Bauen Constructions v Westwood Interiors

LEGISLATION CITED : Building and Construction Industry Security of Payment Act 1999 (NSW) Supreme Court Act 1977 (NSW)

Chase Oyster Bar v Hamo Industries [2010] NSWCA 190 Brodyn Pty Limited v Davenport (2004) 61 NSWLR 41 CASES CITED : Halkat Electrical Contractors Pty Ltd v Holmwood Holdings Pty Ltd [2007] NSWCA 32 Musico v Davenport [2003] NSWSC 977 Waterways Authority v Fitzgibbons (2005) 79 ALJR 816

Bauen Constructions Pty Limited (Plaintiff) PARTIES : Westwood Interiors Pty Limited (First Defendant) Philip Davenport (Second Defendant) Adjudicate Today Pty Limited (Third Defendant)

COUNSEL : M Christie SC / L D R Shipway (Plaintiff) R M O'Brien (Defendants)

Nasser Lawyers (Plaintiff) SOLICITORS : Carl Lee Solicitor (First Defendant) Adjudicate Today (Second and Third Defendants)

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION TECHNOLOGY & CONSTRUCTION LIST

18 November 2010 (ex tempore - revised 25 November 2010)

2010/382267 BAUEN CONSTRUCTIONS PTY LIMITED v WESTWOOD INTERIORS PTY LIMITED JUDGMENT

1 HIS HONOUR: On 29 September 2010, the plaintiff (Bauen) and the first defendant (Westwood) entered into a subcontract relating to works undertaken by Bauen for Housing NSW at Warringa Street, Yagoona. It is common ground that the contract replaced an earlier contract on the same terms and for the same work that had been destroyed by fire. It is also common ground that the contract was a construction contract for the purposes of the Building and Construction Industry Security of Payment Act 1999 (NSW) ("the Act"). In these proceedings, I am concerned with challenges to a determination made by the second defendant (the adjudicator) upon an adjudication application submitted by Westwood. The payment claim and payment schedule 2 The adjudication application was founded on a payment claim dated 1 October 2010. The amount claimed, leaving aside cents, was $92,804. It was calculated by asserting a percentage of completion for individual components of the works - framing, insulation, sheeting and setting - deducing a cost for each component, and giving credit for amounts paid. 3 Bauen provided a payment schedule dated 11 October 2010. It stated a scheduled amount of $0.00 (to make things clear, "inclusive of GST"). It allocated some 23 reasons why this state of affairs, according to Bauen, existed. 4 Of those reasons, one was that the works had not been stated as claimed: "[o]nly 90% of works have been completed, but not to a satisfactory level". Another reason was that "[g]enerally, work was very poor quality and requires rectification". This was amplified by reference to defects said to be identified in some site inspection minutes prepared by architects dated 29 September 2010 and defects indicated in Bauen's "defects sign-off register". 5 Reference to the site inspection minutes of 29 September 2010 shows that they related not just to the Warringa Street site but also to at least two other sites, at Colchin and Dargan Streets, Yagoona, where Bauen held a contract from Housing NSW and Westwood was performing subcontract works. Of the items of work that did not in terms relate to Colchin Street or Dargan Street, it is very difficult to identify any asserted defect that relates to works of the kind that appear to have been the subject of the contract between Bauen and Westwood for Warringa Street. For example, one alleged defect relates to some problem with a brick wall; another relates to cleaning up of the site; another relates to some tiling defects; and the last (non-site-specific) defect refers again to brickwork problems (I said that this was non-site-specific but it is at least possible that it may be limited to the Dargan Street site). 6 The defects sign-off register that is annexed to the payment schedule contains a part that is common to all units and another part that is said to relate specifically to the Warringa Street site. It may be - I have not assessed every item in that lengthy defects register - that some of the items relate specifically to work that was the subject of the contract between Bauen and Westwood for the Warringa Street site. However, it is to be noted that those defects registers are dated 12 and 20 August 2010 and, of their very nature, do not speak of events beyond that date. 7 I should have said that there were also annexed to the payment schedule other site inspection minutes prepared by the architects. They were dated 20 August, and 7, 16 and 24 September 2010. Whether or not they say anything relevant to the Warringa Street site I do not know, but it appears from the payment schedule that it was the minutes of 29 September 2010, to the detail of which I have referred, that were said to particularise in part Bauen's claim of defective work. 8 In due course, Westwood lodged an adjudication application and Bauen lodged an adjudication response. The disputes articulated in the payment claim and payment schedule were enlarged upon in those documents. The determination 9 The adjudicator produced a determination on 11 November 2010. It is apparent from his determination that he had had four applications to consider: one relating to each of the sites (that is to say, the three that I have referred to, and a fourth, to which I have not referred). It is also apparent that in the first of those determinations, the adjudicator dealt with a number of common issues. Very sensibly, he did not repeat in detail what he had said. 10 One of the issues dealt with in the first determination, and effectively incorporated into the one relating to the Warringa Street site, related to breaches of contract. The adjudicator said that Bauen could not set off an amount for alleged damages that was not indicated in the payment schedule. Presumably, in saying this, the adjudicator was seeking to direct himself by reference to s 20(2B) of the Act. In any event, the adjudicator said, if there were no contractual provision for set-off of damages for breach of contract against progress payments, then there was nothing that he could do about it. 11 I mention that because, as was common ground, the amount of the payment claim was to be determined in accordance with s 9(b) of the Act, which directs attention to the method of valuation set out in s 10(1)(b). The fourth item referred to in s 10(1)(b) requires that regard be had to the estimated cost of rectifying defective work. There is no doubt that a claim for defective work is a claim for damages for breach of a building contract. To that extent, perhaps, the adjudicator's analysis of set-off overstated the position. But nothing further turns on that. 12 The adjudicator turned his attention to defective and complete work, and a calculation of the amount of a progress payment, in paras 7 to 11 of his determination. It is convenient to set those out, together with the relevant headings, in full. Allegedly defective and incomplete work 7] In the payment schedule the respondent alleges certain defects in the claimant's work. In the adjudication response the claimant denies that the claimant's work is defective as alleged. As in the three previous adjudications, in support of the allegations of defective work, the respondent relies upon photographs and a report by Mr. Wallace dated 29 October 2010. The photographs are updated and unlabelled. I find them of no assistance. The report of Mr. Wallace is identical to that in the other three adjudications expected for the report number [number 6112] and the address of the property. Mr Wallace does not say that the defects existed at the reference date. The respondent has provided no evidence to rebut the response of the claimant to the allegations in the payment schedule of defective work. 8] I have examined the adjudication response to see if it contains anything to support an allegation of defective work at the reference date. It is irrelevant whether there were defects in the claimant's work as it proceeded. What is relevant is whether there are defects remaining at the reference date. If the claimant has rectified defects before the reference date then there is no abatement of the value of work on account of those defects which no longer exist. 9] The respondent cities s 18B of Home Building Act 1989 NSW. Section 18B prescribes a warranty that the work will be performed in a proper and workmanlike manner. It seems that the respondent is confusing damages [being alleged delay costs] allegedly arising from failure by the claimant, as the work proceeded, to perform it in a proper and workmanlike manner and the cost of rectifying any defects or completing work remaining at the reference date. 10] The respondent has failed to satisfy me that any of the defects alleged in the payment schedule existed at the reference date. The respondent has failed to satisfy me that the respondent has any valid reason for withholding payment. Calculation of the amount of the progress payment 11] I see no reason for not accepting the claimant's estimates [in the payment claim] of the percentage to which are works complete. I accept the claimant's valuation of the work at the reference date. I am satisfied that the claimant is entitled to the whole of the progress payment claimed in the progress claim. 13 The reference to the report of Mr Wallace in para 7 is a reference to a document that formed part of the adjudication response. It was not, of course, referred to in the payment schedule, but no point seems to have been taken about this. Mr Wallace said, in substance, that he had monitored works on the various sites, and that "as at the date of this report, the works are incomplete and behind schedule ...". It is apparent from what he said in the next subparagraph that that comment did not necessarily relate to the works being undertaken by Westwood at the Warringa Street site. 14 In para 3.3, Mr Wallace identified his task as being to address what, in his view, was defective or non-conforming work, and other breaches of the contract, including by reference to instructions and specifications, that he had observed. 15 In paragraph 4.3, Mr Wallace stated: The building works are incomplete, there are some defective items of works that still require rectification.

16 In section 5, Mr Wallace set out, from paras 5.3 to 5.13, various defects that, in his opinion, existed at one time or another. In the case of all but para 5.10, the report was in the form, "I have reported ... that during my inspections ...." or "I have reports that" some defect exists. 17 In no case does Mr Wallace say in terms that the defects that he had reported upon at some stage in the past were current as at the date of his report, 29 October 2010. It may be possible to infer that some of the matters reported upon might not have been rectified, but if that inference is one that can be drawn, the process by which it could be drawn is by no means clear. 18 I excepted para 5.10, in my brief summary of the defects that Mr Wallace had observed to exist at some time. That is simply because para 5.10 was in a different format, and referred to a failure to provide certification. I do not think that this has anything to do with the case of incomplete work, or the dispute between the parties as to the percentage of completion. Nature of the challenges 19 Bauen makes a number of challenges to the adjudicator's reasoning processes. It submits that, in some respects, he failed to carry out the task entrusted to him by the legislation, and in doing so, denied natural justice to Bauen. It is convenient to start with para 8 of the determination. No reference to the payment schedule? 20 In para 8, and elsewhere in the determination, the adjudicator said that what was relevant was the existence of defects as at the reference date. His reasoning was, in substance, that the material in the adjudication response did not satisfy him, that there were any defective works outstanding as at the reference date. A challenge was made to his identification of the reference date as being the relevant date, but that can be put to one side for the moment. In fairness to the adjudicator, I think that what he was saying was that it needed to be shown that there was defective work outstanding as at the reference date because that was the date at which the payment claim speaks, and the date at which the entitlement was to be determined. Thus, as he said explicitly both in para 8 and in para 9, if defects had been rectified before the reference date (i.e., rectified by Westwood), they should not be taken into account in assessing the amount of the payment claim. 21 In terms, the adjudicator said that it was the adjudication response that he "examined" in relation to the allegation of defective work. However, as was submitted, that is not the task entrusted to him by the statute. Section 22(2) of the Act sets out the matters which the adjudicator is to "consider" (and says that the adjudicator is to consider those matters only). They include, by para (d), the payment schedule together with the submissions (including relevant documentation) duly made in support of it. It is, of course, legitimate to have regard to an adjudication response to see what, if any, submissions are duly made in support of a payment schedule. But it is the payment schedule that is to be examined to see what is the case that the respondent to a payment claim puts forward for denying its liability to make the payment of the claimed amount. 22 Adjudicators are required, by s 22(3)(b) of the Act, to give the reasons for their determination unless the parties have dispensed them from doing so. That engages the problem of sufficiency of reasons. In the context of the courts, that question was considered by Hayne J (with whom McHugh and Gummow JJ agreed) in Waterways Authority v Fitzgibbons (2005) 79 ALJR 1816. His Honour said at [129] that reference to the sufficiency of reasons may give rise to "some doubt about what principles are engaged". At [130], his Honour explained one of those principles as follows: ... because the primary judge was bound to state the reasons for arriving at the decision reached, the reasons actually stated are to be understood as recording the steps that were in fact taken in arriving at that result. 23 Although adjudicators work under significantly greater time pressures than judges, and their reasons should not be scrutinised with the attention to detail to which the reasons of trial judges and intermediate appellate courts are subjected in ultimate courts of appeal, nonetheless the reasons must indicate why it was that the adjudicator arrived at the determination given in accordance with s 22(1). Just as there is with judges, so too with adjudicators there is a presumption that the stated reasons are all of the reasons for coming to the conclusion expressed. 24 Of concern in Waterways Authority v Fitzgibbons was the primary judge's acceptance of the evidence of one medical practitioner over that of others. It appears from what Hayne J said at [131] that the trial judge concluded that the evidence of a particular practitioner should be accepted and preferred "but disclosed no reasoning supporting that conclusion". As his Honour said at the end of the same paragraph, "[t]he absence of explanation for, and reasoning and support of, the conclusion expressed ... reveals that the process of fact finding miscarried". 25 In this case, the proper inference to draw from what the adjudicator said at para 8 of his reasons, coupled with his failure to indicate anywhere else that he examined, or in the language of s 22(2)(d) "considered" the payment schedule for the purpose stated in para 8, is that he examined only the adjudication response to see if the "defence" of defective works had been made good. This suggests that the adjudicator did not carry out the statutory function entrusted to him, in so far as considering the payment schedule is an element of that function. 26 I acknowledge that at various places in the determination, the adjudicator refers to the payment schedule. He does so, for example, in para 5 (where he refers to a set-off claimed for delay costs) and in para 7 (where he refers to the allegations of defects). What he does not do is say that he looked at the payment schedule "to see if it contains anything to support an allegation of defective work at the reference date". 27 On the face of things, therefore, there is jurisdictional error because the adjudicator failed to exercise the jurisdiction given to him by the Act. In a somewhat analogous situation, in Musico v Davenport [2003] NSWSC 977, I referred to an adjudicator's failure to have regard to relevant provisions of the construction contract with which that case was concerned (and noted s 22(2)(b) of the Act, requiring consideration of the provisions of the construction contract), and said that the adjudicator "therefore failed to carry out the task that the Act requires to be carried out in the manner that the Act requires it to be carried out". It followed, I said in that case, that the adjudicator "failed to exercise the jurisdiction given to him by the Act". 28 For the same reasons, I think that in relation to the issue with which I am presently concerned, the adjudicator failed to exercise the jurisdiction given to him by the Act. That is why I said, earlier, that there is jurisdictional error in the approach taken. 29 Were it necessary to decide, that could also support a finding of denial of natural justice. Discretionary factors 30 However, it was urged upon me for Westwood that one must pay attention to what would have happened if the adjudicator had looked at the payment claim. (It was urged upon me for Bauen that if I were to undertake this task, it would be intruding into the functions of the adjudicators). I have indicated that one of the documents specifically referred to in the payment schedule as justifying the failure to pay on the ground of defective work does not appear to say anything relevant to this particular contract. I have indicated also that the other documents referred to, which may or may not speak about the particular project, were prepared on 12 and 20 August 2010. I have to say that I think it is unlikely in the extreme that an adjudicator who properly instructed himself or herself as to the relevant task, could find anything in the documents to which reference was made that would supplement the conclusion that, in this case, the adjudicator drew from the adjudication response. 31 If matters went no further, it would be necessary to consider whether, in those circumstances, the relief that prima facie is available under s 69 of the Supreme Court Act 1970 (NSW) based on the conclusions that I have reached, should be granted or withheld as a matter of discretion. 32 Before leaving the question of defective work, I should note that it was of particular relevance in this case because, as I have said, the adjudicator rightly identified his task as being to value the construction work in accordance with s 10(1)(b). As part of that process, the adjudicator was required to have regard to whether any of the work was defective and, if so, the estimated cost of rectifying that defective work. By inference, at least, the adjudicator would be required to set off, from the claimed amount, whatever amount he reached as the estimated cost of rectifying those of the defects asserted by Bauen that he might find were proved to his satisfaction. 33 In this case, however, not only was it difficult to identify from the documents given to the adjudicator what, if any, work was defective; it was difficult, if not impossible, to work out what was the cost of rectifying those defects. So far as I can tell, neither the payment schedule nor the adjudication response contained any attempt to identify specific defects that should be taken into account in assessing the amounts of the progress claim, nor any costing of the rectification of those defects to enable the adjudicator to determine what, if anything, should be allowed for them. Nor, so far as I can tell, was there any basis on which the adjudicator, had he been able to identify the defects, could have costed their rectification. In reality, I think, any estimate of cost would have been a guess. 34 In those circumstances, also, it seems to me to be strongly arguable that there is a strong discretionary ground for the refusal of relief. There was no material before the adjudicator to enable him to say what amount should be set off from the amount claimed by Westwood in respect of the defects alleged. Thus, Bauen did not provide any reason to the adjudicator (apart from a bold and unparticularised assertion that the cost of rectification exceeded the amount of the payment claim) to enable him to come to a reasoned decision. 35 However, there is also a complaint in relation to para 11 of the determination. Because I have concluded that Bauen is entitled to relief for the reasons that follow in relation to that complaint, I do not need to resolve the discretionary issues relating to the complaint about para 8 of the determination. No reasons for decision? 36 I turn to para 11 of the determination. In that paragraph, the adjudicator dealt with the dispute as to the percentage of works that are complete. It is clear, from the way he approached it, that there was an assertion of particular percentages of completion made by Westwood and an assertion of lesser percentages of completion made by Bauen. From the material in the payment claim and payment schedule (and adjudication application and adjudication response) to which I was taken, it appears that there was no more than assertion against assertion. The adjudicator dealt with that by saying that he saw no reason for not accepting one assertion rather than the other, and thus accepting the valuation flowing from the assertion which he preferred. 37 It was submitted for Bauen that in proceeding that way, the adjudicator did not comply with his obligation to give reasons; or alternatively, to the extent that those were his reasons, that they show that he did not carry out the task of making a determination. Reliance was placed on the decision of the Court of Appeal in Halkat Electrical Contractors Pty Ltd v Holmwood Holdings Pty Ltd [2007] NSWCA 32. 38 In that case, as appears from the reasons of Giles JA, (with whom Santow and Tobias JJA agreed) at [14], the adjudicator had before him, as the adjudicator here had before him, assessment versus assessment, or assertion versus assertion, in each case unsupported by evidence that would enable him independently to determine the outcome. The adjudicator preferred one party's assertion to the other because, in another respect, quite unrelated, that other party had put propositions which the adjudicator described as "unmeritorious challenges", and had asserted "completely unjustified deductions". 39 In those circumstances, Giles JA said that the adjudicator did not carry out the task given to him by the Act. The reasons that the adjudicator gave did not support the conclusion, and thus there was a failure to perform the statutory function. I set out his Honour's reasons at [26] to [28]: 26 With respect to the trial judge, I consider that the fundamental vice in the adjudicator's determination can be shortly explained without embarking on an exegesis of the reference in Brodyn Pty Ltd v Davenport to a bona fide attempt to exercise the statutory power. Section 22 of the Act required that the adjudicator determine an adjudicated amount (s 22(1)) by considering particular matters (s 22(2)). The adjudicator had to make a determination, and he did not make a determination if he arrived at an adjudicated amount by a process wholly unrelated to a consideration of those matters. But that is what the adjudicator did. He stated expressly in his reasons that he did not have evidence on which he could independently arrive at the value of the completed work, and that he adopted the appellant's valuation in preference to that of the respondent because of the respondent's unmeritorious challenges to the validity of the payment claim.

27 On the face of the determination, the adjudicator simply did not perform the task required by the Act, and his purported determination was not given greater respectability by the reference to his inclination "to believe the claimant rather than the respondent": the unmeritorious challenges were not a basis for belief or disbelief, and in any event it was not correct to speak of believing a corporate body. The adjudicator did not comply with an essential precondition to the existence of a valid determination.

28 That is sufficient for the disposal of the appeal, and it is not necessary to consider failure to have regard to relevant contractual provisions or failure to have regard to the payment schedule. I should not be taken to approve by silence all that the trial judge said. 40 In this case, para 11 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 para 11 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. 41 In those circumstances, it seems to me, this is again a case of jurisdictional error, because on the face of the reasons, and by application of what was said in Halkat, the adjudicator did not perform his statutory function; and of denial of natural justice. 42 I should note that Halkat was a decision given when the grounds of review were understood to be as stated in Brodyn Pty Limited v Davenport (2004) 61 NSWLR 421. The position is now somewhat different, having regard to the decision of the Court of Appeal in Chase Oyster Bar v Hamo Industries [2010] NSWCA 190. The changes that flow from the decision in Chase are focused more on the juristic basis on which, and the way in which, the Court grants relief than on the substance of the bases upon which relief is granted. 43 In my view, what Giles J said in Halkat is applicable under the Chase regime, at least insofar as it deals with the obligations of adjudicators to carry out the powers entrusted to them by the Act in accordance with the Act and in having regard to the purposes for which those powers are conferred. Discretion 44 Mr O'Brien of counsel, who appeared for Westwood, submitted that the amounts at stake were relatively insignificant and thus that if I were satisfied (as I am) that there was jurisdictional error or denial of natural justice, I should withhold relief as a matter of discretion. 45 I do not think that this is correct. The adjudication application identified the amount claimed for framing, said to be complete, at $133,650. Ten per cent of that is $13,365. There are other components of the claim as well. I have not undertaken the arithmetic to see precisely what is the dollar effect of the difference between the assertion of Westwood and the assertion of Bauen, but it would appear to be of the order of $20,000 or perhaps $25,000 in total. 46 What is a significant or substantial sum is a matter which cannot be considered out of context. One man's pounds are another man's peanuts. I do not think it is appropriate for the Court to say, on some a priori basis, that a difference of $20,000 or $25,000 is insubstantial or insignificant, to the point where, as a matter of discretion, relief otherwise available should be refused. Other issues 47 There were numerous other matters argued by reference to the amended Technology and Construction List Statement. I do not propose to deal with those other matters. They are articulated in the list statement and in the parties' respective written submissions. 48 The conclusion that I have reached in relation to para 11 of the adjudication determination and on the submission as to associated discretionary issues is sufficient to justify the grant of relief that Bauen seeks. Orders 49 The parties did not address in specific terms on the relief sought by the summons. However, it seems to me, both the declaration sought and the orders (in the nature of a certiorari and others) are appropriate. 50 Accordingly, I make the following orders:

(1) Declaration in terms of prayer 1 of the summons filed on 17 November 2010. (2) Orders in accordance with prayers 2 to 4 of the summons. (3) Order that the exhibit be retained for 28 days and thereafter dealt with in accordance with the Rules. 51 Prima facie costs should follow the event, but I will hear the parties on that. (Counsel addressed.) 52 I order the first defendant to pay the plaintiff's costs of the proceedings. I make no order otherwise as to costs.

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