Holdmark v Melhemcorp [2009] NSWSC 305 | Case summary

55025/09 Holdmark (Aust) Pty Ltd v Melhemcorp Pty Ltd and anor JUDGMENT 1 His Honour: This is the hearing of an application for an injunction to restrain the enforcement of part of an adjudication decision which was made by the second defendant under the Building and Construction Industry Security of Payment Act 1999. The actual dispute concerns an application under section 22 (5) of the Act for the correction of an error in the adjudication. The Adjudicator is the second defendant who has filed a submitting appearance. The hearing of the proceedings has been referred to me by a Judge of the Court. Background to the dispute 2 The submissions of the parties helpfully set out these matters and I will incorporate them with some modifications. 3 In about January 2007, the Plaintiff (Holdmark) engaged the Defendant (Melhemcorp) to undertake site remediation and landscaping works to a reserve in Shepherd Bay Park, Meadowbank. It is common ground between the parties that during the course of performing the works and pursuant to arrangements made between them, Holdmark made certain payments directly to sub-contractors engaged by Melhemcorp with its knowledge and authorisation. 4 On 25 January 2009, Melhemcorp made a Payment Claim in the amount of $644,886.64. The amount claimed was later reduced by Melhemcorp in its Adjudication Application to $503,149.58. The Payment Claim acknowledged that Melhemcorp had been paid a total of $914,221 by Holdmark and stated in paragraph 7: "To date, Holdmark has paid Melhemcorp $914,221…." 5 In its Payment Schedule dated 10 February 2009, Holdmark indicated as a reason for withholding payment that it had paid directly to certain sub-contractors of Melhemcorp the sum of $213,940.65. In particular, Holdmark stated in paragraph 14(c): "The Respondent has, at the request of the Claimant, paid directly to the Claimant's sub-contractors, including Ezy-Pave, Bellingham Marine and Sydney Marina Contracting, a total of $213,940.65 in respect of works to be carried out by the Claimant under the contract." 6 In its Adjudication Application dated 24 February 2009, Melhemcorp responded to what is described as "specific matters" in Holdmark's Payment Schedule, including paragraph 14(c) in which Holdmark had asserted that it had paid to Melhemcorp's sub-contractors directly a total of $213,940.65. The relevant portions of the Adjudication Application are as follows: "5. Response to Payment Schedule 5.1 The Claimant wishes to respond to a number of specific matters raised in the 'Schedule of Payment Schedule'. 5.2 … 5.3 … 5.4 … 5.5 … 5.6 … 5.7 In response to paragraph 14(b), the Respondent has actually paid the Claimant the amount of $914,221.00. 5.8 In response to paragraph 14(c), the Claimant calculated this amount as $218,490.65 (incl GST) broken down as follows: 5.8.1 Ezy-Pave $63,844.00; 5.8.2 Bellingham Marine $117,646.65; 5.8.3 Sydney Marina Contracting $37,000.00." 7 The Adjudication Application then set out Melhemcorp's calculation of the amount being claimed as follows: "13. Calculation of amount being claimed 13.1 … 13.2 At the completion of the works, the Claimant's costs totalled $1,241,365.72 (including GST). This amount is broken up as follows: 13.2.1 - 13.2.6 … 13.3 Tabs 33 and beyond of this Application contain the Claimant's sub-contractor and supplier invoices. 13.4 The difference between the above amount and the total project costs of approximately $3 million relates to amounts paid direct by the Respondent (discussed further below). 13.5 … 13.21 … Payments made by the Respondent direct to sub-contractors 13.22 There were delays in paying a number of sub-contractors engaged by the Claimant at the Site. 13.23 In an effort to get paid those sub-contractors approached the Respondent seeking payment direct from it. 13.24 The Respondent requested letters from the Claimant directing it to pay the sub-contractors directly. 13.25 On or about 9 October 2008, the Claimant provided letters to the Respondent authorising direct payment of the following sub-contractors: 13.25.1 Ezy-Pave; 13.25.2 Bellingham Marine; and 13.25.3 Sydney Marina Contracting. 13.26 Tab 32 is a copy of the letters authorising payments by the Respondent. 13.27 The Respondent paid the amount of $218,490.65 to the above three (3) sub-contractors. 13.28 In addition the respondent engaged certain contractors on the site directly. The claimant is not aware of the total amount paid by the respondent to these contractors but has estimated, based on quotes provided by the contractors that the amount is approximately $1,800,000. 8 The Adjudication Response provided by Holdmark did not take issue with what was said in paragraphs 5.8 and 13.22-13.27 of the Adjudication Application. 9 On 2 March 2009, the Second Defendant ("the Adjudicator") accepted the appointment and made an Adjudication Determination on 16 March 2009. The adjudication 10 The structure of the Adjudication Determination is to summarise each of the Payment Claim, Payment Schedule, Adjudication Application and Adjudication Response (paragraphs 9-44). The actual valuation appears under the heading "Decision" commencing at paragraph 45. 11 In summarising each of the adjudication documents, the Adjudicator included reference to the following: (a) That in its Payment Schedule, Holdmark had asserted as one of the reasons for withholding payment that "… at the request of the Claimant, the Respondent has also paid a total of $213,940.65 to three of the Claimant's sub-contractors in respect of works they carried out." (paragraph 15e.); (b) That in its Adjudication Application, Melhemcorp submitted that: "g. Contrary to the Respondent's submission that it paid $213,940.65 to the three sub-contractors named in paragraph 14(c) of the Payment Schedule, the Respondent has actually paid $218,490.65." (paragraph 24g., see also 30a.) 12 In valuing the Payment Claim the Adjudicator: (a) Accepted Melhemcorp's argument that "… at contract commencement, the parties had not agreed on the scope of work covered by the price stated in the signed contract." (paragraph 60); (b) Accepted Melhemcorp's submission that the work under the contract between them "changed substantially" and that therefore, "… the only way to value the work is to base the valuation on the Claimant's actual costs." (paragraph 66); (c) Accepted Melhemcorp's submission that the parties had agreed on a "method of valuing the work except for agreement on a margin …" and that the actual cost would be that indicated in the "invoice tally" (paragraph 69); and (d) Found that there was agreement on the documents on the invoice totals, adopting a figure of $1,196,020.57 including GST as the total cost (paragraph 76). 13 Having found, by this process of reasoning, that the actual total costs to Melhemcorp were $1,196,020.57 (incl. GST), the Adjudicator then went on to consider each of the reasons advanced by Holdmark for withholding payment and did so by reference to a reconciliation provided by Holdmark which included as a reason that Holdmark had made payments to the three sub-contractors in question directly. 14 The Adjudicator dealt with that precise reason for withholding payment at paragraph 80, and purported to adjudicate upon that reason, in the sense of determining whether or not it was a valid reason for withholding payment. The paragraph was in these terms: "80. The second reason is in relation to two cost items. The reason is: "invoice confirmed paid by others - taken out from progress payment assessment demonstration". The first amount deducted is $63,974.00 under item 18 "Paving", I could not find a reference to this amount in any of the schedules behind the 28 Tabs containing the Claimant's invoices. Nor could I detect any problem with any of the numerous invoices in the bundles that appear to be related to paving, so I do not accept this deduction. The second amount deducted is $154,464.64 under item 23 "Marine Consultant and contractor". The amount appears to be in relation to an invoice for $117,646.65 by Bellingham Marine, and an invoice for $37,000.00 from Sydney Marina Contracting Pty Ltd. I did not detect any problems with these invoices so I do not accept this deduction." 15 It was submitted by the plaintiff that in purporting to deal with the deductions referred to in paragraph 80 of the Adjudication Determination, the Adjudicator had either: (a) Overlooked the concession which had been made by Melhemcorp in its Adjudication Application that these amounts had in fact been paid; or (b) Simply mistaken the correlation between the concession made in the Adjudication Application and the items referred to in paragraph 80. 16 Melhemcorp for their part submitted that on the correct reading of the clause the Adjudicator had effectively decided that the claims for these items were not included in the payment claim but presumably were for other works paid for separately by the defendant. 17 The Adjudicator's final reconciliation of the "net amount due" by Holdmark to Melhemcorp is found in paragraph 85 of the Adjudication Determination. That reconciliation applies the total invoiced cost of $1,196,020.57, makes certain deductions, adds 15% margin and then allows a deduction of $914,220 which Melhemcorp conceded as having had been paid by Holdmark. What the reconciliation does not do is allow Holdmark the further deduction of $218,590.65, which it had paid directly to contractors at Melhemcorp's request. If that amount were allowed, the net amount due would have been $150,748.81. Application by Holdmark to correct the award 18 By letter dated 25 March 2009, Colin Biggers & Paisley, lawyers for Holdmark, wrote to the Adjudicator care of the nominating authority, making application for a correction of the determination pursuant to s.25(5)(b) and (c) of the Act. 19 On the same day, Maddocks, solicitors for Melhemcorp, provided submissions to the Adjudicator which inter alia submitted that the findings made by the Adjudicator in paragraph 80 were findings made on matters within the "discretion" of the Adjudicator. 20 By letter dated 26 March 2009, the nominating body provided a facsimile to each of the parties and their solicitors in which the nominating body purported to provide what were described as "comments from the Adjudicator" as follows: "Reference is made to the letter dated 25 March 2009 from Colin Biggers & Paisley, and the letter of the same date from Maddocks, and the submissions made therein. The Adjudicator has reviewed the letters and submissions, and has advised that he does not consider the Adjudication Determination contains a mistake or error that falls within s.22(5) of the Act." 21 That communication is the Adjudicator's decision on the application made under s.22(5) of the Act. 22 On 27 March 2009 Colin Biggers and Paisley for Holdmark wrote to Maddocks for Melhemcorp tendering payment of $167,074.76 representing the difference between the total sum of the adjudicated amount, interest and costs and the amount which was conceded to have been paid, that is, $218,490.65. 23 By letter dated 27 March Maddocks for Melhemcorp rejected the tender and asserted a right to request an adjudication certificate for the full adjudicated amount The plaintiff's submissions 24 The submissions were that in consequence of the Adjudicator's failure to bona fide exercise the power contained s.22 (2) of the Act, Holdmark is entitled to restrain enforcement of the whole or part of the Adjudication. 25 Alternatively, that Melhemcorp conceded and the parties proceeded conventionally on the basis that the sum of $218,490.15 had been paid by Holdmark and was therefore to be deducted from the total invoiced cost claimed made by Melhemcorp. 26 Alternatively, Holdmark is entitled to a set-off of $218,490.65 against the adjudicated amount. Failure to exercise the power bona fide 27 S 22 (5) of the Act is in the following terms: "(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." 28 The most relevant subsection is (c). 29 In Brodyn Pty Ltd t/as Time Cost & Quality v Davenport & Anor (2004) 61 NSWLR 421, Hodgson JA (with whom Mason P and Giles JA agreed) considered what was required by the Act for there to be a valid and effective determination identifying at 441[53] what his Honour described to be five "basic and essential requirements" for a valid determination. The fifth of those basic and essential requirements was expressed as follows: "5. The determination by the Adjudicator of this application (s.19(2) and s.21(5)), by determining the amount of the progress payment, the date on which it becomes or became due and the rate of interest payable (s.22(1)) and the issue of a determination in writing (s.22(3)(a))." 30 His Honour went on to say at 442[55]: "What was intended to be essential was compliance with the basic requirements (and those set out above may not be exhaustive), a bona fide attempt by the Adjudicator to exercise the relevant power relating to the subject matter of the legislation and reasonably capable of reference to this power (cf R v Hickman; ex parte Fox and Clinton (1945) 70 CLR 598), and no substantial denial of the measure of natural justice that the Act requires to be given. If the basic requirements are not complied with, or if a purported determination is not such a bona fide attempt, or if there is a substantial denial of this measure of natural justice, then in my opinion a purported determination will be void and not merely voidable, because there will then not, in my opinion, be satisfaction of requirements that the legislature has indicated as essential to the existence of a determination." 31 It was submitted by Holdmark that the obligation cast upon an adjudicator to bona fide exercise the power to determine an adjudication application extends to exercising the power under s.22 (5) of the Act to correct the determination on the adjudicator's own initiative or on the application of a party because: (a) The power to correct is contained within s.22 of the Act under which the Adjudicator is empowered to determine the adjudicated amount; (b) The exercise of the power may affect the amount of the progress payment, the date on which it becomes payable and interest payable which the Adjudicator is required to determine under s.22 (1) of the Act; (c) A correction potentially has a significant effect upon amount of the progress payment so determined, as reflected by the words in s.22(5)(c), "material miscalculation of figures or a material mistake in the description of any … thing or matter referred to in the determination …" ; (d) Corrections made in the exercise of this kind of power must relate back and operate from the date of the original determination: Elyard Corp Pty Ltd v DDB Needham Sydney Pty Ltd (1995) 133 ALR 206. 32 Melhemcorp submitted that the authorities discussed above do not extend so broadly as to render an adjudicator's determination void if a subsequent dealing (by the adjudicator) with a procedural matter following a determination suffers from a failure of one of the basic and essential requirements set out in Brodyn. Even establishing an "egregious error" it was said would not demonstrate lack of 'bona fides'. Put another way it was said that the principles in Brodyn (and specifically the application of those principles in determining whether a determination is 'void') are concerned with the adjudicator's valid exercise of his or her functions under the Act in reaching their determination, and not with mere application of non-substantive procedural provisions under the Act following the determination. 33 I do not agree with this submission. As the error to be corrected can be one containing a material miscalculation this could often have a substantial affect on the ultimate result. The factual result in this case is a good example. 34 In circumstances where an "application" is made by one of the parties under s.22 of the Act to correct a determination, it was the plaintiff's submission that the adjudicator is at least required to consider (as the adjudicator is required to "consider" the matters in s.22(2) of the Act), the following: (a) The basis upon which the application to correct is made; (b) The submissions made by the parties on the application to correct; (c) Review the adjudication determination in the light of the submissions made by the parties; (d) Decide whether the application to correct is one falling within any of s.22 (5)(a)-(d) of the Act and if so, which of them; and (e) Thereafter to provide the parties with the reasons for that decision. 35 On the face of the adjudication response the Adjudicator appears to have considered the first four of these items but he has not provided reasons for his decision. 36 The obligation of an adjudicator to "consider" certain matters in making a determination in the context of an obligation to act in good faith was considered by McDougall J in Timwin Constructions Pty Ltd v Façade Innovations Pty Ltd [2005] NSWSC 548 where his Honour said at [38]: "[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 at 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 Beasley 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 R v Hunt; ex parte Sean Investments Pty Ltd (1979) 180 CLR 322 (Mason J) and in Evans v Marmont (1997) 42 NSWLR 70, 79-80 (Gleeson CJ and McLelland CJ in Eq)." 37 In Azriel v NSW Land & Housing Corporation [2006] NSWCA 372, Basten JA, with whom Santow and Ipp JJA agreed said at [49]: "The requirement of consideration is not satisfied by formalistic reference. In Weal v Bathurst City Council (2000) 111 LGERA 181 Giles JA, with whom Priestley JA agreed, stated at [80]: 'Taking relevant matters into consideration called for more than simply adverting to them. There had to be an understanding of the matters and the significance of the decision to be made about them, and a process of evaluation, sufficient to warrant the description of the matters being taken into consideration ... ' Mason P commented at [9]: 'There is little point in searching for a definitive statement of what is involved in taking something into consideration. I am however, attracted to Gummow J's formulation of 'proper, genuine and realistic consideration upon the merits'." 38 In Holmwood Holdings Pty Ltd v Halkat Electrical Contractors Pty Ltd [2005] NSWSC 1129, Brereton J said, in treating the concept of "good faith" as having some correlation with the obligation to act "bona fide": "[117] Accordingly, good faith as a condition of validity of the exercise of an Adjudicator's power to make a determination requires more than mere honesty. It requires faithfulness to the obligation. It requires a conscientious effort to perform the obligation. And it does not admit of capriciousness." 39 Holmwood Holdings Pty Ltd v Halkat Electrical Contractors Pty Ltd involved a detailed discussion of good faith and bona fides although the thrust of his Honour's decision was to the effect that in making a determination the adjudicator should not have regard to capricious considerations. The result of his Honour's decision was upheld on appeal - see the reasons of Giles JA in Halkat Electrical Contractors Pty Ltd v Holmwood Holdings Pty Ltd [2007] NSWCA 32 at [26], [27]. However, Giles JA was able to do so without considering the trial judges detailed reasoning. 40 In Reiby Street Apartments Pty Ltd v Winterton Constructions Pty Ltd [2006] NSWSC 375 at [71] White J said: ...Errors in reasoning, even egregious errors, do not equate to an absence of bona fides. 41 In this case, it was submitted by Holdmark that the Adjudicator failed to bona fide exercise the power contained in s.22(5) of the Act because: (a)The form of the Adjudicator's "decision" appears in a communication from the nominating authority which purports to communicate "comments" by the Adjudicator by quoting from either an oral or written statement by the Adjudicator. The description of "comments" applied to the communication does not suggest of a serious application of thought to the power contained in s22(5) or to the submissions of the parties, nor does it suggest that the Adjudicator understood the seriousness of application which had been made or the power he was being asked to exercise; (b) Insofar as what has been communicated is the totality of the Adjudicator's decision, there was merely formal reference to the submissions of the parties and the provisions of s.22 (5) of the Act. The process of reasoning is not disclosed, nor is any explanation for the conclusion provided; (c) The Adjudicator does not address at all the apparent concession made by Melhemcorp that the determination in fact did contain an error; (d) The Adjudicator made no attempt to distinguish between the types of mistakes and errors contemplated by s.22 (5)(b) and (c), making only a broad reference by the expression "mistake or error that falls within s.22(5)" of the Act; (e) The Adjudicator had the advantage of explaining why it was that he did not consider it to be correct that the sum of $218,490.65 should have been deducted from the total net cost, which the Adjudicator had assessed. He did not do so. This of itself suggests that the Adjudicator did not bona fide exercise the power under the section; (f) It is submitted that if the Court finds the Adjudicator failed to bona fide exercise the power under s.22(5) of the Act, that finding affects the validity of the whole determination and would have the effect of rendering the Adjudication Determination void. That is because the power to correct a determination is so integrally connected with and relates back to the power conferred upon an Adjudicator to make an Adjudication Determination. 42 Before dealing with this aspect it is necessary to give further consideration to what the Adjudicator was deciding in paragraph 80 of his adjudication. As I have said Melhemcorp submitted that on the correct reading of the clause the adjudicator had effectively decided that the claims for these items were not included in the payment claim but presumably were for other works paid for separately by the defendant. 43 A cursory reading of the comments on the first claim for $63,000 might tend to support the approach by Melhemcorp. However, the second amount is clearly not in that category. This is because the Adjudicator has located the appropriate invoices and decided that there is nothing wrong with the charges and therefore he would not make any deductions. 44 Plainly the Adjudicator is looking at the liability for the amounts and is not referring to the fact that the deduction is to be because the amount has been paid separately. I have earlier set out the parts of the adjudication application and on the situation put forward it is plain from the application that this is effectively a final claim at the end of the project. It is also clear that there were substantial payments to subcontractors during the course of the project. In paragraph 13.4 of the adjudication application the applicant made it perfectly plain that the total project's costs were much higher than what their final claim was because monies had been paid direct to other contractors. This is seen from 13.4 and 13.28. It is also apparent that standing outside this is a separate set of outside payments the detail of which is carefully set out in 13.22 to 13.27. 45 The Adjudicator in par 77 of his reasons refers to a reconciliation schedule and then seeks to address deductions. That document which was part of the adjudication response is not before me. The adjudication application, which he apparently was not then looking at, makes it clear that the deduction is because of payment not liability. 46 The matter thus cannot simply be explained away on the basis suggested by Melhemcorp. In considering how the Adjudicator dealt with the correction application it is important to note what information was provided to him. The letter from Holdmark's solicitors was in these terms. "In relation to $63,844 paid by the Respondent to Ezy-Pave, the invoices for item 18 behind Tab 33 of the Adjudication Application for "paving contractor and costs" total $136,994. As indicated in the Respondent's reconciliation schedule at Tab 6 of the Adjudication Response, $73,200 of the $136,944 amount was paid to Ezy-Pave by the Claimant directly and the balance of $63,794 was paid by the Respondent to Ezy-Pave on the Claimant's behalf and at the Claimant's request. Although you indicated in paragraph 80 of the Determination that you could not find a reference to the $63,974 amount behind the 28 tabs containing the Claimant's invoices, the invoices totalling $136,994 (of which the $63,794 forms a part) are included at the unmarked tab behind Tab 33 of the Adjudication Application for item 18 - paving contractor and costs and are therefore part of the $1,116,052.57 in net costs determined by you. Please also note that this payment of $63,794 is confirmed by the Claimant at paragraphs 5.8.1, 13.25 and 13.27 of the Adjudication Application ($63,844 rather than $63,794 is confirmed as having been paid by the Respondent).

Holdmark v Melhemcorp

At a glance

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Decision date

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Judgment (11 paragraphs)

Parties

Cases Cited (14)