome reading of the authorities, is slightly different. In Coordinated Construction Co Pty Ltd v Climatech (Canberra) Pty Ltd and Ors [2005] NSWCA 229 itself, Basten JA appeared (at [43]) to agree with Hodgson JA that it was for the adjudicator to determine whether or not a claimant's submissions were within the parameters of the payment claim to which they relate (and by analogy whether a respondent's submissions were within the parameters of the payment schedule to which they relate), and also observed that it was for the adjudicator to determine whether or not the mandatory requirements in s 13(2) of the Act had been satisfied (at [44]- [46]), and that intervention by a court where it thinks that the mandatory requirements in s 13(2) have not been met "will only be justified if the legislature has imposed an objective requirement, rather than one which the adjudicator has power to determine" (at [44]). Nonetheless, his Honour was careful to add (at [47]) that:
[47] It does not follow that the formation of a relevant opinion by an adjudicator with respect to compliance with s 13(2) will in all circumstances be beyond review. The principle stated by Latham CJ in R v Connell; Ex parte Hetton Bellbird Collieries Ltd (1994) 69 CLR 407 at 432, as applied by Gummow J in Minister for Immigration and Multicultural Affairs v Eshetu (1999) 197 CLR 611 at [133], was to the following effect:
If the opinion which was in fact formed was reached by taking into account irrelevant considerations or by otherwise misconstruing the terms of the relevant legislation, then it must be held that the opinion required has not been formed. In that event the basis for the exercise of power is absent, just as if it were shown that the opinion was arbitrary, capricious, irrational or not bona fide.
Thus, as noted in Brodyn , an essential element in the formulation of such an opinion is that is must be undertaken in good faith, but that is not a sufficient condition of validity.
57 The same, in my view, may be said about the adjudicator's opinion with respect to whether, for the purpose of s 20(2B), a respondent's submissions come within the parameters of the respondent's payment schedule.
58 Also in that case, while Hodgson JA likewise expressed the position with some qualification. His Honour said (at [24]):
Generally however, in my opinion, it is for the adjudicator to determine if the basis of the claim is adequately set out in the payment claim, and if not, whether on this ground a relevant amount claim should be excluded from the amount of the progress payment determined under s 22(1).
[Own emphasis added]
59 Somewhat similarly, in Downer Construction (Australia) Pty Ltd v Energy Australia [2007] NSWCA 49; (2007) 69 NSWLR 72, Giles JA, after referring to John Holland Pty Ltd v Roads and Traffic Authority of New South Wales [2007] NSWCA 19; (2007) 23 BCL 205, said (at [87]):
[87] In my opinion, determination of the parameters of the payment claim is a matter for the adjudicator, and a reasonable but erroneous decision by the adjudicator does not invalidate the determination. In the present case, in determining the amount of the progress payment (if any) to be made it was for the adjudicator to decide whether the water ingress fell within latent conditions for the purpose of the contract, and the parameters of the payment claim in that respect. He did so. As to both, it could not be said that the adjudicator's decision was without foundation , and if the adjudicator addressed the matters and came to his decisions, even if other decisions could have been come to, he did what the Act required - he determined the adjudicated amount.
[Own emphasis added]
60 On my reading, his Honour was clearly suggesting that, while it is for the adjudicator to decide whether a claimant's case has been canvassed within its payment claim, if the adjudicator's decision in that regard is not "reasonable" or is "without foundation", the determination may be invalidated. The same would apply in relation to a payment schedule.
61 A statement to the same effect was made by Brereton J in Parkview Constructions Pty Ltd v Sydney Civil Excavations Pty Ltd and Anor [2009] NSWSC 61 (at [24]), albeit in relation to a payment claim rather than a payment schedule:
[24] ... determination of the parameters of the payment claim, and whether a submission has been "duly made" in relation to it, is a matter for the adjudicator, and a reasonable but erroneous decision in this respect by the adjudicator does not invalidate the determination.
[Own emphasis added]
62 A slightly different but nonetheless related question was considered in detail by McDougall J in Leighton v Arogen [2012] NSWSC 1323 (at [82]- [88]), and I therefore propose to quote his Honour in some length:
[82] In Parkview Constructions Pty Ltd v Sydney Civil Excavations Pty Ltd [2009] NSWSC 61, Brereton J said at [22] that it was established "that an applicant may not rely on, and an adjudicator may not consider, material that is included in an adjudication application which is outside the scope or ambit of the claim described in the payment claim". His Honour referred to the decision of Einstein J in John Holland Pty Ltd v Cardno MBK (NSW) Pty Ltd [2004] NSWSC 258 at [22]-[25]. Brereton J also referred to my decision in Minister for Commerce v Contrax Plumbing [2004] NSWSC 823 at [49], [50], [56] and [57]. I repeat what I said in the last two of those paragraphs, as explaining the reasoning of Einstein J in the earlier case:
[56] Section 20(2B) of the Act prevents a respondent from including in its adjudication response any reasons for withholding payment that were not included in the payment schedule provided to the claimant. There is no equivalent limitation, in the case of adjudication applications, in s 17 of the Act; and, as Einstein J held in John Holland at [21], no such limitation could be implied by any process of statutory construction.
[57] What Einstein J said in John Holland was that a claimant that did not provide sufficient details in its payment claim to enable the respondent to verify or reject (ie, assess) the claim could not include the missing details in its adjudication application. That was because, since the respondent was barred by s 20(2B) from replying to those details (ie, of responding in its adjudication response in a way that did deal with the merits of the claim) the result "may indeed be to abort any determination": at [23]. His Honour said, alternatively, that an adjudicator did not have power to consider materials supplied by a claimant in its adjudication application which went outside the materials provided in the payment: at [24]. Materials would go outside what had already been provided if they fell outside the ambit or scope of that earlier material.
[83] There is no doubt that, in general , the question of whether a submission has been "duly made" is one for the adjudicator to determine. See Giles JA in Downer Construction (Aust) Pty Ltd v Energy Australia (2007) 69 NSWLR 72 at [86]-[88]. (I note that Santow and Tobias JJA agreed with his Honour: and reference may be made as well to the cases cited by his Honour in the paragraphs in question.)
[84] Accepting that this is so, nonetheless, the consequence of an invalid application of s 20(2B), with the effect (as here) that the respondent is prevented from advancing reasons because the payment claim that is advanced in the adjudication application is different to the one that was advanced in the payment claim and answered in the payment schedule, is to deny the respondent natural justice.
[85] There is, in my view, another way of approaching the same question. Section 22 of the Act deals with the topic of the "adjudicator's determination". By subs (2), the adjudicator is commanded to "consider the following matters only": namely, the matters listed in paras (a)-(e). One of those matters (para (c)) is:
... 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 ...
[86] In this case, in my view, the submissions that were made by Arogen in the adjudication application, in support of the variations in question, could not be regarded as having been "duly made" in support of those aspects of its payment claim. That is because, on its fair and obvious reading, the payment claim referred to a basis of claim that was quite different to that advanced in the submissions. As I have said already, I have no doubt that the way in which this part of the adjudication application is framed reflects a clear appreciation by Arogen of the strength of Leighton's response to the claims, insofar as it relates to V03 from and after 10 February 2012, and V16, V19 and V21.
[87] Thus, in my view, the adjudicator failed to comply, to the extent indicated, with the mandatory requirements of s 22(2)(c). He failed to comply because he considered submissions that should not be regarded as "duly made ... in support of the claim". For that reason, he did not make his determination (in respect of the relevant variations) in accordance with a condition of, or within the limits of, the jurisdiction given by the Act.
[88] Further, and in any event, by approaching the matter in this way, the adjudicator denied natural justice to Leighton, because he permitted Arogen to advance its claim in a way that Leighton was not able to answer (on the adjudicator's application of s 20(2B)).
63 The same or similar considerations would apply to the relationship between payment schedules and submissions subsequently provided in adjudication responses. Once a payment claim and payment schedule have been exchanged, the claimant's decision of whether or not to take the further step of lodging an adjudication application will depend on its assessment of the respondent's reasons for non-payment as disclosed in its payment schedule. There are obvious and powerful policy considerations in ensuring that the respondent discloses all of its reasons for non-payment in its payment schedule. The difficulties a claimant would experience if faced with an adjudication response which raised reasons for non-payment which were not included in the payment schedule, are amplified by the fact that the Act does not grant to the claimant a right to reply to the respondent's adjudication response.
64 Some of those policy considerations were explained by Palmer J in Multiplex Constructions Pty Ltd v Luikens [2003] NSWSC 1140 (at [67]):
[67] ... The evident purpose of s 13(1) and (2), s 14(1), (2) and (3), and s 20(2B) is to require the parties to define clearly, expressly and as early as possible what are the issues in dispute between them; the issues so defined are the only issues which the parties are entitled to agitate in their dispute and they are the only issues which the adjudicator is entitled to determine under s 22. It would be entirely inimical to the quick and efficient adjudication of disputes which the scheme of the Act envisages if a respondent were able to reject a payment claim, serve a payment schedule which said nothing except that the claim was rejected, and then "ambush" the claimant by disclosing for the first time in its adjudication response that the reasons for the rejection were founded upon a certain construction of the contractual terms or upon a variety of calculations, valuations and assessments said to be made in accordance with the contractual terms but which the claimant has had no prior opportunity of checking or disputing. In my opinion, the express words of s 14(3) and s 20(2B) are designed to prevent this from happening.
65 To summarise, the general position is that it is for the adjudicator to determine whether submissions made by a respondent were "duly made" and in compliance with s 20(2B). However, that does not necessarily place the adjudicator's decision beyond review. If the adjudicator formed his or her opinion by taking into account irrelevant considerations, or by misconstruing the terms of the Act, or the adjudicator's opinion simply cannot be described as reasonable, or is without foundation, that may provide a basis for the intervention of the court.
66 Applying the principles to this case, there is, in my view, no basis whatsoever for the view that State Water's submissions were "duly made", as they clearly and obviously advanced reasons for non-payment which were not included in State Water's payment schedule. It is possible that the adjudicator did not actually turn his mind to the requirement, but simply, as a matter of practice, said that he did so.
67 State Water's third submission should, however, be accepted. When an adjudicator determines an application, he or she must consider, and may only consider, the matters listed in s 22(2) of the Act:
22 Adjudicator's determination
...
(2) In determining an adjudication application, the adjudicator is to consider the following matters only:
(a) the provisions of [the] 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, (e) the results of any inspection carried out by the adjudicator of any matter to which the claim relates.
68 As noted by Hodgson JA in John Holland Pty Ltd v Roads and Traffic Authority of New South Wales [2007] NSWCA 19; (2007) 23 BCL 205 (at [31], with whose reasons Beazley JA agreed, the limit in s 22(2)(d) to submissions "duly made" is intended to engage s 22(2B):
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.
69 A submission included in an adjudication response contrary to the requirements of s 20(2B) is not "duly made" within s 22(2)(d), and therefore that submission cannot be considered by the adjudicator under s 22(2)(d). Consistent with the purpose for which the Act was introduced, the aim of s 20(2B) is to avoid new submissions being introduced late in a process running on a strict and brief timetable ( John Holland Pty Ltd v RTA at [33]).
70 However, it must be remembered that the claimant's and respondent's submissions (duly made) are only two of a number of matters that the adjudicator is required to consider. Accordingly, an adjudicator should not ignore something of real relevance to issues arising under s 22(2)(a) or (b) (or both), simply because the matter was not raised in submissions duly made by the parties ( John Holland Pty Ltd v RTA at [47]-[48]). That applies even where the adjudicator only gained an awareness of those particular matters (i.e. of particular provisions of the relevant construction contract or the Act, as opposed to the facts and circumstances of the particular case) from having come into contact with submissions not duly made ( Minister for Commerce v Contrax Plumbing (NSW) Pty Ltd [2005] NSWCA 142 at [35] per Hodgson JA). But where that situation arises, the adjudicator must bear in mind the need to afford natural justice to the parties. To address that problem, the adjudicator may wish to call for further submissions (s21(4)(a)) or arrange a conference (s 21(4)(c)).
71 Accordingly, in my view, Mr Wilson's consideration of State Water's submissions on the interpretation of clause 12 of the contract, was permissible, pursuant to s 22(2)(b). As I have already noted, State Water's submissions were directed entirely, or almost entirely, to the proper construction of clause 12 of the contract. To the extent that State Water's submissions included submissions as to the facts and circumstances of the dispute, it not does appear that such submissions affected Mr Wilson's determination. Any consequential questions of natural justice arising from Mr Wilson's consideration of State Water's submissions as to the construction of clause 12, were addressed by Mr Wilson's specific invitation to the parties on 28 March 2013 to provide further submissions on the interpretation of clause 12 of the contract. Civil Team's challenge to Mr Wilson's determination therefore fails.
72 I note additionally, though strictly unnecessarily, that the remedy Civil Team seeks is discretionary. The delay in seeking to quash Mr Wilson's determination, the absence of an explanation for such delay, and, if I may say so, the obvious and overwhelming inference arising from the circumstances in which Civil Team's application is brought (namely that it is a forensic move to remove one of the grounds of State Water's attack on Mr Sive's adjudication determination), are factors which, taken together, would in any event have led to my refusal, as a matter of discretion, to quash Mr Wilson's adjudication determination ( Victims Compensation Fund Corporation v District Court of New South Wales & Ors [2001] NSWCA 241 at [9]-[10] per Heydon JA with whom Handley and Stein JJA agreed; Re Refugee Review Tribunal; Ex parte Aala [2000] HCA 57, (2000) 204 CLR 82 from [52] per Gaudron and Gummow JJ).
The second adjudication determination
Construction of clause 12 and issue estoppel
73 The first basis of State Water's challenge to Mr Sive's determination is that it depended on a construction of clause 12.1 of the contract inconsistent with the construction given to that clause in Mr Wilson's determination, and was therefore arrived at contrary to an issue estoppel arising from the earlier determination. State Water also submitted that if alternatively Mr Sive did not rely on clause 12 in arriving at his determination, it meant that he failed to have regard to the provisions of the construction contract (s 22(2)(b)), that such a failure amounted to a failure to act in good faith (in the relevant sense), and that his adjudication determination should therefore be set aside. In this context, "good faith" requires adjudicators to demonstrate "an effort to understand and deal with the issues", "[put] their minds to the comprehension and their wills to the discharge of their duty" ( Timwin Construction v Facade Innovations (2005) 21 BCL 383; [2005] NSWSC 548 at [38]-[40] per McDougall J) and undertake an "active process of intellectual engagement" ( Laing O'Rourke Australia Construction v Handm Engineering and Construction [2010] NSWSC 818 at [39] per McDougall J). Since State Water's two submissions are related, it is appropriate to deal with them together.
74 Clause 12.1 provides:
12 Latent Conditions
12.1 Definition
Latent Conditions are-
(a) physical conditions on the Site or its surroundings, including artificial things but excluding weather conditions or physical conditions which are a consequence of weather conditions at the Site, which differ materially from the physical conditions which should reasonably have been anticipated by the Contractor at the time of the Contractor's tender if the Contractor had
(i) examined all information made available in writing by the Principal to the Contractor for the purpose of tendering;
and
(ii) examined all information relevant to the risks, contingencies and other circumstances having an effect on the tender and obtainable by the making of reasonable enquiries; and
(iii) inspected the Site and its surroundings; and
(b) any other conditions which the Contract specifies to be Latent Conditions.
75 The italics and strike-out in the text are in original formatting, to show the agreed additions and deletions made by the parties to the standard form of contract.
76 Mr Wilson had previously held that clause 12 did not allocate the risks associated with flooding upon State Water, but rather that "physical conditions which are a consequence of weather conditions are excluded from the definition of Latent Conditions" (Mr Wilson's adjudication determination at [122]). However, Mr Sive (at [9(b)]) formed the contrary view that clause 12 "allocates the risk associated with the physical conditions complained of by [Civil Team] squarely upon [State Water]".
77 As a matter of fact, it is clear that these constructions are directly opposed to one another; and as a matter of law, the doctrine of issue estoppel can apply to adjudication determinations ( Dualcorp Pty Ltd v Remo Constructions Pty Ltd [2009] NSWCA 69; (2009) 74 NSWLR 190 at [68] per Macfarlan JA with whom Handley AJA agreed). However, an issue estoppel will only arise from a previously decided issue of fact or law if that decided issue was a necessary component of the reasoning process leading to the conclusion reached ( Blair v Curran [1939] HCA 23; (1939) 62 CLR 464).
78 Clearly, Mr Wilson's interpretation of clause 12 was necessary for, and indeed conclusive in relation to, the outcome of his adjudication determination. But to determine whether Mr Sive's admittedly contrary interpretation of clause 12 played any role in the process leading to the outcome of his adjudication determination, it is necessary to examine the reasoning process in Mr Sive's adjudication determination and the background material relevant to it, including Civil Team's payment claim, State Water's payment schedule, Civil Team's adjudication application and State Water's adjudication response.
79 Civil Team raised a number of issues in its payment claim of 18 June 2013. The claim totalled $6,333,553.76 including GST (though the payment claim only shows an amount of $5,890,001.36, due to an arithmetical error in arriving at the total amount of the payment claim). State Water alleged, and Civil Team accepted, that some of those issues were dealt with in Mr Wilson's earlier determination. Civil Team therefore ultimately only pressed one issue, described as "Issue 1 - Variation Costs for Contract Insurance" ( Issue 1 ), in its adjudication application.
80 Civil Team provided, with its payment claim of 18 June 2013, a letter addressed to State Water explaining the basis of the Issue 1 claim:
1 BACKGROUND
On 23 April 2010, CTE [i.e. Civil Team] notified the Superintendents Rep and the Principal [i.e. State Water] that the contract works insurance were to be provided by the Principal, however, CTE offered two options to the Principal which were;
a) The client [i.e. Civil Team] to procure the contract works insurance and provide CTE details of such insurance prior to commencement of works on the site; or
b) CTE to procure the contract works cover as a variation and valued under the provisions of Clause 40 of the General Conditions of Contract ( GCC ) and subject to markup.
On 25 May 2010, CTE received advice from the Superintendents Rep to obtain a quotation for the insurance of the works for the sum of $5 million and that this will be a variation to the contract.
On 31 May 2010 CTE then received an instruction to procure the works insurance pursuant to clause 40 of the GCC as variation.
2 CONTRACTUAL BASIS OF CLAIM
The Superintendents Rep instructed CTE to take out the above insurance cover and subsequently paid the value through a variation under clause 40 of the contract. Therefore, any further cost incurred by CTE under this insurance policy falls within the ambit of the variation and the cost, plus overhead and profit, is due to CTE from the Principal. There is no dispute that the works insurance was a variation to the contract and Superintendents Rep has valued and paid for all necessary extensions to the insurance as a result of the Latent condition caused delays.
3 VALUATION OF WORKS INSURANCE VARIATION
Pursuant to clause 40.2 of the GCC, CTE is claiming the additional costs incurred for the excess of all repair works carried out and claimed under the works insurance to date. Also claimed is the difference between the claimed amount for expediting and mitigation which has a maximum allowance of $50,000.
...
Accordingly CTE is claiming an amount of $329,166.91 plus markup of 22.5% giving a total of $403,229.46 excl GST.
81 State Water provided its payment schedule, on 1 July 2013, in which it proposed to pay only $173,830.45 (including GST), pointed out that the majority of the claim was the subject of the earlier adjudication determination by Mr Wilson, and provided the following reasons for non-payment of Issue 1:
Issue 1 - Insurance - Scheduled amount $nil
7.1 SWC notes that CTE appears to have made an error in its payment claim by failing to include the amount claimed for Issue 1 entitled - ' Variation 1 additional costs ' ($443,552.40) in the total sum being claimed. This is evident by the formula for the total sum in the Payment Claim. As the amount has not been included in the total amount indicated as ' the amount that the claimant claims to be due ' pursuant to section 13(2)(b) of the Building and Construction Industry Security of Payment Act SWC contends that it is not recoverable.
7.2 In addition to the jurisdictional argument above, SWC contends that it requires CTE to provide proof of insurance for the periods being claimed as well as proof of payment for the relevant insurance policies. Furthermore, in accordance with clause 21.4 of the Contract, SWC request to see any insurance payments received from an insurer. SWC requests that CTE provides this documentation to assist with verifying its claim. Therefore in absence [sic] of such information being provided SWC certifies the amount payable in respect of this issue as $nil.
82 In its adjudication application dated 15 July 2013, Civil Team clarified that the only issue it disputed was Issue 1, for which it sought $443,552.40 (including GST), and then addressed each reason for non-payment advanced by State Water in relation to Issue 1 in paragraphs [7.1] and [7.2] of State Water's payment schedule.
83 Essentially, Civil Teal argued, in response to the reasons for non-payment in State Water's paragraph [7.1], that the mistaken arithmetical omission of Issue 1 from the grand total figure in its payment claim was irrelevant, because Issue 1 was nonetheless clearly indicated in the spreadsheet provided with Civil Team's payment claim, and all that is required by the statutory language is that the claimed amount be "indicated" (s 13(2)(b)) but not necessarily stated .
84 In response to the reasons for non-payment in paragraph [7.2] of State Water's payment schedule, Civil Team submitted that it had already supplied a copy of the relevant insurance policy to State Water after the variation in 2010 (but in any event it re-attached a copy of the policy to its submissions), and that it was not obliged to provide proof of payment of insurance premiums to State Water (but again that in any event the conduct of Civil Water and the insurer unequivocally demonstrated that there was insurance in place and that the premiums were being paid).
85 Civil Team based its entitlement to the Issue 1 claim on a variation effected pursuant to clause 40 of the contract. I understand Civil Team's reasoning to be as follows. On 25 May 2010, State Water advised Civil Team to obtain a quotation for insurance of the works for the sum of $5 million, that this would be treated as a variation under clause 40 of the contract, and that State Water would pay the cost of obtaining such insurance. The insurance policy obtained by Civil Team, and approved by State Water on 31 May 2010, specified maximum amounts recoverable in respect of particular heads of loss, arising from any one indemnifiable event. The policy responded to losses, which resulted from flooding over a period of some years, but did not cover the entirety of the quantum of the loss. The amount claimed by Civil Team in its Issue 1 claim represents that uncovered loss. Civil Team submitted that, had State Water valued the works reasonably and fairly, as it was allegedly obliged to do, State Water could have, but failed to, either instruct Civil Team to obtain a type of policy affording sufficient cover in the light of the value of the works, or advise Civil Team of the inadequacy of cover, to enable Civil Team to obtain its own policy to respond to any shortfall.
86 In its adjudication application, Civil Team also submitted that the contract obliged State Water to insure the works. I should note at this point that in my view, the contract contained no clause to that effect, nor could counsel for Civil Team point to any clause to that effect. It would appear that, when amending the standard form of contract, the parties deleted clause 18 (or the part of it) which would otherwise have required State Water to insure the works.
87 State Water provided its adjudication response on 24 July 2013. Among other things, State Water repeated its argument as to the significance of the arithmetical error I have already referred to (at [6.3]-[6.6] of State Water's adjudication response), challenged Civil Team's characterisation of the claim as one for a variation (at [1.1]), asserted (correctly in my view) that the contract did not impose on State Water an obligation to insure the works (at [1.2]), and submitted that the procurement by Civil Team, at the request and expense of State Water, of insurance for the works, pursuant to a variation of the contract under clause 40, entitled Civil Team to claim from State Water the costs of the insurance, but not shortfalls in cover (at [6.21]-[6.29]). State Water also submitted that Mr Sive was bound by the construction of clause 12 given by Mr Wilson in the previous determination between the parties which allocated the risk of loss from weather conditions to Civil Team, not State Water (at [6.7]-[6.12]) and that even more generally the contract allocated responsibility for the care of the work on Civil Team, not State Water (at [6.13]-[6.20]).
88 Mr Sive issued his adjudication determination on 30 July 2013. After dealing with some introductory matters (including his appointment, some background to the dispute, the material provided to him, and matters as to jurisdiction), he rejected a submission by State Water that Civil Team failed to include sufficient particulars in its payment claim, and he also confirmed that State Water's payment schedule complied with the requirements of the Act.
89 As I understand the adjudication determination, it appears that Mr Sive gave consideration to clause 12 of the contract, gave it an interpretation inconsistent with that given to it in Mr Wilson's previous determination, but ultimately considered it was unnecessary to rely on it, as Civil Team's claim could be decided on the basis of the alleged variation effected under clause 40 of the contract (at least as he understood it). It does appear however that Mr Sive's interpretation of clause 12, which impermissibly conflicted with that of Mr Wilson, affected his consideration of a jurisdictional issue (at [9(b)]), but not his determination of the substance of the claim (as I think appears when one carefully considers the structure of his determination). However, State Water does not challenge Mr Sive's decision with respect to the jurisdictional issue.
90 From the structure of the headings in Mr Sive's adjudication determination, which gives some insight into his thought process, it appears that Mr Sive's reasons for accepting Civil Team's position commence from paragraph [32], under the heading "Reason for Determination". Mr Sive recognised that "[t]he issue in dispute between the parties relates only to 'Issue 1 - Variation 1'", and identified the provisions in the contract dealing with insurance, and the provision in the contract permitting variations. Mr Sive considered that the effect of the agreed variation to the contract, by which Civil Team was required to procure insurance, at the expense of State Water, was that any loss in excess of the amount covered by the insurance was to be borne by State Water, and that State Water's failure to procure further or better insurance to cover any excess losses should therefore be borne by State Water. Although clause 12 of the contract was drawn to Mr Sive's attention in State Water's submissions, and its meaning was considered in his adjudication determination (at [9(b)]), it appears, from Mr Sive's reasoning process, that his ultimate conclusion was reached purely on the basis of what he understood to be the effect of a variation to the contract pursuant to clause 40.
91 That appears from paragraph [36], where Mr Sive says (among other things):
[36] ... I am satisfied that the payment dispute between the parties is attributable to the conduct of the respondent in instructing the claimant to purchase "primary insurance" under a variation order and in electing to go bare with respect to the "excess" insurance which would have provided coverage after the primary insurance is no longer on the risk.
92 Although paragraph [36] commences with the words "[a]s discussed more fully and completely under the heading Jurisdictional Issue", and the earlier discussion there does refer to clause 12 of the contract, it still seems to me that the overwhelming factor driving the adjudicator's decision was his understanding of the effect of the variation under clause 40, independently of the meaning of clause 12. That view is fortified by paragraph [37], where Mr Sive identifies the provisions of the contract which he understands to be relevant to the dispute, and makes reference to clause 40 (among other clauses) but not to clause 12. Finally, that understanding of Mr Sive's reasons is consistent with the manner in which Civil Team presented its case (see [38]-[46] and [72]-[74] of Civil Team's adjudication application).
93 In my view, Mr Sive did bona fide , in accordance with the authorities, consider the meaning of clause 12 of the contract. Although he arrived at a construction of clause 12 which was possibly incorrect, and certainly inconsistent with Mr Wilson's previous adjudication determination, such a construction only influenced his decision with respect to a jurisdictional argument raised by State Water (which is not now challenged by State Water), but not his decision as to State Water's liability to meet any relevant shortfall in insurance coverage. Although the "theme" of the construction of clause 12 is perpetuated to some extent in his subsequent reasoning, it is not, in my view, a necessary component of his reasoning process. Mr Sive's ultimate decision rests on his understanding of the effect of the insurance variation made by the parties pursuant to clause 40 of the contract. The effect of the insurance variation necessarily raises facts and circumstances peculiar to the particular case, which were not referred to in State Water's payment schedule of 1 July 2013. State Water decided not to put forward in its payment schedule as a reason for non-payment that the insurance variation simply did not have the effect contended for by Civil Team. Rather, State Water relied on an arithmetical error (which Mr Sive rejected) and on other matters relating to proof of payment of premiums (which Mr Sive also rejected).
94 Accordingly, I do not accept State Water's contentions as to issue estoppel, or an alleged failure on the part of the adjudicator to act in good faith insofar as that allegation relates to clause 12.
Whether denial of natural justice
95 The second basis of State Water's challenge to Mr Sive's determination is that he arrived at three conclusions in breach of procedural fairness, namely:
(1) Mr Sive did not identify the "understandings" upon which he relied in reaching his conclusions in paragraph [10] (footnote 4) and neither party advanced Mr Sive's conclusion as to the "understandings reached by the parties";
(2) the conclusion at paragraphs [9(c)], [10] and [36] that State Water "went bare", deliberately declined to purchase insurance or was unable to obtain insurance, was not advanced by either party and Mr Sive did not notify State Water of his proposed conclusion; and
(3) the conclusion that the problems suffered by Civil Team were conditions that gave rise to State Water's direction to purchase insurance was not advanced by either party and Mr Sive did not notify State Water of his proposed conclusion.
96 There are many cases commenting on the content of natural justice in the context of the regime established by the Act. Generally, the extent of natural justice must accommodate the scheme of the Act including the compressed timetable in which the determination is to be undertaken ( Watpac Construction (NSW) Pty Ltd v Austin Corp Pty Ltd [2010] NSWSC 168 at [142] per McDougall J), and any denial of natural justice would need to be material before a court would intervene. When determining, in this context, whether there has been a breach of natural justice by an adjudicator, I would respectfully adopt the following observations made by Applegarth J in John Holland Pty Ltd v TAC Pacific Pty Ltd [2009] QSC 205; [2010] 1 Qd R 302 (at [40]) after his Honour reviewed the authorities in New South Wales:
[40] The adjective "substantial" has been used in the relevant authorities to capture the principle that the opportunity denied was material, namely that the matter about which the adjudicator did not provide an opportunity to be heard was a point upon which the adjudicator based his or her decision and was significant to the actual determination . In addition, the Court's concern is with the practical effect of the alleged denial of natural justice. Reference to the High Court's decisions in Stead v State Government Insurance Commission and Ex parte Aala supports the proposition that even if the Court is satisfied that there has been a denial of natural justice, relief may be denied if it can be shown that compliance with the requirements of natural justice could have made no difference to the outcome. It is probably sufficient in this regard for the applicant for relief to show that there were substantial submissions that, as a matter of reality and not mere speculation, might have persuaded the adjudicator to change his or her mind.
[Citations omitted, emphasis added]
97 McDougall J elucidated the principles in this manner in Trysams Pty Limited v Club Constructions (NSW) Pty Ltd [2008] NSWSC 399 (at [52]):
[52] ... the concept of materiality is inextricably interlinked with the concept of natural justice, insofar as the latter concept is relevant to the determinations of adjudicators under the Act. ... [T]he law is concerned with the practical effect of the alleged denial of an opportunity to be heard. Thus, the concept of materiality requires some analysis of at least:
(1) the importance or otherwise of the relevant subject matter (as to which, it is said, there was a denial of an opportunity to put submissions): in particular, its significance to the actual determination; and
(2) whether or not there were submissions that could properly have been put that, as a matter of reality and not mere speculation, might have affected the determination.
98 More recently, in Maxstra NSW Pty Ltd v Blacklabel Services Pty Ltd [2013] NSWSC 406, Rothman J said (at [79]):
[79] ... the approach of the Court should be not to apply an overzealous analysis to the determination of an adjudicator, but rather to take a practical approach, concentrating on the effect of the determination and the reasons of the adjudicator. There must, of course, be a bona fide attempt by the adjudicator to exercise the relevant power and no substantial denial of natural justice of the kind required by the Act. Otherwise, non-jurisdictional error of law would not ordinarily be a basis upon which orders would issue from this Court by way of judicial review. Such error would have to be determinative of the outcome.
99 I will turn then to each of the three matters in respect of which it is said natural justice was denied.
100 Clause 16.2 of the contract provides:
16.2 Reinstatement
If loss or damage (except loss or damage which is the direct consequence, without fault or omission on the part of the Contractor, of an Excepted Risk defined in Clause 16.3) occurs to anything while the Contractor is responsible for its care, the Contractor shall at the Contractor's own cost promptly make good the loss or damage.
101 Neither party contended that any of the exceptions referred to in clause 16.2 and defined in clause 16.3 applied, nor did Mr Sive conclude that any of the exceptions applied. Nonetheless, Mr Sive concluded that clause 16.2 did not prevent Civil Team from recovering the claimed amount (i.e. the shortfall in insurance coverage), and based his conclusion on "the understandings reached by the parties and the contract" (at [10], footnote 4, and the paragraphs of the parties' submissions referred to there).
102 State Water contends that Mr Sive's reliance on unidentified "understandings" which were not contended for by either party amounted to a denial of natural justice. Civil Team contends that the word "understandings" was simply a reference by Mr Sive to the insurance variation agreed between the parties, and that he identified those "understandings" in footnote four of the adjudication determination.
103 In my view, Civil Team's submission should be accepted. It does seem to me that, when read in context, the "understandings reached by the parties" must refer to the main subject matter of the dispute, namely the variation made by the parties under clause 40 of the contract, in relation to the insurance of the works and its effects. That matter (i.e. the insurance variation and its effect) was the principal aspect of Civil Team's payment claim and adjudication application. State Water had an opportunity to be heard on the matter (as it featured prominently in Civil Team's payment claim), but State Water decided not to do so in its payment schedule, and instead raised technical points (such as the arithmetical error and proof of payment of premiums) which Mr Sive rejected.
104 In its adjudication response however, State Water contended that the insurance variation made pursuant to clause 40 did not have the effect contended for by Civil Team. Clearly, the answer to whether or not the agreed insurance variation had the effect of imposing on State Water the obligation to meet any relevant shortfall in insurance coverage depended on matters outside of the contract, as it was a variation to the contract. The first time that State Water grappled with the "understandings reached by the parties" or concerned itself with specific facts and circumstances relevant to the case (i.e. precisely what the parties had agreed on when effecting the variation), was in its adjudication response.
105 I therefore am not satisfied that there was a denial of natural justice on this matter. The "understandings of the parties", or in other words the insurance variation pursuant to clause 40 and its effect on the parties' relationship, was clearly mentioned in Civil Team's payment claim and adjudication application. State Water had the opportunity, but decided not, to put forward in its payment schedule its own contrary understanding of the effect of the insurance variation.
106 I turn now to the second alleged denial of natural justice. On a fair reading of the adjudication determination, it appears that Mr Sive formed the view that State Water did not purchase further insurance (to cover the risk which was left uncovered by the policy obtained pursuant to the insurance variation), either deliberately, or because State Water was unable to do so, or for some other reason (see [9(c)], [10] and [36] together).
107 State Water contended that as Mr Sive's proposed conclusion was not advanced by, or notified to, either party, Mr Sive acted in breach of procedural fairness. Civil Team contended that it had in fact made submissions on this point and that, on the material before the adjudicator, it was open for him to draw that inference in any event.
108 In its adjudication application, Civil Team said (at [45]):
[45] It is common industry practice that when the Works Insurance is the responsibility of the Respondent under the Contract that the Claimant generally obtains its own policy to cover any excess costs on the Principle[sic]/Respondent's policy. In this instance, the Claimant would expect the Respondent to do likewise although, it appears from its valuation of the claim, it has not .
[Emphasis added]
109 As counsel for Civil Team submitted, there does indeed appear to be an (admittedly unclear) insinuation by Civil Team in its adjudication application that State Water failed to obtain insurance (or adequate insurance), resulting in a shortfall in cover. State Water's submission that Mr Sive reached a conclusion not contended for by either party is therefore not entirely accurate. Having regard to this paragraph in Civil Team's adjudication application, I would accept Civil Team's submission that, even if "going bare" was not put in the clearest of terms, it was certainly open for Mr Sive to make that inference.
110 Additionally, I do not think that the outcome of Mr Sive's determination rested on his finding that State Water elected to "go bare". To put it another way, Mr Sive's comment that State Water elected to "go bare" was not a part of the reasoning process that led to his ultimate conclusion; rather it was merely an expression of the consequence (deliberate or otherwise) somehow of the inadequate insurance variation effected under clause 40. That is, at least, how I understand Mr Sive's determination. Accordingly, I do not consider Mr Sive's finding that State Water elected to "go bare" amounted to a breach of procedural fairness.
111 I now turn to the third alleged denial of natural justice. After referring to paragraph [14] of Civil Team's adjudication application, Mr Sive formed the view that "the physical conditions on the site and the problems suffered by the claimant are the conditions that gave rise to the respondent's direction to purchase insurance the subject of this payment dispute" (at [9(c)]). State Water contended that, as this conclusion was not advanced by either party, and as Mr Sive did not notify State Water of his proposed conclusion, State Water was denied natural justice. Civil Team contends that, based on the material before the adjudicator, and the background to the dispute between the parties, it was open to Mr Sive to form the view that State Water directed Civil Team to purchase insurance in order to cover the risk of flooding.
112 Civil Team's adjudication application included the following information by way of factual background (at [9], [10], [12] and [14]):
[9] It is a matter of record that the Claimant encountered latent conditions consisting of piles and tree trunks during the execution of the works.
[10] During the period up to 4 October 2010, the Denilquin [sic] area and the works under the Contract in particular, suffered severe flooding.
[12] During the period up to 4 October 2012 to the time of this adjudication application, the Denilquin [sic] area and the works under the Contract in particular, suffered and continue to suffer the worst floods in recorded history.
[14] During the course of the Contract, the Claimant has suffered extensive delays due to physical conditions on the site (being water on the ground that makes it impossible to access work on the site). The Claimant has made a number of insurance claims as a result of these conditions under the Works policy.
113 Civil Team submitted that, having provided to the adjudicator this background to the dispute, including information that the site on which the construction work was carried out was flood-prone, it was open, and indeed natural, for the adjudicator to form the view that State Water directed Civil Team to purchase insurance due to State Water's recognition of the risk of unfavourable physical conditions on the site. However, Mr Sive appears to have understood Civil Team's submissions to mean that State Water directed Civil Team to procure insurance as a result of Civil Team experiencing unfavourable physical conditions on the site.
114 The significance of the difference between the two positions becomes apparent when one learns (which is uncontroversial, see T39.27) that State Water's direction to Civil Team to procure insurance was given before any work had even commenced on the site. It would follow that, literally speaking, State Water's direction to Civil Team to procure insurance could not possibly have been prompted by an actual experience of unfavourable physical conditions on the site, but only by an appreciation of the risk of such conditions.
115 In my view, the adjudicator should, despite his selection of words, be understood as having intended the latter. That view is supported by the adjudicator's subsequent statement that State Water (being the principal) "is presumed to be better informed concerning the site involved" (at [9(b)]). A comment made by Kirby J in Immigration and Ethnic Affairs, Minister for v Wu Shan Liang [1996] HCA 6; (1996) 185 CLR 259 (at 291, in a different context) was adopted by Rothman J in Maxstra NSW Pty Ltd v Blacklabel Services Pty Ltd (at [77]) as relevant to the approach to take when reviewing the decision of an adjudicator:
The reasons under challenge must be read as a whole. They must be considered fairly. It is erroneous to adopt a narrow approach, combing through the words of the decision-maker with a fine appellate tooth-comb, against the prospect that a verbal slip will be found warranting the inference of an error of law ... This admonition has particular application to the review of decisions which, by law, are committed to lay decision-makers...
116 In my view, the adjudicator should be understood as having meant that State Water's direction to Civil Team to procure insurance was prompted by an appreciation of the risk of unfavourable physical conditions on the site. I am aware that this construction of the adjudicator's statement departs from the literal meaning of the relevant words used in the adjudication, but I am satisfied that, when read in context of the balance of the determination and the facts given to the adjudicator, this is in fact what the adjudicator meant to convey. I am satisfied that this inference was, on the material made available to the adjudicator, capable of being appropriately drawn, and that the possibility that such an inference would be drawn was made sufficiently apparent from Civil Team's submissions in its adjudication application.
117 Furthermore, on one view, whether or not State Water directed Civil Team to procure insurance for the works as a result of the physical conditions on the site , is neither here nor there. Whatever the reason for which State Water gave the direction, the fact (as found by Mr Sive) is that such a direction was made pursuant to a clause 40 variation which had the effect of requiring State Water to meet any shortfall in insurance coverage. A variation is (by definition) clearly a matter outside the written terms of the contract. The effect of the variation is clearly dependant on what the parties agreed at the time of the variation, and is therefore very much a factual matter peculiar to the particular case. State Water did not address or even refer to the relevant facts and circumstances surrounding the variation in the reasons for non-payment included in its payment schedule.
118 Accordingly, I am not satisfied that the adjudicator arrived at a conclusion not advanced by either party. Furthermore, even if the adjudicator did make a finding not advanced by either party, I am not satisfied that the finding affected the ultimate outcome, or possessed a sufficient degree of materiality, to warrant the court's intervention.
Whether adjudicator acted in good faith
119 The final basis of State Water's challenge to Mr Sive's determination is that Mr Sive "did not attempt in good faith to exercise the powers conferred on him by the Act and failed to carry out the task that the Act requires to be carried out in the manner the Act requires it to be carried out, and thus failed to exercise the jurisdiction given to him by the Act." The essence of this challenge is that the adjudication determination is simply devoid of the reasoning process required by the Act. Civil Team disputes this and says the adjudicator explained why he preferred Civil Team's submissions over State Water's submissions, and that he identified the relevant clauses of the contract.
120 In determining what constitutes sufficient reasoning and what does not, there is clearly a tension between, on the one hand, meeting the aims of a regime designed to be extremely quick, cost-effective and driven by lay persons, and on the other hand providing an intellectually satisfactory explanation of the outcome for the parties, especially the losing party. In Bauen Constructions v Westwood Interiors [2010] NSWSC 1359, McDougall J said (at [40]):
[40] In this case, [the relevant paragraph] of the determination gives no intellectual justification for the decision that was made. It does not involve any process of consideration or reasoning; it is, in my view, an abdication of the obligation to reason. As Mr Christie of Senior Counsel (who appeared with Mr Shipway of counsel for Bauen) submitted, if [the relevant paragraph] were a sufficient statement of reasons, adjudicators could deal with applications very quickly and their determinations would be very short. Whilst ordinarily one should be wary of "floodgates" arguments, I think that there is substance in that submission. I repeat that it is not appropriate to expect the detail of reasoning from adjudicators that litigants rightly expect from judges of this court, from judges of equivalent courts, and from judges of intermediate and ultimate appellate courts. But the parties to an adjudication application are still entitled to see some intellectual process that leads to the conclusion, particularly where, in many cases, very substantial sums of money are involved.
121 In Chase Oyster Bar Pty Ltd v Hamo Industries Pty Ltd , McDougall J said (at [177]) that a decision based on illogical reasoning is treated as a failure to exercise jurisdiction.
122 As I have already observed (at [90]-[92] above), on my reading, Mr Sive's decision appears to be based on his understanding of the effect of a variation made under clause 40 of the contract.
123 However, while Mr Sive appears to have based his decision on the variation effected under clause 40, I cannot detect any logical explanation as to why or how the variation actually operates to require State Water to pay the shortfall in insurance coverage. For example, he does not state that something to that effect was agreed during communications between the parties leading up to the variation. Nor, for example, does he state that State Water represented to Civil Team that the insurance coverage procured pursuant to the variation was sufficient to cover all relevant losses, and that Civil Team relied on that representation to its detriment.
124 Indeed, State Water questioned in its adjudication response how the variation (for the procurement of insurance) could result in State Water assuming liability for shortfall in insurance coverage. It accepted that State Water was required under the variation to pay the costs of insurance (i.e. premiums or fees) plus a profit margin, but denied that the variation required State Water to meet shortfalls in indemnification:
[1.4] [State Water] submits that the initial procurement and subsequent renewal of the Contract Works insurance policy does not entitle [Civil Team] to also claim as Variations indemnification shortfall amounts as contended by [Civil Team] in its Adjudication Application.
...
[6.23] [Part of Civil Team's submissions] asserts a non-existent consequence or causative link between the initial instruction by [State Water] to obtain Contract Works insurance policy and 'any further cost' in the form of subsequent indemnification shortfall under that policy. There is no such consequence under the contract or in common law.
[6.24] ... There is no commercial logic to such an interpretation...
[6.27] [State Water] submits that the relevance of Clause 40 to claims in relation to Contract Works insurance starts and stops with the procurement of the relevant insurance policy and its subsequent renewal. [Civil Team] has, however, mischaracterised its claim in relation to incomplete indemnification under the Contract Works policy as variations under the Contract. [State Water] submits that [Civil Team] is not entitled to use the variation clause as a means to obtain the shortfall of any costs incurred in relation to the insurance policy it procured. [State Water] is unable to ascertain what contractual provisions or otherwise have entitled [Civil Team] to claim these shortfalls as a variation from [State Water].
...
[6.29] It is not, however, possible to characterise the shortfall in indemnification of [Civil Team] as a variation under the Contract. [Civil Team] cannot establish that the indemnification shortfall constituting the subject matter of the Adjudication falls within the scope of Clause 40.1 of the Contract...
125 The trouble with these submissions, of course, is that this reason for non-payment (i.e. that Civil Team's understanding of the variation was simply not what was agreed between the parties) was not referred to in any way in State Water's payment schedule. It is not clear whether or not Mr Sive declined to take these submissions into account in arriving at his determination (pursuant to s 20(2B)). Even if he did not take these submissions into account, on the basis that they were not duly made, that does not alleviate him from his obligation under the Act to explain by a legitimate process of reasoning how the variation under clause 40 resulted in State Water becoming liable for any shortfall in insurance coverage. As I have said, I simply am unable to identify any such reasoning process; there is simply the assertion by the adjudicator that the variation somehow had such an effect.
126 In my view, an explanation as to how the variation under clause 40 should result in State Water being obliged to meet shortfalls in insurance coverage, was central and critical. The absence of that explanation is fatal to the reasoning process, and leaves the adjudication determination either without foundation or illogical. It is true, as Civil Team submitted, that the adjudicator (at [37]) identifies clauses 21.4, 18, 19 and 40 as being (to his understanding) the clauses of the contract relevant to the dispute. However the adjudicator does no more than that. After reading the clauses of the contract identified by the adjudicator, one is left in a state of bewilderment, as the clauses (apart from clause 40) bear no apparent relevance to the issue at hand. This is not an instance where an adjudicator has grappled reasonably with the relevant provisions of the contract and arrived at an erroneous result within jurisdiction, rather it is an instance where there is no reasoning process at all, and no attempt at one.
127 During the hearing, I asked counsel for Civil Team to explain to me the basis on which, or the reasoning process by which, it could be said that the variation under clause 40 had the effect of requiring State Water to pay shortfalls in indemnification. Counsel required an adjournment in order to provide an answer, and in my view, the answer was far from satisfactory.
128 In addition to this absence of reasoning, State Water criticised the adjudicator's apparent reliance on notions of "reasonableness" to justify his determination (at [9(c)] and [10]), and said that this simply highlights the absence of any legitimate reasoning process. Civil Team submitted that the adjudicator used the words "unreasonable" and "reasonable" as a way of explaining why he preferred Civil Team's submissions over State Water's submissions. In Halkat Electrical Contractors Pty Ltd v Holmwood Holdings Pty Ltd [2007] NSWCA 32, Giles JA said (at [27]):
[27] ... [The adjudicator's] purported determination was not given greater respectability by the reference to his inclination 'to believe the claimant rather than the respondent'...
129 To the extent that the adjudicator was saying that he preferred Civil Team's submissions over State Water's submissions because the former were more "reasonable", without providing further explanation, the criticisms made by Giles JA probably apply here. But in any event, even if the adjudicator used the word "reasonable" merely to express his preference for Civil Team's submissions, that does not cure the deficiency (or absence) of reasoning in the adjudication determination as to how or why the insurance variation under clause 40 left State Water liable to meet shortfalls in indemnification.
130 In my view, the reasoning process is so deficient that it amounts to a failure on the part of the adjudicator to exercise the jurisdiction given to him under the Act.
Conclusion
131 In the result, the first adjudication determination should stand, but the second adjudication determination must fall for the reasons I have expressed above. In the circumstances, it would be appropriate to declare that the purported adjudication determination (numbered RICS-051) by the second defendant dated 30 July 2013 is void, and to grant certiorari quashing the said adjudication determination.
132 I invite the parties to prepare and send to my Associate short minutes of order giving effect to these reasons and to arrange to re-list the matter at a suitable time to be heard on costs.
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