Energy's submissions
73 Energy submitted that Downer's entitlement to claim under cl 30.1(b) of the deed for costs arising from latent conditions depends upon showing that they were ground conditions not resulting from inclement weather which would not have been anticipated by a prudent, competent, and experienced contractor, and which will impair or delay the completion of the work. It emphasized that upon the proper construction of cl 30.1 it is necessary to show that the costs claimed arose out of, or resulted from, the latent conditions encountered.
74 It was submitted that it is evident on its face that the payment claim was drafted with cl 30.1(b) in mind. It was put that Schedule I and the accompanying documents identified a claim for costs in relation to water ingress resulting from latent conditions being permeable bedding plane shears linked to a rechargeable water source at specified locations. It was put that the particulars of the basis of the claim asserted in terms that significant water entry was encountered at those bedding plane shears as a result of which, inter alia, the water inflow disrupted and reduced productivity during the construction of the tunnel, and Downer incurred additional costs, and completion was delayed. It was argued that the letter of 13 June 2002 from Downer to Energy (para 48 above) and the passage from Douglas Partners Report of 12 July 2005 (para 44 above) effectively particularized the claim that the latent condition relied upon was constituted by ground conditions consisting of three bedding plane shears at specified locations which allowed the inflow of groundwater and were unanticipated within the meaning of the definition. Further, it was put that, consistent with the terms of the definition, particulars (2), (3) and (4) of the basis of the claim should be understood as identifying only the bedding plane shears, and not the water inflow, as the unanticipated ground conditions relied upon, and particulars (5) and (6) as specifying the locations at which they were linked to a rechargeable water source relevant to the assertion in particular (3) that they did not result from inclement weather. It was said that neither in the letter of 13 June 2002, which was given as a notice under cl 30.1(b)(i) of the deed, nor in Schedule I, was it asserted that the ground conditions consisted of water.
75 Energy submitted that its payment schedule responded directly to the matters relied upon in support of the payment claim. It denied the existence of latent conditions at each of the nominated locations (paras 51, 52 above) and that there was ongoing water ingress at any of them. Its denial was supported with detailed reasons including Dr Pells' report of July 2005 (paras 53, 54 above). The payment schedule also contended that the ground water conditions had in fact been, or alternatively, should have been, anticipated by Downer.
76 Energy then submitted that the ambit of the issues for determination was limited by the payment claim and payment schedule. Accordingly, it put that the core dispute concerned the existence of a latent condition with the features, and situated at the locations, specified in the payment claim which resulted in water ingress in relation to which Downer incurred additional costs. It was put that no assertion was made in the claim documents that the level of water ingress was the, or part of a, latent condition relied upon.
77 It contended that the adjudicator failed to determine Downer's claim based upon bedding plane shears as the latent condition, but dealt with it as a claim based upon the unanticipated level of water ingress as the latent condition, an issue not included in the payment claim, or met in the payment schedule, or dealt with in submissions.
78 Energy accepted that at the commencement of his analysis of the Schedule I claim (determination (D) para 63) the adjudicator correctly saw the claim for water entry through bedding plane shears linked to a rechargeable water source encountered during excavation of the tunnel. It was put that, nevertheless, thereafter (D para 68ff) the questions posed and decided were whether substantial water ingress was anticipated by Downer, and whether the amount of water ingress should have been anticipated. As to the first, he found that Downer did not anticipate the amount of water actually encountered (D para 73). After reviewing the documentation he stated that it indicated to him "… that the conditions were not anticipated and that there was substantial ongoing water ingress …". As to the second, he concluded (D para 84) that "… it cannot be said that the Claimant should have anticipated the level of water ingress encountered".
79 It was put that, in effect, the adjudicator erroneously proceeded to determine whether the water inflow was the latent condition upon which the claim was based whereas Downer had never claimed that it was. It was also submitted that his departure from the relevant question is apparent from his finding that the latent condition with which he was concerned was "the water ingress Latent Condition" (D para 86), and that this was the same claim addressed in the payment claim, payment schedule, adjudication application and adjudication response (D para 88).
80 Finally, Energy submitted that it was entitled to relief because the adjudicator did not determine the real dispute between the parties, and/or because it had been denied natural justice when the adjudicator failed to provide an opportunity to put submissions as to the basis upon which he in fact determined the claim. In essence it was put that, in the circumstances, the determination failed to comply with basic requirements for the existence of a determination, and/or the adjudicator failed to make a bona fide attempt to exercise his power, and/or there was a denial of natural justice with the consequence that the determination was void (Brodyn paras 53, 55).
Downer's submissions
81 The thrust of Downer's submission was that at all relevant times the issue for adjudication was whether or not the level of water encountered and unanticipated at the time of tender was a latent condition, or part of the ground conditions which constituted a latent condition within the meaning of cl 30.1 of the deed. It was put that it was evident from Schedule I and its accompanying documents, and from the subsequent documentation under the Act that the entry of water was the critical component of the latent condition either of itself, or as part of the ground conditions which included the bedding plane shears.
82 Downer submitted that Schedule I was to be read with the Douglas Partners Report and the other documents to which it referred. It would be understood that the opinion expressed in the report was that the high groundwater inflow rates encountered were latent conditions, being unanticipated conditions not due to inclement weather (report paras 2, 3, 91-93). Further, it was said that the letter of 11 May 2002 from Downer to Energy concerned delay from increased water ingress, and the effect of the letter of 13 June 2002 was to serve notice of a latent condition claim based on unanticipated inflow. Accordingly, it was put that when read as a whole the information in the payment claim made plain to Energy that the latent conditions relied upon were not bedding plane shears at specified locations, but the water ingress through them, and that the costs claimed were in relation to such water ingress. Further, it was submitted that particulars (6) and (7) identified the bedding plane shears at which the water ingress condition was encountered, and that references to them would not be reasonably understood to be an assertion that they themselves were the latent conditions relied upon.
83 Downer then turned to the payment schedule and contended that it evidences Energy's understanding from the outset that the latent condition was in respect of the water ingress. It put that statements in the "Overview" e.g. para 1.8, challenged the claim that the water ingress was unanticipated which, ultimately, was an issue determined by the adjudicator for which he was criticised. To like effect were the assertions in paras 3.3 - 3.5 of the Schedule in response to the payment claim which indicated Energy was not contesting the claim on the basis that the latent condition consisted of the bedding plane shears. It was said that Dr Pells' report supported the submission as it dealt only with matters pertaining to ground water quantity, and its executive summary refuted the claim that water inflow through the bedding plane shears was unanticipated. It was put that, in responding to the Douglas Partners Report, his assessment of the latent condition claim (section 7) indicated that he identified the latent condition as the groundwater inflow. As the report proceeded to analyse and disagree with Downer's expert, it was put that Energy had joined issue on the latent condition claim of which a critical component was recognised to be water ingress.
84 With reference to the adjudication application Downer submitted that no different claim was advanced by reason of the alteration in the chainages. It was argued that its contents made plain that the contractual basis and quantum of the claim, and the work for which payment was sought, were the same as stated in the payment claim.
85 Downer then submitted that by its adjudication response Energy addressed what it asserted to be a different claim based upon the different location of the bedding plane shears, and advanced reasons on the facts in support of its contention that the adjudicator was being asked to determine a claim different from that stated in the payment claim. Reference was made, for example, to Dr Pells' report of 12 August 2005 which responded to Douglas Partners Report of August 2005 from Mr John Braybrooke in which he noted "… In order to address Braybrooke's comments it must be remembered that the claimed latent conditions are for sustained flows from bedding plane shears because they are claimed to have been connected to a "rechargeable water source"". Alternatively, it was put that if there was a divergence between the payment claim and the adjudication application, and the adjudicator had proceeded to determine the claim raised in the adjudication application and was wrong to do so, such error was one of fact or law and would not amount to a failure to comply with the requirements essential to the validity of his determination i.e. such error would be non-jurisdictional as explained in Brodyn paras 55, 56.
86 The detail of Downer's careful analysis of the adjudication determination has been recorded in the transcript (T pp 86-90). In essence it was put that the adjudicator's reasons demonstrate that he made a bona fide effort to understand and consider the issues. It was put that paras D 63 and 64 demonstrate that the adjudicator correctly understood from the payment claim, payment schedule and the adjudication application that the issue was water entry to an unanticipated level, and paras D 86ff his due consideration to Energy's contention in the adjudication response that Downer was propounding a new claim, following which he properly rejected it. Alternatively, if he was wrong, his error was not sufficient to render the determination void (Brodyn paras 55, 56).
87 As to the issue of natural justice, it was put that from the outset the issue as to water ingress being the latent condition was fully addressed by each party's experts and, accordingly, even if the adjudicator determined the wrong question there was no procedural unfairness to Energy in the circumstances of this case.
Decision
88 The first step is to ascertain from the payment claim the basis upon which the claim for costs in relation to water ingress was made. For the following reasons I accept generally Energy's submissions that Downer asserted as the basis of its claim the existence of latent conditions consisting of bedding plane shears at specified locations which resulted in water entry.
89 Schedule I of the payment claim commences with the description that it relates to delay and other costs incurred as a result of a latent condition. It was common ground that the contractual basis of the claim was cl 30.1(b) of the deed.
90 Latent conditions are defined as any ground conditions, excluding ground conditions resulting from inclement weather, wherever occurring, which differ materially from those which should have been anticipated by a prudent, competent and experienced contractor. Clause 30.1(b)(i) requires the contractor to give notice to the principal's representative if it considers that it has encountered a latent condition which will impair or delay completion of the work. Clause 30.1(b)(ii) requires the principal's representative, within 21 days of receipt of the notice, to determine whether a latent condition has been encountered and whether it will impair or delay completion of the work, and to notify the parties of its determination. Clause 30.1(b)(iii)(B) founds the entitlement of the contractor to be paid extra costs incurred after the notice is given arising from the latent condition if the principal's representative has determined that a latent condition has been encountered and it will impair or delay completion of the work. The effect is that a contractor which claims extra costs under these provisions needs to show that, in fact, it encountered latent conditions as defined, which impaired or delayed completion of the work, and that the costs arose or resulted from the latent conditions encountered.
91 It is apparent from the particulars included in the section of Schedule I headed "Basis of Claim/Entitlement" that Downer intended to specify the facts and matters relied upon to establish that the ground conditions it encountered were latent conditions as defined, which impaired or delayed completion of the work with the consequence that it incurred additional costs in relation to water ingress.
92 Particulars (2), (3) and (4) identified the ground conditions relied upon in terms of the latent condition definition, and particulars (5) and (6) provided the reader with a detailed description of location and features. Particulars (6) and (7) alleged water entered through, and was encountered at, those features. In my opinion it is clear from the context in which they appear that the terms "ground conditions", "those features", and "Latent Condition" refer to bedding plane shears that were asserted to be linked to a rechargeable water source at each of the locations specified in particular (5) with the characteristics specified in particular (6). Mindful that an element of the definition of latent conditions is the exclusion of the ground conditions resulting from inclement weather, the reader of Schedule I would understand that in describing the bedding plane shears as linked to a rechargeable water source (particulars (2), (6)(e)) Downer was stating the fact relied upon to bring these features within the definition. By these particulars Downer clearly identified the bedding plane shears as the latent conditions relied upon.
93 Particular (8) includes particulars of what was claimed to be "… the result of Downer encountering the Latent Condition …", being water inflow in respect of which it incurred additional costs and completion was delayed. Particulars (9) and (10) identified clause 30.1(b) as the basis of its entitlement to payment.
94 In the section headed "Notices" reference was made to the letter of 11 May 2002 and to the cl 30.1(b)(i) notice of 13 June 2002 in further identification of the basis of the claim. The relevant text of the notice is at para 48 above. The letter drew attention to water entry which might cause delay. The notice, in terms, described the latent condition which Downer asserted it had encountered as consisting of a horizontal feature in the bedrock located between chainages 572 and 505. Its purpose, under the contract, was to require Energy to undertake the twofold task under cl 30(1)(b)(ii) namely, to determine whether the alleged condition had been encountered and, if so, whether it would impair or delay completion of the work. Accordingly, in the notice (and in the Schedule I particulars) Downer identified the respects in which the latent conditions resulted in impairment or delay by asserting they were responsible for the volume of groundwater entering at the specified locations. It is relevant that neither in the notice nor the Schedule I particulars was it alleged, expressly or by implication, that the latent condition relied upon was the unanticipated volume of water ingress.
95 Consideration of the whole of Schedule I (including, as part of it, the documents referred to) with regard to the principles stated in the cases leads to the conclusion that the basis of the claim specified by Downer to be answered by Energy, and to be determined by the adjudicator, was substantially the same which Downer required Energy to determine under cl 30(1)(b)(ii) of the deed, namely whether the bedding plane shears were latent conditions and, if so, whether the water ingress arose from them.
96 I have not overlooked the passages from the Douglas Partners Report referred to in Schedule I upon which Downer relied on this issue. In my opinion, read in the context of the other matter in Schedule I, the report does not justify the conclusion that the latent conditions identified were water ingress and not bedding plane shears. The cl 30.1(b)(i) notice distinguished between groundwater inflow and ground conditions. It claimed that the groundwater inflow was the result of the ground conditions consisting of bedding plane shears which constituted a latent condition. The Schedule I particulars were consistent with the claim, and the distinction between "ground condition" and "groundwater inflow" made in the notice.
97 For the purpose of the Douglas Partners Report, the brief was to provide an opinion "… as to what groundwater conditions that (sic) should have been reasonably anticipated by a prudent … contractor …" (report p 4). As I understood it, the report dealt with that question. To the extent that the relevant ground conditions were considered the view was expressed that the three bedding plane shears could not, and should not, have been anticipated (report paras 82, 93). A similar view was expressed about the water ingress and groundwater conditions (report paras 91, 92). In my opinion it is improbable that reference to these opinions would cause the reader to conclude that the groundwater conditions, and not the bedding plane shears, constituted the latent conditions relied upon as the basis of the claim.
98 The relevant matter from Energy's payment schedule is set out in paras 51-54 above. In my opinion it is plain from the face of the payment schedule (including Dr Pells' report) that the reasons provided pursuant to s 14(3) of the Act show that Energy understood from Schedule I that Downer's claim was based on the allegation that the bedding plane shears constituted latent conditions which attracted the application of cl 30.1(b) of the deed. In para 3.4 of its schedule Energy expressly denies that the ground conditions, the bedding plane shears, amount to a latent condition. In paras 3.5 and 3.7 it joins issue with the view expressed in the Douglas Partners Report that the groundwater conditions should not have been anticipated. In my opinion simply because Energy challenged, with Dr Pells' support, the claims about groundwater expressed in the Douglas Partners Report does not support Downer's submission that Energy understood from the payment claim that the water inflow was the latent condition.
99 The issues for determination were those disclosed in the payment claim and the payment schedule (Multiplex paras 67, 68; Climatech paras 24, 25; Energetech para 24). Submissions in support of an adjudication application or an adjudication response are to be taken as supportive of, but not part of, a payment claim or a payment schedule as the case may be (John Holland paras 25, 30). Thus it is necessary to ascertain the issues in dispute uninfluenced by accompanying submissions.
100 For the reasons given, I accept Energy's submission that the core dispute concerned the existence of latent conditions consisting of bedding plane shears with the features, and situated at the locations, specified in the Schedule I particulars, and whether such conditions resulted in water ingress for which Downer incurred additional costs.
101 I turn now to consider the adjudication determination, the relevant passages of which are at para 72 above.
102 The adjudicator (D para 92) found that the level of groundwater encountered was a latent condition for the purpose of the contract notwithstanding that the principal's representative determined under cl 30.1(b)(ii) that it was not. As pointed out in Energy's submissions, the adjudicator's reasons (D para 68ff) disclose that he proceeded on the understanding that the latent condition specified in the payment claim as the basis of entitlement to payment under the deed was excess water ingress. Accordingly, and mindful of the definition of latent conditions, his analysis of the documents before him was directed to the questions whether the water ingress was, or should have been, anticipated. He found that the conditions, being the levels of water ingress actually encountered, were not anticipated (D para 73), and that it cannot be said that they should have been (D para 84).
103 The reasons show that the adjudicator was alive to Energy's submission in support of its adjudication response protesting that in the adjudication application Downer advanced a latent condition claim different from that relied upon in the payment claim in that the chainages at which the bedding plane shears were located were different. Notwithstanding, he went on to say:
"86. … Although the Payment Claim and the Adjudication Application identify the cause of the water ingress Latent Condition as " extensive, sub-horizontal, bedding plane shears that were linked to a rechargeable water source " it is the same claim for a Latent Condition for excess water ingress as was notified in accordance with Clause 30 on 11 May 2002.
87 There were errors in the Payment Claim regarding the chainages at which the excess water ingress is claimed to have occurred. Notwithstanding the Respondent's submission that this amounted to the claim in the Payment Claim being a different claim to that in the Adjudication Application, the many volumes of supporting material provided by both parties deal with only two latent conditions. These two latent conditions are:
a) the present group of claims under consideration which relate to the amount of water ingress; and
b) the claims relating to the composition of the groundwater.
88 The Payment Claim, Payment Schedule, Adjudication Application and Adjudication Response clearly address the same claim for the increased water ingress. The claim in this adjudication is not a new claim. The issues are extensively ventilated by the parties in the large body of supporting documents provided by each party".
104 In my opinion these statements demonstrate, and I find, that the adjudicator failed to understand, and to determine, Downer's payment claim.
105 The adjudicator's reasons indicate that his approach was coloured by his understanding of the cl 30(1)(b)(i) notice to Energy. (In D para 86 he stated the date of the notice as 11 May 2002. I accept that he intended to refer to the notice of 13 June 2002 as the quotation in the immediately preceding paragraph (D 85) was taken from it.) It appears that he understood it to be notice of a claim by Downer that excess water ingress was a latent condition under the deed. For reasons earlier given, in my view he was wrong to do so.
106 In addition, it appears that his understanding was also the product of consideration of the payment claim, payment schedule, adjudication application, adjudication response and supporting material including submissions. He says that these documents demonstrate that the parties addressed only two latent conditions, one being that which related to the amount of water ingress. He might have concluded otherwise had his consideration been limited to the payment claim and to the payment schedule for the purpose of identifying the basis of the claim and the true ambit of the dispute.
107 It follows that, in my opinion, the adjudicator failed to determine the payment claim the basis of which was bedding plane shears as the latent conditions, but instead determined a claim that was substantially different from it based on what he found was a latent condition consisting of excessive water ingress.
108 The remaining issue is whether the failure to determine the payment claim has the effect that the determination is void.
109 In Brodyn (para 53) Hodgson, JA identified some basic and essential requirements for the existence of an adjudicator's determination. He concluded that the legislature did not intend that exact compliance with all the more detailed requirements of the Act was essential to the existence of a determination (Brodyn para 55). His view is that compliance with the requirements of s 22(2) is not a pre-condition of the existence of any authority to make a decision and that "… it is sufficient to avoid invalidity if an adjudicator either does consider only the matters referred to in s 22(2), or bona fide addresses the requirements of s 22(2) as to what is to be considered" (Brodyn para 56).
110 In The Minister for Commerce, His Honour said (para 49) that s 22(2) requires the adjudicator to consider the provisions of the Act and the provisions of the contract and so long as he does this, or at least bona fide addresses the requirements of s 22(2) as to what is to be considered, an error of fact or law does not render the determination invalid.
111 His Honour provides guidance as to the application of these principles in Climatech in which he said:
"24. However, I accept that what is referred to an adjudicator for determination is a claimant's payment claim, and what an adjudicator is to determine is the amount of the progress payment to be paid on the basis of that claim and on the basis of other considerations in s.22(2) of the Act. Accordingly, the task of the adjudicator is to make a determination within the parameters of the payment claim, although that is not to say that, if an adjudicator were to make an error which can later be seen as taking the determination outside those parameters, it necessarily invalidates the determination".
112 His Honour proceeded (Climatech paras 25-27) to emphasize the importance of the identification of the basis of a claim which I take to be the core issue for consideration and determination under s 22(2). It follows, in my opinion, that it is an essential requirement that the adjudicator must consider and determine whether the specified basis of the payment claim has been established, and a failure to do so is a failure to meet the mandate of s 22(2)(c). Support for this view is derived from the scheme of Divs 1 and 2, Pt 3 of the Act by which the ambit of the issues for determination is confined by the payment claim and the payment schedule.
113 The discharge of the statutory duty requires the adjudicator to direct his mind to the terms of the payment claim itself to ascertain the basis upon which the claim is made and, having done so, to determine the payment claim with regard to other matters in s 22(2). As held in John Holland (para 25) supporting submissions cannot constitute a payment claim or part of it.
Conclusion
114 In the present case the adjudicator failed to determine Downer's payment claim the basis of which was the latent conditions consisting of the bedding plane shears which resulted in excessive water ingress. He made a determination in respect of a substantially different claim. As a result, the determination lacked a basic and essential requirement for its existence as it was not the adjudication of the payment claim. There has not been an adjudication of the payment claim within the meaning of the Act and, accordingly, the determination is void.
115 In addition, the outcome of his determination indicates a failure to consider the matters to which s 22(2) refers. The requirement to make a bona fide attempt to exercise the statutory power obliges the adjudicator to attempt to understand and deal with the real issues as disclosed in the payment claim and the payment schedule, assisted by the submissions (Brodyn para 55; Timwin para 38). Although it is apparent that the adjudicator addressed the parties' submissions as to the existence of latent conditions, his failure to deal with those directed to bedding plane shears, which went to the core of the claim, supports the finding that he did not give due regard to Energy's submissions on that issue. In the circumstances my conclusion is that his reasons indicate a fundamental failure on his part to attempt to understand the basis of the claim in the exercise of his statutory power. The consequence is that the determination is void on the additional ground that it was not the product of a bona fide exercise of power.
116 In my opinion Energy has also established that it was denied natural justice in the sense explained in Brodyn (para 55). The adjudicator made his determination of a claim the basis of which was markedly different from that specified in the payment claim and addressed in the payment schedule. Energy was afforded no opportunity to put its case in response to the approach taken by the adjudicator in the course of the determination process. I find that, in all the circumstances, there was a substantial denial of the measure of natural justice that the Act requires to be given, with the consequence that the determination is void on this ground.
117 I find that Energy has established its entitlement to a declaration that the determination of the adjudicator dated 4 October 2005 purportedly made pursuant to s 22 of the Act is void, and to appropriate consequential orders.
118 In the circumstances it is appropriate that I direct Energy to bring in short minutes, and to afford the parties the opportunity to address me concerning what further orders are appropriate and, failing agreement, in relation to costs. Arrangements should be made with my associate by 24 February 2006 for the re-listing of the matter.
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