A-Civil Aust Pty Ltd v Ceerose Pty Ltd

Court of Appeal (NSW)|2023-11-15|Before: Leeming JA, White JA, Mitchelmore JA, Richmond J

Background to the appeal

As there was no dispute as between A-Civil and Ceerose about the background to the appeal, I have largely adopted the primary judge's summary. I note for completeness that a submitting appearance was filed in the appeal on behalf of the second respondent (the adjudicator, Mr Paul Roberts) and the third respondent (ABC Dispute Resolution Service).
On 2 March 2022, Ceerose and A-Civil entered into a subcontract for works at 163-167 McEvoy Street, Alexandria; Ceerose was the main contractor and A-Civil was the subcontractor: at [3]. The subcontract required A-Civil to perform excavation work on the site for a contract sum of $2,840,210: at [3]. The subcontract incorporated the General Conditions contained in the "Subcontract conditions for design and construct" (AS4903-2000). Clause 5 of the General Conditions, which was headed "Security", provided as follows: "5.1 Provision Security shall be provided in accordance with Item 19 or 20. All delivered security, other than cash or retention monies, shall be transferred in escrow. Except for any security provided in respect of unfixed plant or material, the total value of all security held by the Main Contractor shall not exceed: (a) Prior to practical completion of the head contract - 5% of the subcontract sum; and (b) After practical completion of the head contract - 2.5% of the subcontract sum. 5.2 Recourse A party may have recourse to security: (a) Where the amount due to that party under the Subcontract or otherwise remains unpaid after the time for payment; and (b) In respect of any Claim to payment (liquidated or otherwise) that party may have against the other under the Subcontract or otherwise, On the giving of written notice to the other party. 5.3 Change of security At any time, a party providing retention monies or cash security may substitute, with the written consent of the other in its absolute discretion, form of security. To the extent that another form of security is provided, the other party shall not deduct, and shall promptly release and return, retention moneys and cash security. 5.4 Reduction and release Upon the issue of the certificate of practical completion under the head contract, a party's entitlement to security (other than in Item 19(e)) shall be reduced by the percentage or amount in Item 19(f) or 20(d) as applicable, and the reduction shall be released and returned within 28 days to the other party. A party's entitlement otherwise to security shall cease 28 days after final certificate is issued under the head contract. Upon a party's entitlement to security ceasing, that party shall release and return forthwith the security to the other party. 5.5 Trusts and interest Except where held by a government department or agency or a municipal, public or statutory authority, any portion of security which is cash or retention monies, shall be held in trust for the parties in accordance with the terms of this agreement."

The adjudicator's determination

On 27 September 2022, the adjudicator made a determination under s 22 of the Security of Payment Act that the adjudicated amount was $167,970.87 (including GST), the date on which the amount became payable was 16 August 2022, and his fees were to be apportioned between the parties equally: at [18]. The adjudicated amount included the full amount of the retention monies that A-Civil claimed, being $115,577.79 (ex GST).
Section 22(3)(b) of the Security of Payment Act requires that the adjudicator's determination include the reasons for the determination. In the Background and Preliminary Issues section of the reasons, the adjudicator summarised the parties' respective positions regarding the subcontract, including Ceerose's position that it had lawfully terminated the subcontract on 1 July 2022 and that in accordance with its terms, it was entitled to set off and/or otherwise deduct amounts that were payable to A-Civil. In [9] of the determination, the adjudicator set out what he considered to be the parties' rights regarding the payment claim, which relevantly included the following: "a. Under section 13(1C) of the Act, [A-Civil] is entitled to serve a payment claim on and from the date of termination; b. Under Clause 39.4 - Main Contractor's rights: if the Subcontractor fails to show reasonable cause, the Main Contractor may by written notice: 39.4(a) - Take out of the Subcontractor's hands the whole or part of the work remaining to be completed and suspend payment until it becomes due and payable pursuant to clause 39.6; or 39.4(b) - Terminate the Subcontract. c. … d. … e. Under clause 39.10 - Termination, if the Subcontract is terminated pursuant to subclause 39.4(b), the parties' remedies, rights and liabilities shall be the same as they would have been under the law governing the Subcontract had the defaulting party repudiated the Subcontract and the other party elected to treat the Subcontract as at an end and recover damages. f. …."
The adjudicator then stated, at [10]: "Accordingly, if the Subcontract is terminated, pursuant to subclause 39.4(b), payment shall [be] as per the Subcontract."
Although the adjudicator formulated [10] contingently, he ultimately decided that the subcontract had been terminated. The adjudicator's reasons regarding the implications of termination for A-Civil's claim for the retention monies commenced at [107]. Given the issues that arise on the appeal it is useful to set those reasons out in full: "Claim for Retention Release 107. In the payment claim, the Claimant claims $115,577.79 for release of its retention. 108. In the payment schedule, the Respondent assesses this item as $0.00 for the following reasons: a. There is no right or entitlement under the Subcontract; b. The Claimant has not satisfied the Subcontract pre-conditions to an entitlement to claim retention money; c. It has an express right under the Subcontract to have recourse to retention money; d. The Claimant is indebted to the Respondent "for an amount enormously in excess of the retention money"; and e. When the Subcontract was terminated, the Claimant did not accrue any right to retention money and cannot satisfy the contractual rights to claim its retention. 109. In the adjudication application, the Claimant states: a. It did not abandon the site and complied with its obligations under the Subcontract; b. A Notice of Delay was submitted by A-Civil on 1 July 2022, requesting an Extension of Time for the delay caused by inclement weather in reaching practical completion; c. The Respondent sent it the termination letter on 1 July 2022 without providing any reasons as to why the project was terminated; and d. The Respondent deprived it of the opportunity to carry out its obligations under the Contract by wrongfully terminating the Contract which was intentional. 110. In the adjudication response, the Respondent states: a. There is no basis to claim retention monies under the contract or under the Act; b. The Respondent is entitled under the Subcontract to have recourse to the retention money and alternatively, any claim for retention monies is a claim for damages and cannot be made under the Act; c. It repeats and relies on the reasons in its Payment Schedule; d. The payment claim is not a claim for construction work or related goods or services and is therefore not a payment claim for the purposes of the Act; and e. There is no right or entitlement under the Subcontract for the Claimant to claim its retention. In accordance with section 10 of the Act, the Adjudicator must have regard to the terms of the Subcontract and the terms of the Subcontract do not give rise to an entitlement for the Claimant to make this claim. 111. Pursuant to Clause 5.4, the Subcontractor's entitlement to security is: a. reduced by 50% upon practical completion of the head contract with the reduction released within 28 days; and b. the balance released 28 days after the final certificate is issued under the head contract. 112. Clause 5.4 of the Subcontract links the Subcontractor's entitlement to security to practical completion and issue of the final certificate under the head contract which I find is void for contracting out of the Act. Notwithstanding, the Subcontract has been terminated and, therefore, the Claimant is entitled to the release of its security. 113. Therefore, I value the claim for retention at $115,577.79." (Footnotes omitted.)
In respect of deductions for which Ceerose advanced a claim in its payment schedule, the adjudicator found in its favour on one item, being a deduction of $6,000 for a Council fine: at [24]. The largest item that Ceerose had claimed was $2,694,506 for the cost to complete the works under the subcontract. In relation to this item, the adjudicator concluded that A-Civil could not be "back charged" for the cost to complete for two reasons: Ceerose had not deducted the value of subcontract works remaining (so as to calculate the "extra over cost of completing the works"), and Ceerose "[had] not incurred the cost to complete which is based on a quotation and estimates".
On 28 September 2022, the adjudicator issued an invoice for his fees and expenses, which were to be split between A-Civil and Ceerose. A-Civil paid the full amount, and claimed from Ceerose its proportion of $18,791.22, which has not been paid: at [27]-[28].
On 11 October 222, an adjudication certificate was issued for the amount of $189,095.53 and judgment was entered in the District Court for that sum (plus the filing fee): [29]. On 12 October 2022, the District Court made a garnishee order: at [29].
On 14 October 2022, Ceerose commenced proceedings by way of a Summons filed in court before the Equity duty judge. An interim stay was granted with respect to A-Civil enforcing the judgment and the bank acting on the garnishee order. On 17 October 2022, Ceerose paid the amount of the judgment sum into court: at [30]-[31]. On 2 November 2022, Rees J lifted the interim stay and made an order that the amount paid into court be paid out to A-Civil: see Ceerose Pty Ltd v A-Civil Aust Pty Ltd [2022] NSWSC 1487.

The reasons of the primary judge

The focus of Ceerose's procedural fairness complaint was the second sentence of [112] of the determination. In its Amended Technology & Construction List Statement at [18]-[19], Ceerose contended that neither party had sought the conclusion that the adjudicator reached in that sentence, and the adjudicator had not given any notice that he was contemplating adopting that reasoning.
The primary judge accepted that the reasoning for the adjudicator's decision about the retention monies was confined to the second sentence of [112], which referred to the subcontract having been terminated: at [33]. After setting out a number of provisions of the Security of Payment Act relevant to the process by which progress payments may be recovered under the Act, and the principles relevant to considering an alleged denial of procedural fairness, the primary judge turned to identifying what issues were "on the table" in the adjudication. To that end, his Honour had regard to the terms of the payment claim, the payment schedule, the adjudication application and the adjudication response, stating at [67]: "It is clear from the adjudication application that A-Civil claimed to be entitled to the retention monies because Ceerose had wrongfully terminated the Contract: see adjudication application at [57] and [58]. This statement of the basis for its claim needs to be read in the context of what A-Civil knew was Ceerose's position, which was stated clearly in the payment schedule as being that there was no right to the retention monies for two alternative and independent reasons: first, because cl 5.4 applied to restrict release of the retention monies until the certificates referred to in that clause had been issued, and second, that it had exercised its right to have recourse to the retention monies under cl 5.2. A-Civil did not respond to these contentions by a contention that neither cl 5.2 nor cl 5.4 applied because there had been a termination of the Contract. Rather, A-Civil responded by contending that these provisions did not apply because Ceerose's termination was wrongful (i.e. not permitted by the contract)."
His Honour had earlier found at [33] by reference to [112] of the adjudicator's reasons, that the adjudicator did not conclude that A-Civil was entitled to the retention monies because Ceerose had wrongfully terminated the subcontract. Rather, as his Honour said of the second sentence of [112] (at [68]): "The issue raised by this sentence is whether cl 5 ceases to apply following termination of the Contract for whatever reason, so that from that time there is nothing to prevent A-Civil from claiming the retention monies. In my view, it cannot be said that Ceerose should have reasonably anticipated that this issue was raised by the payment claim or the adjudication application. Ceerose was not given prior notice that this was an issue that it had to deal with, and it was entitled to be given such notice and an opportunity to make submissions on it."
The primary judge found that this denial of the opportunity to make submissions was material, accepting Ceerose's submission that "it could have put to the adjudicator that cl 5.2 was a complete answer to the issue raised by the second sentence of [112] of the determination" in circumstances where (at [69]): 1. there was no express term in the subcontract that the right to have recourse to the retention monies under cl 5.2 ceased on termination; 2. clause 5.2 permitted Ceerose to have recourse to security "in respect of any Claim to payment (liquid or otherwise) that it may have against A-Civil under the subcontract or otherwise", and "Claim" was broadly defined; 3. there was a "respectable argument" that s 34 of the Security of Payment Act did not apply to cl 5.2 because the clause did not, and did not purport to, exclude, modify or restrict the operation of the Act; and 4. the adjudicator did not record in [1]-[10], [108] or [110] of the determination that Ceerose had exercised its right of recourse under cl 5.2; and as Ceerose had exercised its right of recourse to the retention monies, the submission now contemplated was one the adjudicator had not previously addressed and it could not be assumed that he would reject it.
It was common ground before the primary judge that if his Honour found that the adjudicator had denied Ceerose procedural fairness in relation to the retention monies, the declaration of invalidity should relate only to that part of the determination. Section 32A(1) of the Security of Payment Act relevantly provides that if the Supreme Court makes a finding that jurisdictional error has occurred in relation to an adjudicator's determination, the Court may make an order setting aside the whole or any part of the determination.

A-Civil's appeal

By its Amended Notice of Appeal, A-Civil appealed from that part of the primary judge's decision by which his Honour found that the adjudicator made a material jurisdictional error affecting his determination regarding the retention monies. A-Civil advanced ten grounds of appeal, nine of which alleged various errors attending the primary judge's conclusion that the adjudicator had denied Ceerose procedural fairness, while ground 10 set out various conclusions that his Honour should instead have reached. Thus, in grounds 1 to 9, A-Civil alleged that the primary judge made the following errors: 1. finding that the adjudicator's decision to include the retention monies claim in the adjudication amount was affected by jurisdictional error, being a material denial of procedural fairness (ground 1); 2. framing the issue for decision by the adjudicator as whether A-Civil was entitled to the retention monies on the basis of wrongful termination, contrary to his Honour's statement of principle that the issues for decision were determined by reference to the payment claim, payment schedule, adjudication application and adjudication response (ground 2); 3. finding that it was not open to the adjudicator to decide A-Civil's claim for the retention monies on the basis that the subcontract had been terminated by Ceerose because this was not the basis of A-Civil's claim (ground 3); 4. finding that the issue raised by the second sentence of [112] of the determination was whether cl 5 of the subcontract ceased to apply following termination (such that there was nothing preventing it from claiming the retention monies), because no such issue was raised in the second sentence of [112] (ground 4); 5. engaging in impermissible merits review by formulating the issue in [112] of the adjudicator's reasons in a manner from which the only available conclusion was that the adjudicator had decided an issue of which the parties were not on notice and which was not within their reasonable anticipation (ground 5); 6. alternatively to ground 5, finding that Ceerose could not have reasonably anticipated that the adjudicator might decide that A-Civil was entitled to the retention monies following Ceerose's termination of the subcontract and reject Ceerose's claim to have had recourse to the retention monies, because Ceerose could have anticipated that the adjudicator would not accept its interpretation of cl 5.2 and/or it would not succeed on the claimed deductions and set-offs (ground 6); 7. finding that the issues "on the table" for decision by the adjudicator did not extend to A-Civil's entitlement to the retention monies following termination of the subcontract and Ceerose's recourse to those monies, in circumstances where Ceerose addressed those issues and the adjudicator decided them (ground 7); 8. finding, in [23] of the primary judgment, that the adjudicator made no reference to Ceerose purporting to exercise its rights under cl 5.2 of the subcontract (ground 8); and 9. finding, in [25] of the primary judgment, that it was of any consequence that the declined deduction of $2,694,506 for the cost of completing the construction works was not linked to the claim for retention monies (ground 9).
During the hearing of the appeal, counsel for A-Civil accepted that success on grounds 8 and 9 alone would not relevantly affect the correctness of the primary judge's decision. The critical grounds of appeal were grounds 1 to 7 and [67]-[69] of the reasons of the primary judge. In the written and oral submissions, A-Civil took a global approach to those paragraphs and the grounds. Ceerose, on the other hand, made submissions on each of the grounds, addressing A-Civil's broader complaints in the process. I have evaluated A-Civil's arguments by reference to its broader approach, assisted by the focus that Ceerose brought to the individual grounds. A-Civil also prepared, at the time of its reply submissions, a detailed schedule of the arguments that the parties respectively advanced and the reasoning and conclusion of the adjudicator, to which I have had regard.

Preliminary issue: characterisation of the adjudicator's reasons

A-Civil first submitted that the primary judge mischaracterised the import of the second sentence of [112] of the adjudicator's reasons, wrongly reading the sentence as raising the issue of the proper or correct interpretation of cl 5 when that was not the adjudicator's reasoning or his conclusion, much less an issue that the adjudicator identified or raised. A-Civil contended that in so construing that sentence, his Honour had impermissibly supplemented the adjudicator's reasons, drawing inferences that did not appear on the face of that sentence. In oral argument, counsel for A-Civil submitted that the adjudicator had concluded that A-Civil was entitled to release of the retention monies because the subcontract had been terminated, without attributing that conclusion to cl 5 or any other provision of the subcontract.
A-Civil's encapsulation of the adjudicator's conclusion about the retention monies served to highlight the concern that the primary judge expressed in [68]. The adjudicator decided that it followed from termination of the subcontract, without more, that A-Civil was entitled to the release of the retention monies. That conclusion necessarily involved a further, albeit unexpressed, conclusion, namely that cl 5.4 and cl 5.2 of the subcontract, on which Ceerose relied, ceased to operate upon termination. What his Honour directed attention to in [68] was the issue that underpinned the adjudicator's conclusion. That his Honour referred to cl 5 as opposed to the specific clauses is of no moment.
A-Civil described the alleged error of the primary judge in [68] as involving impermissible merits review, in the sense that his Honour identified an issue as he saw it, and then addressed how the adjudicator should have resolved it. Properly understood, that is not what his Honour did. In any event, his Honour did not make the error of characterisation for which A-Civil contended. Grounds 2, 4 and 5 of the Amended Notice of Appeal related to this issue. They should be dismissed.
Before moving to A-Civil's arguments regarding procedural fairness, it is necessary to address a further submission that A-Civil made regarding the second sentence of [112] of the adjudicator's reasons, namely, that it also resolved the application of the retention monies against, or recourse to those monies for, the various deductions and set-offs that Ceerose had raised. I do not accept that submission. As counsel for Ceerose submitted during the hearing, the adjudicator did not reason from his conclusion regarding Ceerose's claim for deductions and set-offs to his conclusion regarding the retention monies. The second sentence of [112] does not contemplate or accommodate such a process of reasoning.

Did the adjudicator deny Ceerose procedural fairness?

In Demex Pty Ltd v McNab Building Services Pty Ltd [2023] NSWCA 261 ("Demex"), which post-dated the decision of the primary judge in this case, Kirk JA (Mitchelmore and Adamson JJA agreeing) considered the scope and content of the requirement for procedural fairness under the Security of Payment Act. Without repeating his Honour's careful review of the applicable principles and the provisions of the Security of Payment Act (as to which see [10] to [34]), it is useful to refer to some of what his Honour said by reference to a number of authorities regarding procedural fairness generally and in the context of the Security of Payment Act: 1. A statute conferring a power the exercise of which is apt to affect an interest of an individual is presumed to confer that power on condition that the power is exercised in a manner that affords procedural fairness to that individual, with that presumption operating unless it is clearly displaced by the particular statutory scheme: at [11], citing Minister for Immigration and Border Protection v SZSSJ (2016) 259 CLR 180; [2016] HCA 29 at [75]. 2. Procedural fairness generally requires that those liable to be affected by a decision be given the opportunity of first being heard. That opportunity "would ordinarily require the party affected to be given the opportunity of ascertaining the relevant issues and to be informed of the nature and content of adverse material", and "extends to require the decision-maker to identify to the person affected any issue critical to the decision which is not apparent from its nature or the terms of the statute under which it is made": at [12], quoting Commissioner for ACT Revenue v Alphaone (1994) 49 FCR 576 at 590-591, 591-592. 3. The general attributes of the doctrine must then accommodate to the terms and structure of the statutory scheme in question: at [15]. Specifically in relation to the Security of Payment Act, Kirk JA referred to: 1. the close delineation under the Act of the boundaries of a dispute, having regard to the limited material to which an adjudicator may have regard in determining an adjudication application, in s 22(2) (at [16]-[17]); 2. the tight timeframe for raising and resolving claims under the Act, as can be seen in the provisions for serving a payment schedule (s 14), an adjudication application (s 17), and a response to an adjudication application (s 20), the time for the adjudicator's determination in s 21 (subject to extensions by agreement) (at [18]), and the fact that an adjudicator may require further submissions, under s 21(4), but that does not lead to any automatic extension of time (at [19]); 3. the interim nature of the adjudicator's decision, which, noting s 3(4) and s 32 of the Security of Payment Act, does not affect any rights the parties have under the construction contract (at [22], citing Probuild Constructions (Aust) Pty Ltd v Shade Systems Pty Ltd (2018) 264 CLR 1; [2018] HCA 4 at [39]-[40]); and 4. the selection criteria for adjudicators in s 18 of the Act, which do not include legal qualifications and which contemplate that adjudicators may be expected to bring their experience and expertise to bear in making determinations (at [23]-[24]). 1. The purpose of the scheme for which the Security of Payment Act makes provision "is best served by restricting the scope of intervention by the courts" (at [27], quoting Chase Oyster Bar Pty Ltd v Hamo Industries Pty Ltd (2010) 78 NSWLR 393; [2010] NSWCA 190 at [55]). 2. "[T]he general requirement of procedural fairness that might ordinarily be applied by a decision-maker exercising statutory power is attenuated in the context of the Act": at [30]. 3. Only a substantial denial of procedural fairness by an adjudicator in determining an adjudication application will be a jurisdictional error under the Security of Payment Act: at [32]. What this means in practice will depend on the particular circumstances of cases, but "generally a conclusion of invalidity would only be reached if there was a significant departure from what would ordinarily be the requirements of procedural fairness for a person exercising a statutory power, and where that departure could be characterised as leading to substantial practical injustice in all the circumstances": at [32].
A-Civil alleged error on the part of the primary judge regarding procedural fairness on two bases. First, it contended that the basis on which the adjudicator determined the claim for retention monies was in issue, or "on the table", by reason of submissions that the parties made in the course of the procedure under the Security of Payment Act. Second, even if the basis on which the adjudicator determined the claim was not "on the table", A-Civil contended that Ceerose should have anticipated that the adjudicator would need to decide the question of whether the retention money should remain with Ceerose or be released. It could not be said in those circumstances that there had been substantial practical injustice.

(1) Was the basis on which the adjudicator determined the claim for retention monies in issue or "on the table"?

As Kirk JA observed in Demex (at [33]), by reference to Ausenco Operations Pty Ltd v Ferretti International Ottoway Pty Ltd [2020] SASC 46 at [61] (Doyle J), whether an adjudicator has determined a matter on a basis for which the parties did not contend will often depend on the level of abstraction or specificity at which one articulates the issue in dispute. His Honour further observed, again by reference to Ausenco (at [62]), that beyond extremes "it is difficult to generalise as to the level of abstraction or specificity at which the obligation to afford procedural fairness must be addressed in a particular case".
A-Civil contended that the primary judge's conception of what was on the table for decision by the adjudicator was too narrow. It submitted that Ceerose's submissions raised the question of entitlement to the retention sum as a matter of contractual interpretation, including pursuant to cll 5.2 and 5.4. A-Civil relied in this regard on Ceerose's submission that it had lawfully terminated the subcontract, and its further submission that A-Civil was not entitled to the retention monies on a proper construction of the subcontract. Those two submissions were sufficient, in its submission, to raise as an issue the basis on which the adjudicator ultimately determined A-Civil's claim for retention monies, which entailed acceptance of the first submission and rejection of the second. This argument was the subject of ground 7 of the Amended Notice of Appeal.
As I noted above at [33], the adjudicator reasoned because the contract had been terminated, A-Civil was entitled to release of the retention monies. Ceerose unquestionably put in issue A-Civil's entitlement to the retention monies, but on the basis that cl 5.4 and/or cl 5.2 of the subcontract continued to operate. By contrast, the adjudicator's reasoning in [112] could only have been premised on those clauses having no operation beyond termination of the subcontract. The primary judge was correct to conclude that Ceerose's submissions did not raise as an issue the path of reasoning and conclusion that the adjudicator ultimately adopted.
A-Civil relied additionally on the statement in Ceerose's payment schedule that A-Civil had "no right or entitlement to claim its retention under the Subcontract or otherwise" (at [121], emphasis added; Ceerose made a similar statement at [123]). The words "or otherwise" do not have the effect for which A-Civil contends, of broadening the scope of Ceerose's response to the claim for the retention monies so as to accommodate the basis on which the adjudicator ultimately determined that claim. As counsel for Ceerose submitted, s 20(2B) of the Security of Payment Act provided one explanation for its inclusion of those words, as that provision prohibits a respondent to an adjudication application from including, in its response, any reasons for withholding payment unless those reasons have already been included in the payment schedule provided to the claimant. Additionally, and as counsel for Ceerose further submitted, the use of "or otherwise" would not reasonably be construed as operating to put on the table every issue that could conceivably fall within its terms.
A-Civil next submitted that it had raised, in its adjudication application, what was to be done with the retention monies in the event that the adjudicator decided that Ceerose: (i) had lawfully terminated the subcontract for breach, but (ii) was not entitled to have recourse to the retention monies. This argument was the subject of ground 3 of the Amended Notice of Appeal.
A-Civil relied on [44]-[52] of its adjudication application. Accepting that its primary submission to the adjudicator was that Ceerose had wrongfully terminated the subcontract, A-Civil argued that it had also submitted that its right to the progress payment (which included the retention monies) was unaffected by termination. A-Civil contended that although his Honour had stated, correctly, that it was necessary to have regard to the adjudication documents to understand the issues for determination, his Honour had overlooked this aspect of its submissions.
The section of the adjudication application on which A-Civil relied was headed "Ceerose's Claims have no Prospects of Success". The focus of that section of its application was what Ceerose had advanced, in the payment schedule, in the way of set-offs, deductions and costs to complete, on the basis of which Ceerose contended that it did not owe A-Civil any money. The section is not lengthy and it is useful to set it out: "(44) Ceerose spuriously pursues negative valuations, purported setoffs and deductions and costs to complete in the [payment schedule (PS)], summarised at paragraph 6 of the PS. (45) Ceerose's allegations are untrue and misleading. (46) A-Civil denies paragraphs 4 and 5 of the PS. (47) Ceerose contends that A-Civil was in substantial breach of the Contract, that A-Civil repudiated the Contract, to [sic] which Ceerose accepted and terminated the Contract. This is not true, A-Civil was not in breach of the Contract and did not repudiate the Contract. (48) A-Civil submits that Ceerose wrongfully terminated the Contract. Ceerose was not justified in terminating the Contract and A-Civil relies upon its response to Ceerose's purported show cause notice dated 7 June 2022 … . (49) A-Civil's right to a progress payment is not affected by termination of the Contract. The Court of Appeal in Brodyn Pty Ltd (t/as Time Cost & Quality) v Davenport [2004] NSWCA 394 at [62] to [66] decided that s 8(2) of the Act does not provide that reference dates cease on the termination of a contract or cessation of work. (50) A-Civil has an accrued right to a progress payment under the Act. … (51) A-Civil's view is that Ceerose is not entitled to set off any of its claimed amounts under any circumstances because the amounts claimed are unliquidated and not amounts due but amounts claimed to be due. (52) Ceerose has failed to demonstrate with its setoffs to: (a) identify any express or implied provisions of the Contract at [sic] which it alleges to have been breached or which it relies upon for its entitlement; (b) identify the act of omission of A-Civil that constitutes an alleged breach; (c) demonstrate any causal nexus between the alleged breach of the Contract and the alleged loss and damage suffered, and; (d) identify the quantum of its loss or damage claimed in respect of each alleged breach. (53) Further or in the alternative, Ceerose's setoffs are damages and are not able to be valued or considered by the Adjudicator in this particular forum. As was distinguished in Quasar Constructions v Demtech Pty Ltd [2004] NSWSC 116, the relevant concepts do not extend to damages for breach of contract." (Footnotes omitted.)
In the written submissions on the appeal, A-Civil emphasised [49]-[50] and [52] in the above extract. Those first two paragraphs addressed the statutory basis of A-Civil's right to a progress payment, as opposed to the contractual basis of A-Civil's right or entitlement to the retention monies. In oral submissions, counsel for A-Civil emphasised [52(c)] and [52(d)] of the adjudication application, submitting that because those subparagraphs assumed lawful termination of the subcontract they raised as an issue, admittedly "faintly", what was to be done with the retention monies in the event that the adjudicator found the contract was terminated but rejected Ceerose's claims for deductions and setoffs.
Consistently with the balance of this section of A-Civil's adjudication application, the focus of [52], including (c) and (d), was Ceerose's claimed deductions, setoffs and costs to complete. Neither the paragraph nor any other part of this section of the application said anything about A-Civil's claim to retention monies. Rather, that issue was the subject of the immediately following section of the adjudication application, in which A-Civil specifically responded to Ceerose's submissions and, in that context: 1. relied on what it alleged was Ceerose's wrongful termination of the subcontract (at [57]-[58]); and 2. did not advance any submission in support of its entitlement to the retention monies, let alone submit that it was entitled to those monies if the adjudicator were to find that the subcontract was terminated and that Ceerose's claims for deductions and setoffs were unsubstantiated.
It follows that I would dismiss grounds 3 and 7 of the Amended Notice of Appeal.

(2) Should Ceerose have foreseen, or anticipated, that the adjudicator would reach the conclusion in the second sentence of [112]?

A-Civil next submitted that both parties should have anticipated that the adjudicator might conclude that A-Civil had a right to the retention monies notwithstanding Ceerose's termination of the subcontract. If the adjudicator accepted that the subcontract was terminated, but rejected Ceerose's alternative arguments regarding cll 5.4 and 5.2, the adjudicator would still have to decide whether A-Civil was entitled to the retention monies, as a matter of contractual interpretation or under the Security of Payment Act. Ceerose was legally represented and should have anticipated that possibility. A-Civil relied on the decision of JKC Australia LNG Pty Ltd v INPEX Operations Australia Pty Ltd (2018) 41 NTLR 149; [2018] NTCA 6 ("JKC") as instructive in this context.
In Multiplex Constructions Pty Ltd v Luikens [2003] NSWSC 1140, Palmer J said at [76] that a "payment claim and a payment schedule are, in many cases, given and received by parties who are experienced". After quoting this statement in Demex at [84], Kirk JA stated that "[g]iven experienced parties, and the tight timeframes under the legislative scheme, there is no requirement that every step in a payment claim or adjudication application must be spelt out in express words". Ceerose accepted that it was a sophisticated party with legal representation and it should have anticipated that the adjudicator might decide that it did not have a right of recourse to the retention monies. However, it submitted that it should not have anticipated the conclusion that A-Civil was entitled to those monies merely because the subcontract had been terminated, noting that A-Civil was represented and had advanced no such contention.
It was apparent from the payment claim that A-Civil was claiming the retention monies, but it did not articulate any basis for that claim in that document. Then, in its adjudication application, A-Civil adopted a position that was inconsistent with the subcontract being at an end, relying on Ceerose's purportedly wrongful termination of the subcontract. Having regard to the matters on which the parties joined issue in the documents that the adjudicator is limited to considering, I do not accept A-Civil's submission that Ceerose should have anticipated that the adjudicator would decide that A-Civil was entitled to the retention monies on the basis that he did.
Contrary to A-Civil's reliance on JKC, the facts of that case provide a useful counterpoint to the present. The adjudicator decided that a provision of the Construction Contracts (Security of Payments) Act (NT) regarding the importation of certain provisions of the Act into deficient contracts (s 20) should apply because the contract in issue was deficient in a relevant respect. The practical consequence was that the notice of dispute was served out of time: at [14]. The adjudicator had invited the parties to make submissions on this issue in advance of his decision, and they had each responded to the effect that there was no basis for s 20 to operate: at [11]-[12]. The denial of procedural fairness alleged was that the adjudicator had not foreshadowed that he would decide that the parties' submissions on the issue were wrong and that the notice of dispute was served out of time.
In allowing the appeal from the trial judge's conclusion that there was a denial of procedural fairness, the Northern Territory Court of Appeal observed that "once the Adjudicator sought submissions on whether cl 6 was to be implied into the [contract] the possibility of a finding that no notice of dispute was given within 14 days was clearly flagged": at [49]. Further, the consequence of a finding in those terms "would inevitably be that INPEX would be obliged to pay the whole sum in dispute to JKC unless there was some compelling reason why that should not be so": at [50]. By contrast, in the present case, the adjudicator gave no indication of the issue on the basis of which he concluded that A-Civil was entitled to the retention monies; and the proposition that those monies had to be released upon termination of the subcontract was not inevitable.
A-Civil's contention that Ceerose should have anticipated the argument that the adjudicator ultimately found to be decisive was the subject of ground 6. It should be dismissed.

The primary judge's conclusion was correct

Ground 1 of the Amended Notice of Appeal took issue with the primary judge's general conclusion that there was a material denial of procedural fairness. As I have noted above, consistently with authority it is necessary for the denial of procedural fairness to be substantial, with satisfaction of that requirement turns on whether the error was substantial: Demex at [32]. I agree with the conclusion of the primary judge that the error in the present case met that description. The denial of procedural fairness was also material, in the sense that there was a realistic possibility that the decision could have been different but for the denial of procedural fairness: Minister for Immigration and Border Protection v SZMTA (2019) 264 CLR 421; [2019] HCA 3 at [45]; MZAPC v Minister for Immigration and Border Protection (2021) 273 CLR 506; [2021] HCA 17 at [2], [85].
I have referred above to the primary judge's identification of the arguments that Ceerose was precluded from putting to the adjudicator on the issue he found to be determinative (see [28] above). A-Civil contended on the appeal that those arguments were no more than refinements of Ceerose's recourse arguments, referring to Downer Construction (Australia) Pty Ltd v Energy Australia (2007) 69 NSWLR 72; [2007] NSWCA 49 ("Downer"). The reasoning of Giles JA in Downer at [91], on which A-Civil relied, was that there is no denial of procedural fairness if a party could have put its arguments in a different or better way. In my view, that reasoning does not apply to the arguments that Ceerose could have put to the adjudicator if he had given Ceerose the opportunity to make submissions on the reasoning that he ultimately adopted as determinative.
A-Civil submitted that as a consequence of the primary judge's reasoning, adjudicators would have to make decisions in terms closely reflecting the arguments the parties advanced, or submit their own views for further submissions. It submitted that such an approach was inconsistent with the tight timeframes for which the Security of Payment Act makes provision (to which I have referred above). The submission misunderstands the nature of the denial of procedural fairness that the primary judge found and that I would uphold, namely, that the adjudicator made a decision on a basis that no one put and that was not properly anticipated. It turns on its particular facts. The additional reasons of Leeming JA, with which I agree, are also relevant in this regard.
Ground 1 should be dismissed. It follows that it is unnecessary to consider grounds 8 and 9, noting the submission of counsel for A-Civil to which I referred at [31] above, and they should also be dismissed.

Conclusion

I propose the following orders: 1. The appeal is dismissed. 2. The appellant is to pay the first respondent's costs of the appeal.

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 01 February 2024

HEADNOTE [This headnote is not to be read as part of the judgment] On 2 March 2022, Ceerose Pty Ltd (Ceerose) and A-Civil Aust Pty Ltd (A-Civil) entered into a subcontract for excavation work on a site in Sydney; Ceerose was the main contractor and A-Civil was the subcontractor. On 1 July 2022, Ceerose terminated the subcontract and A-Civil left the site. On 29 July 2022, A-Civil served its final payment claim on Ceerose pursuant to s 13 of the Building and Construction Industry Security of Payment Act 1999 (NSW) (Security of Payment Act) for $709,940.74, which included the release of retention monies of $115,577.79 (ex GST). On 12 August 2022, Ceerose provided a payment schedule to A-Civil in which Ceerose asserted that A-Civil was not entitled to the retention monies. Ceerose submitted that A-Civil had not satisfied the preconditions for making a claim in cl 5.4 of the General Conditions of the subcontract and, alternatively, Ceerose had recourse to the retention monies in part satisfaction of its claim for amounts A-Civil owed to it for breach of the subcontract under cl 5.2 of the General Conditions. On 26 August 2022, A-Civil submitted an adjudication application under the Security of Payment Act. In relation to the retention monies, A-Civil submitted that it had complied with Ceerose's directions, and any delays were the result of Ceerose's poor management. Further, A-Civil submitted that Ceerose had wrongfully terminated the subcontract and deprived it of the opportunity to carry out its obligations. In its adjudication response of 6 September 2022, Ceerose reiterated that A-Civil had no right to the retention monies under cl 5.4 and that it had exercised its right to recourse under cl 5.2. It denied any wrongful termination of the subcontract. On 27 September 2022, the adjudicator made a determination under s 22 of the Security of Payment Act, concluding, relevantly to the appeal, that Ceerose owed A-Civil the full amount of the retention monies claimed. In his reasons, the adjudicator decided that the subcontract had been terminated and that A-Civil was therefore entitled to the release of the retention monies. The primary judge held that the adjudicator's conclusion regarding the retention monies was affected by jurisdictional error, namely, a material denial of procedural fairness. His Honour concluded that the adjudicator had decided the claim for the retention monies on a basis for which neither party had contended and without putting the parties on notice and giving them an opportunity to be heard. His Honour declared that the part of the adjudication determination involving the claim for retention monies was invalid. The central issue on the appeal was whether his Honour erred in finding that there was a material denial of procedural fairness. A-Civil contended that the primary judge had mischaracterised the basis of the adjudicator's determination and had erred in concluding that it was not in issue or "on the table". Alternatively, A-Civil contended that the primary judge erred in concluding that Ceerose could not have reasonably anticipated that the adjudicator would decide the retention monies claim in the manner he did. The Court (Leeming JA, White JA and Mitchelmore JA), dismissing the appeal, held: Per Leeming JA (White JA and Mitchelmore JA agreeing): (1) The primary judge was correct to conclude that the adjudicator's reasons were so far removed from the parties' submissions that it resulted in a substantial breach of the obligation to accord procedural fairness: [4]. Only rarely will there be a basis for quashing an adjudication certificate for want of procedural fairness; this appeal turned on its very particular facts: [1]. Per Mitchelmore JA (Leeming JA and White JA agreeing): (2) The primary judge did not err in characterising the reasoning of the adjudicator and the issue to which the reasoning gave rise, namely, whether the clause governing retention monies provided by a subcontractor ceased to apply upon termination of the subcontract: [32]. His Honour's reasons in this regard did not involve impermissible merits review: [31]. (3) There was no error in his Honour's conclusion that the basis of the adjudicator's determination regarding retention monies was not in issue or "on the table". Although Ceerose put in issue A-Civil's entitlement to the retention monies, it was on the basis of the operation of cl 5.4 or cl 5.2. By contrast, the adjudicator's reasoning could only be premised on cl 5.4 and cl 5.2 having no operation upon termination: [37]. A-Civil did not raise the issue in its adjudication application, instead contending that the subcontract had been wrongfully terminated: [43]. Demex Pty Ltd v McNab Building Services Pty Ltd [2023] NSWCA 261; Ausenco Operations Pty Ltd v Ferretti International Ottoway Pty Ltd [2020] SASC 46 considered. (4) The primary judge did not err in concluding that Ceerose could not have anticipated the adjudicator's conclusion. Although it was apparent that A-Civil was claiming the retention monies, it did not articulate any basis for that claim in the payment claim; and its position in the adjudication application was inconsistent with the subcontract being at an end: [47]. Demex Pty Ltd v McNab Building Services Pty Ltd [2023] NSWCA 261; Multiplex Constructions Pty Ltd v Luikens [2003] NSWSC 1140 considered; JKC Australia LNG Pty Ltd v INPEX Operations Australia Pty Ltd (2018) 41 NTLR 149; [2018] NTCA 6 distinguished. (5) The primary judge was correct to find a material denial of procedural fairness. The denial of procedural fairness was substantial and material in the sense that there was a realistic possibility that the decision could have been different but for the denial of procedural fairness: [51]. Ceerose was not given the opportunity submit on the reasoning ultimately adopted by the adjudicator: [52]. Demex Pty Ltd v McNab Building Services Pty Ltd [2023] NSWCA 261; Minister for Immigration and Border Protection v SZMTA (2019) 264 CLR 241; [2019] HCA 3; MZAPC v Minister for Immigration and Border Protection (2021) 273 CLR 506; [2021] HCA 17 applied. Downer Construction (Australia) Pty Ltd v Energy (2007) 69 NSWLR 72 distinguished.

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