Goodwin Street Developments Pty Ltd v DSD Builders Pty Ltd

Court of Appeal (NSW)|2018-10-17|Before: Basten JA, Leeming JA, White JA, McDougall J

Background circumstances

On 2 March 2018 the owner issued the builder with a notice to remedy defaults, pursuant to clause Q1.1 of the contract. On the basis that the defaults had not been remedied, and the builder had failed to show within 10 working days reasonable cause why they could not be remedied, the owner issued a notice pursuant to clause Q1.2 on 19 March 2018 terminating the contract.
On 30 April 2018 the builder served a payment claim on the owner with a reference date of 15 March 2018, in the amount of $727,256. On 14 May 2018 the owner provided a payment schedule in response, denying liability for the amount claimed and stating that the builder owed it a substantial sum, with the result that the schedule amount was $0.
On 28 May 2018 the builder applied for adjudication of the payment claim pursuant to s 17 of the Security of Payment Act. The owner failed to lodge an adjudication response within the time fixed by s 20, with the result that the adjudicator was required not to consider the response: s 21(2). The information provided by the owner was therefore limited to the payment schedule dated 14 May 2018, to which were attached certificates of the contract administrator setting out an assessment of the cost of completing the works, and setting out amounts payable to the owner, which included an amount for the "rectification of defective & incomplete works" ($280,000) and an amount for "rectification of damage/replacement of stolen items" ($551,382). These sums were broken up into their constituent elements.
On 15 June 2018 the adjudicator provided her determination awarding the builder an amount of $265,510. The reasons provided by the adjudicator ran to some 22 pages. In substance, issue was taken with 10 paragraphs (one page) under the heading "The respondent's off-setting claims". It will be convenient to set out so much as is necessary from that part of the adjudication determination when considering the substance of the challenge raised by the owner.

Statutory scheme

As was explained in Probuild Constructions (Aust) Pty Ltd v Shade Systems Pty Ltd: [2] "[4] The object of the Security of Payment Act is 'to ensure that any person who undertakes to carry out construction work (or who undertakes to supply related goods and services) under a construction contract is entitled to receive, and is able to recover, progress payments in relation to the carrying out of that work and the supplying of those goods and services' [3] . [5] The means by which the Security of Payment Act ensures that a person is entitled to a progress payment is by 'granting a statutory entitlement to such a payment regardless of whether the relevant construction contract makes provision for progress payments' [4] ."
It is not necessary for present purposes to make further reference to the statutory provisions, other than those governing the function of the adjudicator. The adjudication procedures are set out in s 21. Relevantly for present purposes, they require the adjudicator "to determine an adjudication application as expeditiously as possible and, in any case … within 10 business days after the date on which the adjudicator notified … acceptance of the application, or … within such further time as the claimant and the respondent may agree": s 21(3).
Central to the present dispute is s 22 which provides as follows: 22 Adjudicator's determination (1) An adjudicator is to determine: (a) the amount of the progress payment (if any) to be paid by the respondent to the claimant (the adjudicated amount), and (b) the date on which any such amount became or becomes payable, and (c) the rate of interest payable on any such amount. (2) In determining an adjudication application, the adjudicator is to consider the following matters only: (a) the provisions of this Act, (b) the provisions of the construction contract from which the application arose, (c) the payment claim to which the application relates, together with all submissions (including relevant documentation) that have been duly made by the claimant in support of the claim, (d) the payment schedule (if any) to which the application relates, together with all submissions (including relevant documentation) that have been duly made by the respondent in support of the schedule, (e) the results of any inspection carried out by the adjudicator of any matter to which the claim relates. (3) The adjudicator's determination must: (a) be in writing, and (b) include the reasons for the determination (unless the claimant and the respondent have both requested the adjudicator not to include those reasons in the determination). (4) If, in determining an adjudication application, an adjudicator has, in accordance with section 10, determined: (a) the value of any construction work carried out under a construction contract, or (b) the value of any related goods and services supplied under a construction contract, the adjudicator (or any other adjudicator) is, in any subsequent adjudication application that involves the determination of the value of that work or of those goods and services, to give the work (or the goods and services) the same value as that previously determined unless the claimant or respondent satisfies the adjudicator concerned that the value of the work (or the goods and services) has changed since the previous determination. (5) If the adjudicator's determination contains: (a) a clerical mistake, or (b) an error arising from an accidental slip or omission, or (c) a material miscalculation of figures or a material mistake in the description of any person, thing or matter referred to in the determination, or (d) a defect of form, the adjudicator may, on the adjudicator's own initiative or on the application of the claimant or the respondent, correct the determination.
As may be seen from s 22(4), the central function of determining the value of the claimant's entitlement turns on the application of s 10. Section 10(1) provides for the valuing of "construction work"; s 10(2) provides for the valuing of "related goods and services". It is sufficient for present purposes to refer to the former provision, but that must be understood in the context of s 9. Those provisions state: 9 Amount of progress payment The amount of a progress payment to which a person is entitled in respect of a construction contract is to be: (a) the amount calculated in accordance with the terms of the contract, or (b) if the contract makes no express provision with respect to the matter, the amount calculated on the basis of the value of construction work carried out or undertaken to be carried out by the person (or of related goods and services supplied or undertaken to be supplied by the person) under the contract. 10 Valuation of construction work and related goods and services (1) Construction work carried out or undertaken to be carried out under a construction contract is to be valued: (a) in accordance with the terms of the contract, or (b) if the contract makes no express provision with respect to the matter, having regard to: (i) the contract price for the work, and (ii) any other rates or prices set out in the contract, and (iii) any variation agreed to by the parties to the contract by which the contract price, or any other rate or price set out in the contract, is to be adjusted by a specific amount, and (iv) if any of the work is defective, the estimated cost of rectifying the defect.
As will be noted shortly, the challenge to the adjudication determination was based on the proposition that the adjudicator had not undertaken her function "in good faith". Lack of good faith was said to be established by a failure to apply s 10(1)(b) in valuing the construction work the subject of the payment claim.

Legal issues

The High Court confirmed in Probuild Constructions that review of an adjudication determination is only available on the basis of jurisdictional error. In so holding, the Court affirmed the approach consistently adopted by this Court since the decision in Brodyn Pty Ltd t/as Time Cost and Quality v Davenport in 2004. [5] That line of authority had been upheld in Shade Systems Pty Ltd v Probuild Constructions (Aust) Pty Ltd (No 2), [6] which was the subject of the appeal to the High Court in Probuild Constructions.
The nature of jurisdictional error was recently explained by Kiefel CJ, Gageler and Keane JJ in Hossain v Minister for Immigration and Border Protection: [7] "[23] Jurisdiction, in the most generic sense in which it has come to be used in this field of discourse, refers to the scope of the authority that is conferred on a repository. In its application to judicial review of administrative action the taking of which is authorised by statute, it refers to the scope of the authority which a statute confers on a decision-maker to make a decision of a kind to which the statute then attaches legal consequences. It encompasses in that application all of the preconditions which the statute requires to exist in order for the decision-maker to embark on the decision-making process. It also encompasses all of the conditions which the statute expressly or impliedly requires to be observed in or in relation to the decision-making process in order for the decision-maker to make a decision of that kind. A decision made within jurisdiction is a decision which sufficiently complies with those statutory preconditions and conditions to have 'such force and effect as is given to it by the law pursuant to which it was made' [8] . [24] Jurisdictional error, in the most generic sense in which it has come to be used to describe an error in a statutory decision-making process, correspondingly refers to a failure to comply with one or more statutory preconditions or conditions to an extent which results in a decision which has been made in fact lacking characteristics necessary for it to be given force and effect by the statute pursuant to which the decision-maker purported to make it. To describe a decision as 'involving jurisdictional error' is to describe that decision as having been made outside jurisdiction [9] ."
It may be accepted that the concept of "authority to decide" must be given content in a specific statutory context. The primary source of that content will be the terms of the statute itself; however, there are likely to be implied constraints, sourced in general law principles.
There are preconditions to the exercise of the adjudication function, which include, for example, the existence of a valid progress payment claim. However, this case turns upon a quite different constraint, identified as an obligation to act in good faith.
While it may readily be accepted that the statutory mandate of the adjudicator would not be satisfied by action taken in bad faith, or not bona fide, it is important to acknowledge that these phrases can have a range of meanings. Thus, in Commissioner of Taxation (Cth) v Futuris Corp Ltd, [10] Gummow, Hayne, Heydon and Crennan JJ said: "[11] What is conveyed by the holding by the Full Court that the Second Amended Assessment did not represent an exercise by the Commissioner of the power to assess which was bona fide? That phrase is used in several senses in public law. With cognate expressions, it also appears in formulations of the tort of misfeasance in public office. This Court has accepted that in that context it is sufficient that the public officer concerned acted knowingly in excess of his or her power [11] . The House of Lords has since indicated that in English law recklessness may be a sufficient state of mind to found the tort [12] . The affinity between tort law and public law has been remarked upon in this Court [13] ; that affinity reflects the precept that in a legal system such as that maintained by the Constitution executive or administrative power is not to be exercised for ulterior or improper purposes [14] . [12] However, Aickin J observed in R v Toohey; Ex parte Northern Land Council [15] that sometimes it was impossible to be certain of the meaning intended to be conveyed by the expressions 'good faith' and 'bad faith'. His Honour went on to discern three distinct grounds upon which an exercise of an administrative power might be attacked [16] . One was the existence of a corrupt purpose, with which Aickin J identified the doing of an act for personal gain including a gain for the associates of the person doing the act. Absence of good faith also was used to indicate the presence of an improper purpose outside the scope of the power but without any endeavour to obtain personal gain. [13] Finally, Aickin J indicated that in a narrow and technical sense a power might be said to have been exercised improperly where the act done was beyond the power conferred irrespective of the motive or intention of the party exercising the power. In this third sense 'good faith' means merely exercising an administrative power 'for legitimate reasons' and its absence suggests no degree of moral obliquity [17] . However, it is apparent from the terms in which the Full Court expressed its reasons that the failure attributed to the Commissioner to exercise bona fide the power of assessment was not designed to identify 'good faith' in any such softer sense."
In The Queen v Toohey; Ex parte Northern Land Council [18] Aickin J used the term "ultra vires" for the third "soft" meaning of bad faith. Indeed, to use the term "bad faith" (or lack of good faith) in the soft sense without identifying the particular respect in which the decision-maker has exceeded his or her powers may suggest error. It will, in every case, be critical to identify the point of departure from the statutory power, in order to determine that there has in fact been jurisdictional error. Once that exercise has been undertaken it adds nothing to characterise the error as a lack of good faith, with the implications of moral culpability which that language carries.
This inappropriate step appears to have found its way into the case law regarding the operation of the Security of Payment Act. Thus, in Laing O'Rourke Australia Construction Pty Ltd v H&M Engineering and Construction Pty Ltd, [19] McDougall J stated: "[30] I dealt with the obligation of good faith, in the context of an adjudicator's statutory obligation to consider certain matters pursuant to s 22(2) of the Act, in Timwin Construction v Façade Innovations [2005] NSWSC 548. Having referred at [19] and [20] to what Hodgson JA had said in Brodyn at … [55], [56], I said at [38] to [40]: [38] There has not been any decision to my knowledge elaborating the requirement of good faith to which Hodgson JA pointed in Brodyn. Clearly, I think, his Honour was not referring to dishonesty or its opposite. I think he was suggesting that, as is well understood in the administrative law context, there must be an effort to understand and deal with the issues in the discharge of the statutory function: see, for example, the speech of Lord Sumner in Roberts v Hopwood [1925] AC 578, 603, where his Lordship said that a requirement to act in good faith must mean that the board 'are putting their minds to the comprehension and their wills to the discharge of their duty to the public, whose money and locality which they administer.' [39] That construction of the requirement of good faith is supported by the provisions of s 22(2), requiring an adjudicator to "consider" certain matters. A requirement to consider, or take into consideration, is equivalent to a requirement to have regard to something: see Zhang v Canterbury City Council (2001) 51 NSWLR 589 at 602 (Spigelman CJ, with whom Meagher and Beazley JJA agreed). [40] As his Honour emphasised, the requirement to 'have regard to' something requires the giving of weight to the specified considerations as a fundamental element in the determination, or to take them into account as the focal points by reference to which the relevant decision is to be made. His Honour relied on the tests expounded in The Queen v Hunt; ex parte Sean Investments Proprietary Limited (1979) 180 CLR 322 (Mason J) and in Evans v Marmont (1997) 42 NSWLR 70, 79-80 (Gleeson CJ and McLelland CJ in Eq). [31] Shortly after I decided Timwin, Brereton J considered the obligation of good faith in Holmwood Holdings Pty Ltd v Halkat Electrical Contractors Pty Ltd [2005] NSWSC 1129. In a detailed review of the authorities from [66] to [109], his Honour identified what he described as a narrow view and a broader view of good faith. His Honour explained the narrow view at [80] as 'focussing on whether objectively the exercise of power could be regarded as honestly referrable to the purpose for which the power was conferred, and excluding from its ambit the reasoning process leading to the decision'. His Honour identified the broader view, at [87] and other paragraphs, as including recklessness or caprice in the exercise of the power, although falling short of a wilful and deliberate failure to exercise, or to attempt to exercise, the power. For the reasons given at [111] to [116], his Honour concluded at [110] and [117], that the requirement of good faith required more than honesty. In particular, it required faithfulness to the obligation and a conscientious attempt to perform it (at [117]), and absence of recklessness or caprice [at 110], [117]). [32] The defendant appealed. The appeal was dismissed (Halkat Electrical Contractors Pty Ltd v Holmwood Holdings Pty Ltd [2007] NSWCA 32). Nonetheless, Giles JA (with whom Santow and Tobias JJA agreed) referred at [26] to what Brereton J had said. His Honour did not think that it was necessary to embark on 'an exegesis of the reference in Brodyn… to a bona fide attempt to exercise the statutory power'. That was because, as his Honour said at [27], 'the adjudicator simply did not perform the task required by the Act', and thus did not exercise his power in good faith. [33] The Court of Appeal returned to the topic of good faith in Perform (NSW) Pty Ltd v MEV-AUS Pty Ltd [2009] NSWCA 157. It appeared that the appellant in that case had submitted that the Court of Appeal did not 'fully endorse' the broader approach to good faith that Brereton J had identified in Holmwood. At [114], Giles JA (with whom McColl and Young JJA agreed) said that the Court 'did not endorse it at all'. [34] I do not think that it is necessary to say more than that, in the words of Lord Sumner in Roberts v Hopwood [1925] AC 578 at 604 (cited by me in Timwin at [38]), for administrative bodies to act in good faith, they must put 'their minds to the comprehension and their wills to the discharge of their duty'. As I said at [39] and [40], that view of the content of the obligation of good faith was supported by the requirement to 'consider' various matters set out in s 22(2) of the Act. It follows that the obligation of good faith requires at least that adjudicators should turn their minds to, grapple with and form a view on all matters that they are required to 'consider'. [35] It may be easy to see why an exercise of power that could be characterised as reckless or capricious is not undertaken in good faith. But it does not follow that, for there to be absence of good faith, it must be possible to characterise what happened as having been done recklessly or capriciously."
In the present case McDougall J repeated what he had said in Laing O'Rourke at [34], namely "that the obligation to exercise the statutory function in good faith 'requires at least that adjudicators should turn their minds to, grapple with and form a view on all matters that they are required to 'consider'." [20] In other words, lack of good faith was identified as a failure to comply with s 22(2) of the Security of Payment Act. What is more, it imposed a gloss on the language of s 22(2). Properly understood, the ground must be failure to take into account a mandatory consideration. The flaw in the reasoning occurs in the extract from Timwin Construction which adopts language from Roberts v Hopwood which is said to be "supported by" s 22(2).
It is also necessary to identify the source of the gloss, namely the reference to Zhang v Canterbury City Council [21] where Spigelman CJ stated: "[72] In one such statutory context in The Queen v Hunt; Ex parte Sean Investments Pty Ltd (1979) 180 CLR 323 at 329, Mason J said: 'When sub-s (7) directs the Permanent Head to 'have regard to' the costs, it requires him to take those costs into account and to give weight to them as a fundamental element in making his determination.' (Emphasis added). [73] In the case of a statute which empowered the court to make such order 'as to it seems just and equitable having regard to: (a) … and (b) …', Gleeson CJ and McLelland CJ in Eq said in Evans v Marmont (1997) 42 NSWLR 70 at 79-80: '… par (a) and par (b) prescribe the focal points by reference to which the discretionary judgment as to what seems just and equitable must be made. They are not merely two matters, or groups of matters, which take their place amongst any other relevant considerations.' (Emphasis added)."
If those passages are taken to imply that every matter identified as a mandatory consideration has to be considered as a "fundamental element" in, or a "focal point" of, the decision-making process, [22] that reasoning should not be accepted. Read in context, it is reasonably clear that those passages were not intended to state a legal principle of such general application.
Basic principles of judicial review refer to a "failure to take into account a relevant [that is, mandatory] consideration", as explained by Mason J in Minister for Aboriginal Affairs v Peko-Wallsend Ltd. [23] As Mason J further explained, "it is generally for the decision-maker and not the court to determine the appropriate weight to be given to the matters which are required to be taken into account in exercising the statutory power." [24]
It is significant that, in the next section of the reasons in Laing O'Rourke, McDougall J addressed the language of s 22(2) and the obligation imposed on the adjudicator by the words "is to consider" the identified matters. Where there is apparently credible and relevant material before the decision-maker, which appears to engage with a mandatory consideration, and there is no reference to that material in the reasons provided by the decision-maker, it may be inferred that no regard was had to it. That may allow for the inference that no regard at all was had to the mandatory consideration. That must be distinguished from the situation where, while there is no reference to the material, it cannot be inferred that the decision-maker must have referred to it, if it had been properly considered. It is well established that judges are not required to refer to all the evidence before the court; so it is true that a decision-maker is not required to refer to all the material supplied by one party before rejecting the party's claim.
Furthermore, saying that the decision-maker must "grapple with" particular material reflects statements that the decision-maker must give "proper, genuine and realistic consideration" to such material. As the High Court noted in Minister for Immigration and Citizenship v SZJSS [25] this language can invite a slide into impermissible merit review. [26] Finally, a refusal to give any weight to particular material does not demonstrate that the decision-maker failed to have regard to a mandatory consideration. This was explained in the following passage in SZJSS: [27] "[33] The Minister's submissions on the letters issue must be accepted as on a fair reading of the whole of the Tribunal's decision, when the Tribunal said that it gave the letters "no weight" it was referring to the fact that it did not accept the letters as evidencing that the first respondent was in some danger from the Maoists in Kathmandu. … The weighing of various pieces of evidence is a matter for the Tribunal. [34] It has been recognised that to describe reasoning as irrational or unreasonable may merely be an emphatic way of disagreeing with it. In referring to 'any rational, reasonable approach to the evaluation' and the need for 'a proper, genuine or realistic evaluation' of the letters, the Federal Court was registering emphatic disagreement with the Tribunal's assessment of the factual matters to which the letters were relevant. It appears the Federal Court would have weighed the letters differently which seems to suggest that, on the basis of the letters, the Federal Court would have been satisfied that Maoists were pursuing the first respondent in Kathmandu. When employing the formula 'proper, genuine and realistic evaluation' in respect of the letters, the Federal Court did not appear to consider that one of the matters against which the Tribunal weighed the letters was the first respondent's evidence of the effects of social and political changes in Nepal. [35] Whether the letters were 'highly supportive' or 'powerfully corroborative' (as they appeared to the Federal Court) of the first respondent's claim that Maoists were pursuing him in Kathmandu was a question upon which reasonable minds might come to different conclusions. The Tribunal's preference for other evidence, including the first respondent's own evidence about numerous matters, including the effect of social and political changes from, and since, 2006, over the evidence of the letters written during the first half of 2006, could not be said to constitute a failure to take into account a relevant consideration as canvassed in Peko‑Wallsend or [Minister for Immigration and Multicultural Affairs v Yusuf [28] ]. Nor could it be said to be a failure to respond to a substantial argument thereby giving rise to the kind of error identified in Dranichnikov v Minister for Immigration and Multicultural Affairs [29] . [36] The conclusion that the Tribunal erred in giving 'no weight' to the letters, with the implication that it should have given different, presumably determinative, weight to them, depended on the Federal Court reviewing the factual findings of the Tribunal rather than the process by which it arrived at its conclusions."
There may be circumstances in which a particular matter, given the statutory context, can be said to have greater importance than other factors. However, there is a significant danger in imposing an obligation in every case to require that specified considerations be given "weight as fundamental elements in the determination" or be considered as "the focal points by reference to which the relevant decision is to be made". [30] Nor can invocation of an obligation to act in good faith require "at least that adjudicators should turn their minds to, grapple with and form a view on all matters that they are required to 'consider'." [31]
The more restrictive view of bad faith as a ground of judicial review, which should be adopted in identifying the implied obligation of good faith adjudication under the Security of Payment Act, was adopted by Hodgson JA in Brodyn [32] and in Transgrid v Siemens Ltd. [33] A similar approach to the concept of good faith was articulated by the Full Court of the Federal Court in SBBS v Minister for Immigration and Multicultural and Indigenous Affairs. [34] The Court summarised the relevant principles as follows: "[43] First, an allegation of bad faith is a serious matter involving personal fault on the part of the decision maker. Second, the allegation is not to be lightly made and must be clearly alleged and proved. Third, there are many ways in which bad faith can occur and it is not possible to give a comprehensive definition. Fourth, the presence or absence of honesty will often be crucial …. [44] The fifth proposition is that the circumstances in which the Court will find an administrative decision maker had not acted in good faith are rare and extreme. This is especially so where all that the applicant relies upon is the written reasons for the decision under review …. [45] Sixth, mere error or irrationality does not of itself demonstrate lack of good faith …. Bad faith is not to be found simply because of poor decision making. It is a large step to jump from a decision involving errors of fact and law to a finding that the decision maker did not undertake its task in a way which involves personal criticism …. [46] Seventh, errors of fact or law and illogicality will not demonstrate bad faith in the absence of other circumstances which show capriciousness …. [47] Eighth, the Court must make a decision as to whether or not bad faith is shown by inference from what the Tribunal has done or failed to do and from the extent to which the reasons disclose how the Tribunal approached its task …."
In Minister for Immigration and Multicultural and Indigenous Affairs v SBAN, [35] Heerey and Kiefel JJ stated: "There is no such thing as deemed or constructive bad faith. It is the ultimate decision … which must be shown to have been taken in bad faith. Illogical factual findings or procedural blunders along the way will usually not be sufficient to base a finding of bad faith. Such defects can be equally explicable as the result of obtuseness, overwork, forgetfulness, irritability or other human failings not inconsistent with an honest attempt to discharge the decision-maker's duty …." Rather, there must be something equivalent to "wilful blindness" or "conscious maladministration." [36]
In dealing with matters of principle, the primary judge also set out a lengthy extract from a judgment of Vickery J in SSC Plenty Road Pty Ltd v Construction Engineering (Aust) Pty Ltd. [37] That passage purported to establish a set of 11 obligations imposed on the adjudicator making a determination under the relevant Victorian legislation. The primary judge then expressed a view that this lengthy exegesis did not give rise to "any difference in principle" from that which had been said in Laing O'Rourke. [38] However that statement was qualified to deny that the requirements "must be applied serially and mechanically in every case", noting that there was "a risk that overzealous attention to his Honour's formulation of the elements of the task that adjudicators are required to perform may lead a court into the error of straying from review of the kind that is permitted (which is essentially confined to aspects of jurisdictional error, want of good faith and the like) and into review on the merits." [39]
The qualification should be accepted; the result is that it is inappropriate to make further reference to SSC Plenty Road, at least in this jurisdiction. The function of an adjudicator is to have regard to the matters, and only the matters, set out in s 22(2). These include "the provisions of [the Security of Payment Act]"; they do not include judicial glosses on the statute. Nor are such glosses helpful to judges undertaking the function of judicial review. Finally, if the real question is whether the adjudicator failed to have regard to some matter expressly identified in s 22(2), that should be the ground of review. No question of good faith will normally arise in such circumstances.
For reasons set out below, there was nothing approaching bad faith in the present case.

Impugned reasoning of adjudicator

Having satisfied herself that she had jurisdiction to determine the adjudication application, the adjudicator then set out, by reference to s 22(2), the matters required to be considered. Under the heading "Contract Works" she set out the relevant background and the positions of both claimant and respondent. She made a similar summary with respect to "Variations" (of which there were six) and with respect to a claim for "loss of profit" and for "return of bank guarantee". The fact that there was no challenge to the approach adopted in the first 17 pages of the reasons, and no challenge to the last three pages, demonstrates the absence of merit in the suggestion that the ultimate determination was reached in bad faith.
The challenge was limited to a discussion under the heading "The Respondent's off-setting claims". The adjudicator first referred back to the (correctly) identified documents comprising the payment schedule and noted the items referred to as "deductible" which had already been noted. There was reference to the contract administrator's assessment of the amount payable; the reasons then continued: "150. First, it is evident from the material provided to me that the above costs are prospective, i.e. they are estimated future costs that may be incurred after the reference date, as opposed to retrospective actual costs incurred for this payment period i.e. prior to 15 March 2018, in rectifying defects etc. Furthermore, the BB Estimate is indicative, and has been prepared by another builder to assist the Respondent with its budgeting. The Contractor's [Administrator's] Assessment of Damage Costs is thorough in that it sets out the quantification and rate applied for each trade. However, there is no evidence within it indicating that another person has completed any of the alleged damage rectification works. In respect of the BB Estimate in particular, I am mindful of my comments in paragraph 77 above in regard to fairness and impartiality of the architect/[Contract] Administrator under the Contract."
In the earlier analysis at par 77 the adjudicator had explained the structure of the contractual arrangements, noting that the architect, who was the contract administrator, was to be considered as the owner's agent for giving instruction to the contractor, but was also to act as assessor, valuer or certifier and was required to act fairly and impartially in those capacities. The reasoning with respect to the off-setting claims continued: "151. Second, I consider the terms of the Contract to determine whether the Respondent is entitled to the progress claim for the Contract works without deduction for the alleged defective work. 152. Item 22 of Schedule 1 and Clause M1 provide a Date for Practical Completion of 31 March 2018. Clause M11 provides that the contractor must correct any defects or finalise any incomplete work, whether before or after the date of practical completion with an agreed time as stated in an instruction from the architect. Under Clause M12, the owner is entitled to make a claim to adjust the contract pursuant to Clause N4, if it is required to use another person to rectify the problem because the contractor fails to correct a defect or finalise incomplete work. Under Clause N4.e, the architect, when assessing a progress claim, is to take account of any claim by the owner for a set off of monies due under the Contract."
Up to that point, there could be no complaint that the adjudicator was not addressing herself to the relevant mandatory considerations and only those considerations; nor was there any basis for an allegation of bad faith. As the primary judge noted, there appears to have been a typographical error in par 151, which referred to the respondent (namely the owner) when the sense of the sentence suggests that the intended reference was to the claimant (the builder). It was the next paragraph which was said to give rise to difficulties of interpretation. "153. I acknowledge that in earlier certificates, the Contract Administrator included photographs of purported defective work and incomplete work. However, there is no clear evidence provided from the Respondent that persuades me that the Claimant was instructed by the architect to correct particular defects or finalise any incomplete work prior to the reference date, the Respondent [claimant?] failed to correct those particular defects or incomplete work, and because it failed to do so, the owner evoked [invoked] its right to use another person to rectify the problem pursuant to Clause N4, and did so, and finally in by doing so, is entitled to off-set the cost of it. 154. Furthermore, I can find no contractual mechanism that would permit the Respondent to offset monies for the replacement of stolen items. 155. Accordingly, I find the Respondent is not entitled to deduct rectification costs and for damage/replacement of stolen items under the Contract for the applicable reference period. 156. I value the Respondent's off-setting claims in an amount Nil."
Once the reference to "the Respondent" in the middle of par 153 is corrected to claimant, the reasoning of the adjudicator is tolerably clear. She was saying that there was no evidence provided by the owner to satisfy her that (i) the builder was instructed by the architect to correct particular defects or finalise incomplete work prior to the reference date, (ii) the builder failed to correct those defects or incomplete work, and (iii) because it had failed to do so the owner had invoked its right to use another person and had thereby incurred costs which it was entitled to off-set.
Having set out paragraphs 148-156 of the adjudicator's reasons, the primary judge stated: "[25] The fundamental problem in this part of the adjudicator's reasons is that it shows that she was well and truly aware of the claim by the owner that the work was in many respects defective, but she made no precise finding on the topic. She referred in one place to 'alleged defective work' and in another to 'purported defective work and incomplete work'. The obligation to have regard to those matters required her to deal with them as a fundamental element of this part of her determination, or as the focal point of her analysis."
The basis of this criticism is by no means obvious. The adjudicator was looking for "clear evidence" that certain steps had been taken prior to the reference date, absent which, on her view of the contract, there was no entitlement to make an off-setting claim. There can be no obligation on any decision-maker to make a "precise finding" on a topic where there is no evidence to support such a finding, or the evidence is insufficient to satisfy the decision-maker that such a finding should be made. Indeed, the finding that there is "no clear evidence" is itself a sufficient finding.
On the appeal, the appellant sought to rely upon the critical elements of the judge's identification of a "fundamental problem".
After dealing with the authorities as to the nature of the obligations of the adjudicator discussed above, the judge returned to assess the key passage in the adjudicator's reasons in the following terms: "[29] There was a substantial body of material before the adjudicator that dealt with the question of defects. That included what was said to be an instruction to the 'contractor' (i.e. the builder) dated 15 January 2018. That document, which was signed on behalf of the owner but which apparently had been sent by the 'Achitect' [sic] under the contract in his role as administrator of the contract, set out in very considerable detail defects that were said to exist as at its date. I think that this is what the adjudicator was dealing with at [153] of her reasons where she referred to 'earlier certificates' that 'included photographs of purported defective work and incomplete work'. [30] There is a real question as to whether the so-called instruction complied with the contractual prerequisites. It would appear from what the adjudicator said that she did not think that it did. But she did not deal with it on that basis. She said, quite clearly, that there was no clear evidence that the purported defective and incomplete work shown in that earlier certificate remained defective or incomplete as at the date of the payment claim. [31] The question is really whether the adjudicator dealt with this in a way that shows that she grappled with the underlying factual issue. That is a very difficult question. I am not being critical of the adjudicator, but it would have been helpful had she expressed a clear view in clear terms as to what she found and why. [32] The task has been complicated because the adjudicator gave reasons that are not entirely logical for apparently downplaying the significance of the claim for defective work. I refer for example to what she said at [150]. It does not seem to me that the question, whether rectification work has actually been carried out in the reference period or as at the reference date, is relevant to the statutory task set out in section 10(1)(b)(iv). Nonetheless, if that were the only error, it is very hard to see how it could be jurisdictional. [33] I suspect that one of the problems that the adjudicator had was that she was dealing with the matter on the basis of the payment claim, payment schedule and adjudication application only. She had directed herself, correctly in my view, that it was not open to her to take into account the 'merits' submissions made in the adjudication response, because that had been served out of time. [34] In the material that the adjudicator did have, there was a commentary from the builder that responded to the various complaints made in the so-called instruction of 15 January 2018. That response started with the proposition that the instruction was contractually invalid. Nonetheless, it turned to the merits of the matters, and dealt individually with each item. That I think is the foundation of the adjudicator's reasoning process at [153] where she referred to the lack of clear evidence to show that the position as to defects asserted in the earlier certificate remained current two months later, at the date the payment claim was to be valued."
With regard to these passages, there is no fault in the reasoning identified in [29] or [30]. At [31] the judge questioned whether the adjudicator had "grappled with the underlying factual issue." He described that as "a very difficult question." However, the difficulty may have arisen from imposing a gloss on the statutory obligation to have regard to certain material. So far as the factual assessment was concerned, as the judge correctly noted at [33], the adjudicator was constrained by the need to rely only on the material supplied by the builder and the payment schedule supplied by the owner, the adjudication response being made out of time. So much appears to be accepted at [34].
In that context, the criticism at [32] appears to be resolved by the subsequent reasoning. In any event, the criticism implicit in [32] is that the exercise the adjudicator was undertaking had to be founded upon s 10(1)(b)(iv) of the Security of Payment Act. However, to engage that obligation there must be a finding that there was relevant defective work, absent which the cost of rectifying the defective work would not arise. The factors addressed by the adjudicator, and identified at [32], related to the timing of certain events which were thought (rightly or wrongly) to be critical, based on the terms of the contract. On that understanding, the adjudicator's reasons did not lack logic, nor did she "down play" the significance of the claim for defective work. She addressed it on the basis of the available material, including the contractual provisions, and rejected it. An error in construing the contract would not have been a reviewable error, nor was there any suggestion otherwise.
The primary judge concluded in the following terms: "[38] Looking at the adjudicator's reasons in their entirety, and without any predisposition to find error or want of attention in them, I conclude that she did deal with the dispute put before her, and did in substance both say that she was not satisfied that there was defective work and say why."
In my view, that conclusion was correct.

Grounds of appeal

The appellant's written submissions identified the ground on which it had sought to have the determination set aside, which was the only ground pursued on the appeal, as the failure of the adjudicator to "determine the disputed value of [the builder's] work in good faith". The submissions further stated that the appeal grounds related to the primary judge's findings relevant to the appellant's "good faith challenge to the validity of the Determination." [40]
Ground 1 in the notice of appeal alleged that the primary judge erred "in construing the Adjudicator's reasons for not having regard to the estimated cost of rectifying the defects" as being based on the failure of the adjudicator to be "satisfied on the material before her that the works were defective". The error was said to arise in the passage at [30] in the judgment below, reasoning which was repeated at [38]. As explained above, that reasoning did not reveal error.
Ground 2 asserted that the error in construing the adjudicator's reasons led the judge to reject the appellant's claim that the adjudicator "did not value the construction works … in good faith" and had not dealt with the appellant's submissions "in good faith", referring to the finding at [31] of the judgment below. There are three responses to this ground. First, in so far as it depended upon an error alleged in ground 1, that error was not made out. Secondly, to the extent that there was error in the reasoning at [31], that error favoured the appellant. Thirdly, there was nothing in the adjudicator's reasons which provided any basis for an allegation that she acted otherwise than in good faith.
Ground 3 was more complex. It had two limbs, each identifying findings the trial judge should have made. The first was that "the basis of the Adjudicator's failure to not value [sic] the estimated costs of rectifying defects" was because (i) the defects were "prospective", rather than "retrospective" - at [150] of the adjudicator's reasons; (ii) there was no evidence that the owner had engaged anyone else to carry out the work, - at [150] of the adjudicator's reasons; (iii) the adjudicator had regard to the contract to determine whether it envisaged the valuation of progress claims without deduction for defective works, at [151] of the adjudicator's reasons, and (iv) because the estimated costs of rectifying defects could not be considered, the owner not having complied with clause N4 of the contract. The second limb of ground 3 asserted that, presumably on the basis of those findings, the adjudicator had failed to have regard to the mandatory requirements of s 10(1)(b), and had failed to value the construction work in good faith.
The proposed findings as to the basis on which the adjudicator failed to value and then deduct the cost of rectifying defective work may indeed be as the appellant alleged in ground 3; the fact is she did not value the defective work. However, as already noted, she had first to find that there was defective work which entitled the owner to a deduction under the contract. That condition not being satisfied, there was no requirement to value the work or to make the deduction. As the reliance upon lack of good faith appeared to concede, any error in the construction of the contract, or factual error as to the evidence of defective work, would not demonstrate jurisdictional error. In the absence of some legitimate basis to claim lack of good faith, ground 3 lacked substance.

Conclusion

For the reasons given by the Full Court of the Federal Court in SBBS, an allegation of bad faith on the part of a decision-maker is a serious matter involving personal fault and should not be made lightly. A degree of vacillation in the reasons given by the primary judge may have suggested that there was more substance to the application than was in fact the case. It may also have led to the appeal to this Court, which lacked a sufficient basis to justify an allegation of lack of good faith.
It follows that the appeal must be dismissed with costs. There is a further issue as to a continuing stay.
The orders made by the primary judge, as entered, were: 1. I order that the summons be dismissed with costs. 2. I order that the money paid into court together with any interest accrued thereon should be paid out of court to the first defendant. 3. I make no other orders as to costs. 4. I stay until 5pm on Wednesday 15 August 2018 the order for payment out of court. The stay in order 4 has apparently been continued by agreement until the determination of this appeal.
Senior counsel for the appellant foresaw that, if the appeal were dismissed, the stay on payment out of the money held in court would cease to operate and the money would be immediately payable to the respondent. He said there were proceedings on foot to resolve outstanding contractual disputes and, he submitted, there was doubt as to the capacity of the builder to repay the money should the owner be successful in its contract claims. In the event that the court was minded to dismiss the appeal, the appellant sought an opportunity to make submissions as to the form of any proposed orders. It was foreshadowed that there would be an application to stay any order that the moneys held in court be paid out to the respondent.
The Court was not prepared to entertain that application, noting that (i) the statutory scheme transferred the financial risks resulting from progress payments from the builder to the owner, and (ii) there was no material before the Court to justify any order which might depart from that statutory scheme. The appellant was left with the opportunity to seek such an order from the court before which the trial is pending. The reasons for dismissing the appeal may be relevant to such an application; nothing in this judgment is intended to foreclose such an application.
The Court should make the following orders: 1. Dismiss the appeal from the judgment in the Equity Division given on 6 August 2018. 2. Order that the appellant pay the respondents' costs in this Court, in the case of the second respondent on a submitting basis.
LEEMING JA: I agree with Basten JA.
WHITE JA: I have had the advantage of reading in draft the reasons for judgment of Basten JA. I agree with his Honour's reasons and the orders he proposes.

Endnotes

Goodwin Street Developments Pty Ltd v DSD Builders Pty Ltd [2018] NSWSC 1229.
[2018] HCA 4; 92 ALJR 248 (Kiefel CJ, Bell, Keane, Nettle and Gordon JJ).
s 3(1) of the Security of Payment Act. That wording was inserted into the Security of Payment Act as part of extensive amendments effected by the Building and Construction Industry Security of Payment Amendment Act 2002 (NSW). Similar language was later adopted in the equivalent Acts in the other jurisdictions: s 3(1) of the Building and Construction Industry Security of Payment Act 2002 (Vic); s 7 of the Building and Construction Industry Payments Act 2004 (Q); s 6(1) of the Building and Construction Industry (Security of Payment) Act 2009 (ACT); s 3(1) of the Building and Construction Industry Security of Payment Act 2009 (SA); s 3 of the Building and Construction Industry Security of Payment Act 2009 (Tas).
s 3(2) of the Security of Payment Act.
(2004) 61 NSWLR 421; [2004] NSWCA 394.
(2016) 95 NSWLR 147; [2016] NSWCA 379.
[2018] HCA 34; 92 ALJR 780.
Minister for Immigration and Multicultural Affairs v Bhardwaj (2002) 209 CLR 597 at 613 [46]; [2002] HCA 11.
Eg Minister for Immigration and Multicultural Affairs v Bhardwaj (2002) 209 CLR 597 at 606 [17].
(2008) 237 CLR 146; [2008] HCA 32.
Sanders v Snell (1998) 196 CLR 329 at 346‑347 [42].
Three Rivers District Council v Bank of England (No 3) [2003] 2 AC 1 at 192, 228, 231.
Commissioner of Australian Federal Police v Propend Finance Pty Ltd (1997) 188 CLR 501 at 558; Re Refugee Review Tribunal; Ex parte Aala (2000) 204 CLR 82 at 106‑107 [53].
cf Three Rivers District Council v Bank of England (No 3) [2003] 2 AC 1 at 190‑191.
(1981) 151 CLR 170 at 232.
R v Toohey; Ex parte Northern Land Council (1981) 151 CLR 170 at 232‑233. See also Western Australian Planning Commission v Temwood Holdings Pty Ltd (2004) 221 CLR 30 at 67 [93], 95 [181]; SZFDE v Minister for Immigration and Citizenship (2007) 232 CLR 189 at 195 [13].
SZFDE v Minister for Immigration and Citizenship (2007) 232 CLR 189 at 195 [13]; 237 ALR 64 at 67‑68.
151 CLR at 233.
[2010] NSWSC 818.
Primary judgment at [25].
(2001) 51 NSWLR 589; [2001] NSWCA 167.
Zhang at [75].
(1986) 162 CLR 24 at 39; [1986] HCA 40.
Peko-Wallsend at 41.
(2010) 243 CLR 164; [2010] HCA 48 (French CJ, Gummow, Hayne, Heydon, Crennan, Kiefel and Bell JJ).
SZJSS at [30].
Some references omitted.
(2001) 206 CLR 323; [2001] HCA 30.
(2003) 77 ALJR 1088; 197 ALR 389; [2003] HCA 26.
Judgment at [21].
Judgment at [25].
Brodyn at [55].
(2004) 61 NSWLR 521; [2004] NSWCA 395 at [33] (Mason P and Giles JA agreeing).
[2002] FCAFC 361; 194 ALR 749 (Tamberlin, Mansfield and Jacobson JJ).
[2002] FCAFC 431 at [8].
Hii v Commissioner of Taxation (2015) 230 FCR 385; [2015] FCA 375. See generally R Creyke, M Groves, J McMillan and M Smyth, Control of Government Action (5th ed, Lexis Nexis, 2018) at [15.4.10]-[15.4.14].
[2015] VSC 631 at [101].
Judgment at [28].
Ibid.
Appellant's submissions filed 19 September 2018, pars 7 and 8. 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: 20 November 2018

Building and Construction Industry Security of Payment Amendment Act 2002(NSW)

Richard Green Construction Lawyers (Appellant) CCS Legal Pty Ltd (First Respondent) File Number(s): 2018/253475 Decision under appeal Court or tribunal: Supreme Court Jurisdiction: Equity Division Citation: [2018] NSWSC 1229 Date of Decision: 6 August 2018 Before: McDougall J File Number(s): 2018/193623

headnote [This headnote is not to be read as part of the judgment] Goodwin Street Developments Pty Ltd ("the owner") and DSD Builders Pty Ltd ("the builder") were parties to a construction contract. On 19 March 2018, the owner purported to terminate the contract. On 30 April 2018 the builder served a payment claim on the owner in the amount of $727,256. On 14 May 2018 the owner served a payment schedule in response of $0, stating that the builder owed it a substantial sum for rectification of defective works and damage, and replacement of stolen items. The builder applied for adjudication of the payment claim. The adjudicator provided her determination on 15 June 2018, awarding the builder an amount of $265,510. The owner commenced proceedings in the Equity Division seeking to have the determination quashed; the primary judge dismissed the proceedings. Section 10 of the Building and Construction Industry Security of Payment Act 1999 (NSW) relevantly provides: 10 Valuation of construction work and related goods and services (1) Construction work carried out or undertaken to be carried out under a construction contract is to be valued: … (b) if the contract makes no express provision with respect to the matter, having regard to: … (iv) if any of the work is defective, the estimated cost of rectifying the defect. The key issue on appeal was whether the adjudicator's determination was invalid for want of good faith. Lack of good faith was said to be established by the adjudicator's failure to apply s 10(1)(b) when valuing the construction work the subject of the payment claim. The Court (Basten JA, Leeming and White JJA agreeing) dismissed the appeal and held:

The obligation on adjudicators to act in good faith should not be conflated with an obligation to "grapple with" and form a view on all matters they are required to consider. Such language invites a slide into impermissible merit review: [24]-[25]. Minister for Immigration and Citizenship v SZJSS (2010) 243 CLR 164; [2010] HCA 48, applied.

At a glance

Court

Decision date

Before

Source

Judgment (7 paragraphs)

Parties

Legislation Cited (6)

Cases Cited (44)