Fulton Hogan Construction Pty Ltd v Cockram Construction Ltd

Background

1. On 4 April 2017, Fulton Hogan as head contractor entered into a major works subcontract with Cockram for the design and construction of three carparks at Manly Vale, Narrabeen and Warriewood and associated works in connection with the Northern Beaches B-Line Program for a total price of $22,137,366 (the Subcontract). Under the terms of the Subcontract, the Date for Substantial Completion of the works was 29 October 2017.
2. On 12 December 2017, Cockram served payment claim no 9 (the Payment Claim), claiming a total of $12,606,129.29 under the Subcontract.
3. On 2 January 2018, Fulton Hogan served a payment schedule in response to the Payment Claim certifying the amount payable (excluding GST) as $62,695.12. The payment schedule was divided into two parts. The first part raised what were said to be a number of jurisdictional issues. The second part consisted of a detailed schedule setting out an itemised list of the amount claimed, the amount that Fulton Hogan was prepared to allow in respect of the claim and a brief summary of the reasons for the difference.
4. On 16 January 2018, Cockram lodged an adjudication application with Australian Solutions Centre in respect of the Payment Claim. Australian Solutions Centre appointed the Adjudicator to determine the application.
5. In accordance with s 20(1) of the Act, Fulton Hogan provided the Adjudicator with an adjudication response on 24 January 2018.
6. As I have said, the Adjudicator delivered the Determination on 20 February 2018, having been granted two extensions by the parties under s 21(3)(b) of the Act.
7. Fulton Hogan challenges the Determination on two bases. First, it contends that the Adjudicator failed to perform her statutory function, in that she refused to apply what she considered to be the correct construction of cl 22.2(1)(e) of the Subcontract because she considered that it was not a legitimate condition precedent to a claim for an extension of time in accordance with the Subcontract.
8. Second, Fulton Hogan contends that the Determination was legally unreasonable and therefore invalid because the Adjudicator advanced a reason for concluding that a claim for preliminaries under the Subcontract was to be valued on a time basis that could not rationally support that conclusion.

First contention

1. In its payment schedule, Fulton Hogan contended that Cockram's payment claim should be reduced by a total amount of $1,603,000, which was an amount Fulton Hogan claimed as liquidated damages. Under cl 23.5(2) of the Subcontract, Fulton Hogan was entitled in effect to set-off that amount against the amount claimed by Cockram.
2. The claim for liquidated damages had two components. First, under cl 24.4(1) of the Subcontract, Fulton Hogan was entitled to liquidated damages of $16,000 per day for each calendar day Substantial Completion had not been achieved after the Date for Substantial Completion. Fulton Hogan claimed a delay of 58 days at $16,000 per day, making a total of $928,000.
3. Second, under cl 24.5, Cockram was liable relevantly to indemnify Fulton Hogan for any liquidated damages which Fulton Hogan was liable to pay to the principal, Transport for NSW (TfNSW), under the Head Contract to the extent "such liability arises out of or in any way in connection with the Date of Substantial Completion not occurring by the Date for Substantial Completion". Fulton Hogan claimed an amount of $675,000 under that clause.
4. One of Cockram's answers to Fulton Hogan's claim for liquidated damages was that it was entitled to a number of extensions of time. The Subcontract specified a number of conditions that had to be satisfied by Cockram in order to obtain an extension of time. One of those, set out in cl 22.2(1)(e) of the Subcontract, was that Fulton Hogan "has received an equivalent extension of time under clause 10.10 of the Head Contract".
5. Relevantly, Cockram claimed the following extensions of time: 1. EOT 28, which was a claim of 12.5 days arising from sewer encasement works; 2. EOT 03, 04 and 06, which were claims totalling 11 days arising from the presence of asbestos at the Manly Vale site; and 3. EOT 05, 07, 10, 12 and 15, which were claims totalling 16 days arising from the presence of asbestos at the Warriewood site.
6. The Adjudicator accepted each of those claims for an extension of time and accepted that there had to be a corresponding reduction in the claim for liquidated damages.
7. In dealing with the question whether the requirement of cl 22.2(1)(e) had been satisfied in relation to EOT 28, the Adjudicator said: EOT under the Head Contract - clause 22.2(1)(e): I do not consider that this is a legitimate condition precedent as it relies on a contract relationship, and the attendant obligations, to which the Claimant is not a party. Further, there is no information to suggest that the Respondent [Fulton Hogan] even sought an EOT from the Head Contractor's Principal.
8. The Adjudicator gave slightly different reasons in relation to the other extensions of time. In each case, she said: EOT under the Head Contract - clause 22.2(1)(e): I do not consider that this is a legitimate or workable condition precedent as it relies on a contract relationship, and the attendant obligations, to which the Claimant [Cockram] is not a party. Further, it appears [to] require the Claimant to demonstrate that the Respondent has been granted an EOT in submitting an EOT for same issue when the Claimant has no way of knowing if the Respondent has even sought an EOT from the Principal of the Head Contract.
9. It is common ground that, in reaching a determination, an adjudicator is required "to determine and apply what the adjudicator considers to be the true construction of the construction contract": SSC Plenty Road Pty Ltd v Construction Engineering (Aust) Pty Ltd [2015] VSC 631 at 101 per Vickery J, quoted with approval by McDougall J in Richard Crookes Construction Pty Ltd v CES Projects (Aust) Pty Ltd (No 2) [2016] NSWSC 1229 at [23]; see also Coordinated Construction Co Pty Ltd v JM Hargreaves (NSW) Pty Ltd (2005) 63 NSWLR 385 at [52] per Hodgson JA.
10. An adjudicator is also required to give reasons for his or her decision: s 22(3)(b) of the Act (unless both parties request the adjudicator not to include reasons in the determination). In determining what counts as adequate reasons for this purpose, it is necessary to bear in mind the informal nature of the adjudication process and the fact that the adjudicator may be placed under extreme time pressures because of the truncated nature of the process: New South Wales Land and Housing Corporation v Clarendon Homes (NSW) Pty Ltd [2012] NSWSC 333 at [9] per McDougall J; Bauen Constructions v Westwood Interiors [2010] NSWSC 1359 at [23] and [40] per McDougall J; Avopiling (NSW) Pty Ltd v Menard Bachy Pty Ltd [2012] NSWSC 1466 at [34]-[38] per Sackar J.
11. Fulton Hogan initially sought to characterise the Adjudicator's (jurisdictional) error as a failure to apply what she acknowledged was a term of the Subcontract - that is, the requirements of cl 22.2(1)(e). However, as the argument developed, that question merged into the question whether the Adjudicator gave adequate reasons for refusing to apply that clause of the Subcontract.
12. Cockram's primary submission was that the Adjudicator was entitled to take the view that cl 22.2(1)(e) had no effect as a result of the operation of s 12 of the Act. That section provides: 12 Effect of "pay when paid" provisions (1) A pay when paid provision of a construction contract has no effect in relation to any payment for construction work carried out or undertaken to be carried out (or for related goods and services supplied or undertaken to be supplied) under the contract. (2) In this section: money owing, in relation to a construction contract, means money owing for construction work carried out or undertaken to be carried out (or for related goods and services supplied or undertaken to be supplied) under the contract. pay when paid provision of a construction contract means a provision of the contract: (a) that makes the liability of one party (the first party) to pay money owing to another party (the second party) contingent on payment to the first party by a further party (the third party) of the whole or any part of that money, or (b) that makes the due date for payment of money owing by the first party to the second party dependent on the date on which payment of the whole or any part of that money is made to the first party by the third party, or (c) that otherwise makes the liability to pay money owing, or the due date for payment of money owing, contingent or dependent on the operation of another contract.
13. Another possibility is that Fulton Hogan was not entitled to rely on cl 22.2(1)(e) because it had failed to comply, or at least had not lead evidence that it had complied, with its implied duty to cooperate by seeking the appropriate extensions of time from TfNSW. Cockram did put a submission to the Adjudicator along those lines in paras [271]-[272] of its Adjudication Application. There it said: 271 There is also a real question over, to the extent delays were suffered by the Respondent under the Head Contract, it would be a breach of the implied duty to cooperate if the Respondent failed to prosecute EOT claims upstream under the Head Contact. 272 In other words can the Respondent even attempt to rely on clause 22.2(1)(e) and 22.2(3) (noting 22.2(1)(e) is informed by 22.2(3)) when to do so would be relying on its own breach and failure to claim the same EOT under the Head Contract.
14. The difficulty is that the Adjudicator does not expressly offer either of these reasons as reasons for her conclusion and, on the face of it, she appears to be saying that cl 22.2(1)(e) should not be applied because she did not consider it to be legitimate or workable, which, without more, is not a proper basis for refusing to apply the clause.
15. One thing the Adjudicator does say is that the clause is not a legitimate condition precedent because it relies on a "Contract to which the claimant is not a party". Cockram submits that in making that statement the Adjudicator must have had in mind s 12 of the Act, since the expression used by the Adjudicator corresponds closely to the expression in s 12(2)(c), "contingent or dependent on the operation of another contract". Cockram submits that that conclusion is reinforced by the fact that the equivalent of s 12 in the Building and Construction Industry Security of Payment Act 2009 (SA) (the SA Act) was the subject of a judgment of the High Court handed down on 14 February 2018 in Maxcon Constructions Pty Ltd v Vadasz (trading as Australasian Piling Co) [2018] HCA 5, which was likely to have been on the Adjudicator's mind. However, it was never put to the Adjudicator that s 12 of the Act applied and the Adjudicator did not raise the section with the parties, as might have been expected if the Adjudicator intended to rely on it. Nor did the Adjudicator refer to the section or to the decision of the High Court in the Determination. In addition, the language adopted by the Adjudicator does not mirror the language of the section. Taking account of those consideration, it is mere speculation that the Adjudicator intended to apply s 12.
16. It might be that the Adjudicator intended to rely on a failure to comply with the duty of cooperation. To some extent that conclusion is supported by the Adjudicator's statement that "there is no information to suggest that the Respondent [Fulton Hudson] even sought an EOT from the Head Contractor's Principal". But the most that could be said is that that statement is one link in a chain of reasoning that would have a failure to comply with the implied duty of cooperation at its heart. The Adjudicator does not refer to the submissions on that topic. Moreover, the Adjudicator does not make the same statement in relation to the other extensions of time. Instead, she says in relation to those that "the Claimant has no way of knowing if the Respondent has even sought an EOT from the Principal of the Head Contract". That statement appears to be less concerned with an implied duty of cooperation and more concerned with providing a justification for why the Adjudicator thought that cl 22.2(1)(e) was not a workable condition precedent.
17. The result is that it is simply a matter for speculation why the Adjudicator thought that cl 22.2(1)(e) did not apply. That conclusion was critical to the Adjudicator's decision on the issue of extensions of time and consequently liquidated damages. Consequently, in my opinion, the Adjudicator failed to give reasons for a critical aspect of her decision. In my opinion, that involved a failure to comply with the requirements of s 22(3)(b) of the Act and amounted to a jurisdictional error.

Second contention

1. In the Payment Claim, Cockram claimed 100% of the amount allowed for preliminaries, overheads and profits in respect of each carpark. Fulton Hogan objected to each of those claims in part and proposed that Cockram should receive a proportion of the amount claimed. In each case, Fulton Hogan gave as its reason that the amount claimed was disproportionate to the work that had been done. So, for example, in relation to the Manly Vale carpark, Cockram claimed 100% of the amount allowed for preliminaries, overheads and profits ($1,873,217), whereas Fulton Hogan was only prepared to certify an amount of $1,030,269 or 55% in respect of that item. It gave the following reason: The value of work certified to the contract value (excluding Preliminaries and Associated Works) equates to 22% therefore 55% is significant overpayment. [See Exhibit 204]
2. Although not as clear as it might have been, what Fulton Hogan appears to be saying is that the contract value of the work done (excluding preliminaries etc) was 22% of the total work, that therefore Cockram was only entitled to 22% of the amount allowed for preliminaries etc and consequently its agreement to 55% involved a significant overpayment.
3. Cockram's contention before the Adjudicator in respect of this item was that it was entitled to claim a proportion allowed for that item by reference to the time left before the Date for Substantial Completion as a proportion of the total period of the Subcontract. Since the date for Substantial Completion had passed, it claimed 100 per cent of the amount allowed for that item. In response to that submission, Fulton Hogan made the following submission (as recorded by the Adjudicator): c. The Claimant's time related valuation is incorrect as the 'entitlement to preliminaries, overheads and profit arises as scope is completed. This is clear by demonstrating the simple example that it would be an absurdity if a subcontractor was contractually entitled to 100% of its profit (which is included in this item) if it had, as is currently the case, only complete [sic] about 50% of its scope' d. While the Preliminaries costs are incurred by the Claimant as time passes, the entitlement to be paid the entire amount of those costs arises when the entire project is finished, not when it was planned to be finished.
4. After recording the parties' respective contentions, the Adjudicator expressed the view that there were generally two methods of applying and valuing preliminaries. One was to apportion the cost of preliminaries over the contract duration on a monthly basis, as contended for by Cockram. The other was to apportion the cost of preliminaries by reference to the value of the contract works that had been achieved at the relevant time, as contended for by Fulton Hogan. In that context, the Adjudicator observed that: 'Preliminaries' are a standing cost which is incurred by the contractor, irrespective of and delays in and / or the progress of the work. This leads to the 'time based' approach generally having wider use in the construction industry.
5. The Adjudicator concluded that, in this case, the method proposed by Cockram was appropriate. She gave the following reasons: 2. On a percentage basis, I note the following with respect to the amount of 'Preliminaries' certified and / or payment by the Respondent: Percentage of Preliminaries paid based on value of 55% work claimed prior to the date of the payment claim

Percentage of Preliminaries entitlement based on 22% Respondent certification of the current payment claim 3. I consider that the previous payment of 55% to 60% of the value of 'Preliminaries' indicates that the item has not been paid on the basis of the percentage of work complete[d]. I then conclude that I do not agree with the Respondent's submission that it has been the practice on the project that 'The entitlement to preliminaries, overhead and profit arises as scope is completed'. [Footnotes omitted] The reference to "60%" arose from the fact that the Adjudicator had calculated that the amount paid corresponded to the 60% of the work done, not 55% as claimed by Fulton Hogan.

1. It was common ground that an adjudicator appointed under the Act is obliged to give reasons for his or her decision that meet the minimum requirements of reasons for the purposes of the Act. Expressed in terms of unreasonableness, Fulton Hogan submitted that the relevant standard was that stated by Hayne, Kiefel and Bell JJ in Minister for Immigration and Citizenship v Li (2013) 249 CLR 332; [2013] HCA 18 at [76]: Even where some reasons have been provided, as is the case here, it may nevertheless not be possible for a court to comprehend how the decision was arrived at. Unreasonableness is a conclusion which may be applied to a decision which lacks an evident and intelligible justification.
2. Li was a case concerned with the exercise of a discretion conferred on a Tribunal exercising powers under the Migration Act 1958 (Cth). However, it was not suggested that different principles applied in this case. Consequently, the question is whether the reason advanced by the Adjudicator for preferring a time basis for calculating the amount that should be allowed in respect of preliminaries lacked an evident and intelligible basis.
3. The Adjudicator's reasoning appears to have two steps. The first was to conclude from the available facts that preliminaries in the past had not been paid on a value-of-work-completed basis. The second was to infer from that that a time basis should be applied.
4. The second of these steps appears to be rational in the context of what else the Adjudicator said. The Adjudicator pointed out that there were two ways of apportioning preliminaries. She also appointed out that the more common one was the time basis. They were conclusions that she was clearly entitled to reach. Accepting that the parties had not adopted the value-of-work-completed basis, she concluded that a time basis was appropriate. Although her reasoning could have been fleshed out, that seems to me to be a rational conclusion to reach.
5. The first step in the Adjudicator's reasoning process is more difficult to follow. It appears to rest on a misunderstanding of the facts and of Fulton Hogan's submissions. What the Adjudicator appears to be saying is that Fulton Hogan had previously accepted that a payment of 55% to 60% of the value of preliminaries was appropriate. However, it contended that (by value) at the time of the payment claim only 22% of the work had been done. Consequently, it had not applied the method of apportionment to preliminaries for which it contended. However, as I have said, that appears to involve a misreading of the submission advanced by Fulton Hogan. Fulton Hogan's submission appears to be to the effect that the appropriate amount for preliminaries was 22% but it was prepared to allow 55%, not that 55% represented the amount of some past payment.
6. Even so, in my opinion, the Adjudicator's error does not involve a failure to give a rational reason for her decision. Rather, it involves a misreading of a poorly expressed submission, resulting in a misunderstanding of the facts. That was an error that the Adjudicator was entitled to make. Consequently, I do not accept that the Determination was defective in that respect.

Severance

1. On the conclusions I have reached, the Determination is void because the Adjudicator failed to give reasons for a critical part of her decision relating to the amount that should be allowed for liquidated damages. Cockram submits that that part of the Determination can be "severed" from the rest, leaving it to recover the balance. In effect, however, what Cockram asks the court to do is substitute for the adjudicated amount a different amount which excludes that amount affected by the error.
2. The weight of authority is clearly against that course: see Multiplex Constructions Pty Ltd v Luikens [2003] NSWSC 1140 at [92] per Palmer J; Trysams Pty Ltd v Club Constructions (NSW) Pty Ltd [2007] NSWSC 1298 at [16] per Hammerschlag J; Anderson Street Banksmeadow Pty Ltd v Helcon Contracting Australia Pty Ltd [2013] NSWSC 657 at [9] per Stevenson J; BM Alliance Coal Operations Pty Ltd v BGC Contracting Pty Ltd [2015] 1 Qd R 228; [2013] QCA 394 at [71] per Muir JA (with whom Holmes JA and Ann Lyons J agreed). As those decisions, and others, point out, the Act requires the Adjudicator to make a single decision on the amount that should be recovered in respect of the relevant payment claim. If that decision does not comply with the requirements of the Act, it is void. There is no room in that case for the court to create out of one decision a number. And where the result of a failure to comply with the Act is that the decision is void, it would not be appropriate for the court to withhold relief in an attempt to achieve what it considers to be a more just outcome.
3. Despite those authorities, Cockram submits that severance is appropriate and that the court could make it a condition of the relief it gives that Fulton Hogan pay the amount unaffected by the error. It relies on the decision of Blue J in Maxcon Constructions v Vadasz (No 2) (2017) 127 SASR 193 at [222]; [2017] SASCFC 2 and the decision of the High Court in Re Media, Entertainment and Arts Alliance; Ex parte Arnel (1994) 179 CLR 84; [1994] HCA 1, discussed in Stephen Lloyd and Houda Younan, 'The Use of the Blue Pencil - Partial Invalidity' in Neil Williams (ed), Key Issues in Judicial Review, (The Federation Press, 2014) at 130ff.
4. However, in my opinion, neither of those authorities supports the order sought by Cockram in this case. In Maxcon, the remarks of Blue J were obiter, it having been held in that case that the primary judge was correct to refuse judicial review of an adjudicator's decision made under the SA Act on the basis that error of law on the face of the record was not a ground for review under the Act (a conclusion recently upheld by the High Court in Maxcon Constructions Pty Ltd v Vadasz (trading as Australasian Piling Co) [2018] HCA 5). Blue J went on to consider the position if that conclusion was wrong and concluded that severance was possible. In reaching that conclusion, he said (at [235]): An error of law on the face of the record differs fundamentally from a jurisdictional error. Jurisdictional error renders a decision void and, at least in the case of an administrative decision, it is regarded as no decision at all. A decision affected by error of law on the face of the record is a lawful decision made within jurisdiction: however, it is liable to be set aside in the exercise of the court's discretion by the grant of certiorari.
5. In the present case, the error is plainly "jurisdictional" in the sense discussed by Blue J. It was a failure to produce a determination that complied with the requirements of the Act.
6. In Re Media Entertainment and Arts Alliance, the Australian Industrial Relations Commission, following a hearing, decided on 1 April 1993 to make an award affecting certain employees of the Hoyts group of companies. Before the award was actually made, the applicants, who were young employees of the group who were not members of the relevant unions but who were affected by a particular aspect of the decision relating to differential wage rates for junior employees, made an application to intervene in the proceedings. The Full Bench gave directions joining the applicants as parties and providing for the filing of an outline of their submissions. However, on 19 May 1993, it decided without a further hearing that it was not appropriate to refrain from making an award or to hear further argument on the issue raised by the applicants. The applicants contended that in doing so the Commission had breached the requirements of procedural fairness. That contention was upheld by the plurality (Mason CJ, Brennan, Dawson and Gaudron JJ), which concluded that prohibition should be granted in the following terms: Prohibition should issue to the members of the Full Bench directing them not to act on their decision of 19 May 1993 to the extent that it affects the entitlement of the applicants to put a case for leave to intervene with respect to differential rates for junior employees and, if leave is granted, to put an argument with respect to that aspect of the decision of 1 April 1993. To the same extent, certiorari should issue to quash the decision of 19 May 1993.
7. It is plain from the facts that the High Court's decision did not involve a finding of invalidity in relation to part of a decision. The decision that was held to be invalid was the decision of 19 May 1993.
8. Fulton Hogan also advanced an argument in favour of severance based on s 32(2) of the Interpretation Act 1987 (NSW), which provides: If any provision of an instrument, or the application of any such provision to any person, subject-matter or circumstance, would, but for this section, be construed as being in excess of the power conferred by the Act under which it is made: (a) it shall be a valid provision to the extent to which it is not in excess of that power, and (b) the remainder of the instrument, and the application of the provision to other persons, subject-matters or circumstances, shall not be affected.
9. However, the short answer to this point is that, however broad the notion of an instrument is, it does not include the decision of an Adjudicator under the Act. That is a decision involving the application of the Act to a particular set of circumstances. A decision of that type, which is akin to a decision of a court, is not an instrument.

Orders

1. It follows from what I have said that Fulton Hogan is entitled to the orders that it seeks. Although it was only successful on one of the two arguments it raised, the effect of that success is that it has obtained all the relief it sought. The two arguments ultimately relied on by it both required consideration of the Adjudicator's reasons and the other material relied on. Consequently, in my opinion, there is no basis for trying to separate out the costs of each argument and Fulton Hogan should be entitled to its costs.
2. The orders of the court are: 1. The court declares that the determination dated 20 February 2018 of the Second Defendant (the Determination) is void; 2. An order restraining the First Defendant from: 1. requesting the provision of an adjudication certificate pursuant to s 24(1) of the Act; 2. filing an adjudication certificate (or purported adjudication certificate) as a judgment for a debt in any court pursuant to s 25 of the Act; and 3. serving (or purporting to serve) a notice on the plaintiff pursuant to s 24(1)(b) of the Act, in connection with the Determination; 1. An order that any moneys in Court be paid out to the Plaintiff or the Plaintiff's solicitor; and 2. An order that the First Defendant pay the Plaintiff's costs of the proceedings.

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: 07 March 2018