McNab Building Services Pty Ltd v Demex Pty Ltd

PRINCIPLES

1. The principles were not in dispute. A decision maker, including an adjudicator under the Act, is obliged to take into account all relevant (or "mandatory") considerations in making a decision: Minister for Aboriginal Affairs v Peko-Wallsend Ltd (1986) 162 CLR 24 at 39 (per Mason J); Lo v Chief Commissioner of State Revenue (2013) 85 NSWLR 86; [2013] NSWCA 180 at [9] (per Basten JA, with whom Beazley P agreed). A decision-maker will fail to exercise a statutory power, that is to say there will be a jurisdictional error, if they fail to take into account a mandatory consideration: Coordinated Construction Co Pty Ltd v JM Hargreaves (NSW) Pty Ltd (2005) 63 NSWLR 385; [2005] NSWCA 228 at [65] (per Basten JA); Goodwin Street Developments (atf Jesmond Unit Trust) v DSD Builders Pty Ltd (2018) 98 NSWLR 712; [2018] NSWCA 276 at [19] (per Basten JA, with whom Leeming and White JJA agreed), citing Liang O'Rourke Australia Construction Pty Ltd v H&M Engineering and Construction Pty Ltd [2010] NSWSC 818 at [34] (per McDougall J). In that event, a determination is void: Brodyn Pty Ltd v Davenport (2004) 61 NSWLR 421; [2004] NSWCA 394 at [53] (per Hodgson JA, with whom Mason P and Giles JA agreed) CMF Projects Pty Ltd v Masic Pty Ltd [2014] QSC 209 at [30] (per Daubney J), citing Brodyn, Northbuild Construction Pty Ltd v Central Interior Linings Pty Ltd [2012] 1 Qd R 525; [2011] QCA 22.
2. Section 22(2) of the Act prescribes these considerations: Coordinated Construction at [52] (per Hodgson JA), [65] (per Basten JA). Section 22(2) provides: 22 Adjudicator's determination … (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. While the adjudicator must give consideration to these matters, it is generally for the adjudicator to determine the appropriate weight to be each when exercising their statutory power: Peko-Wallsend at 40-1 (per Mason J); Goodwin Street Developments at [23] to [25] (per Basten JA with whom Leeming and White JJA agreed).
4. Further, failure to take a matter into account must be "material" in order to constitute appealable jurisdictional error: Probuild Constructions (Aust) Pty Ltd v DDI Group Pty Ltd (2017) 95 NSWLR 82; [2017] NSWCA 151 at [99]-[101] (per McColl JA, with whom Beazley ACJ and Macfarlan JA agreed); Anderson Street Banksmeadow Pty Ltd v JCM Contracting Pty Ltd [2014] NSWSC 102 at [47] (per Ball J); Ceerose Pty Ltd v A-Civil Aust Pty Ltd [2022] NSWSC 1487 at [30]-[31] (per Rees J). As recently explained by the High Court in Nathanson v Minister for Home Affairs [2022] HCA 26; (2022) 403 ALR 398, the question is "whether the decision that was in fact made could have been different" as a "matter of reasonable conjecture" if the particular consideration had been taken into account: at [32]-[33] (per Kiefel, Keane and Gleeson JJ), [84] (per Gordon J), citing MZAPC v Minister for Immigration & Border Protection [2021] HCA 17; (2021) 390 ALR 590.
5. This Court does not, however, have jurisdiction to quash an adjudicator's determination for non-jurisdictional error of law on the face of the record (in other words, the adjudicator is conferred with decision-making authority to err in law): Probuild at [83] (per Gageler J). The difference between jurisdictional and non-jurisdictional error is illustrated by Cockram Construction Ltd v Fulton Hogan Construction Pty Ltd & Anor (2018) 97 NSWLR 773; [2018] NSWCA 107, where the applicant challenged a determination on the basis that the adjudicator had failed to consider the terms of the contract. In rejecting that challenge, Basten JA observed at [13]: The adjudicator construed the provision as not a valid precondition to the claimant's application for an extension of time. By so holding, the respondent submitted the adjudicator had "put the contract aside" or "declined to apply" the contract. But that was no more than a rhetorical expression of strong disagreement with the construction of the contract adopted by the adjudicator. She may have been wrong in law … But … that was not, of itself, a basis to set aside the adjudication. Likewise, Meagher JA (with whom Barrett AJA agreed) observed that the process followed by the adjudicator did not cease to comply with section 22(2) simply because a conclusion "proceeded from an error in construction or wrong understanding of the particular law": at [41].
6. More recently, in Acciona Agua Australia Pty Ltd v Monadelphous Engineering Pty Ltd (2020) 4 QR 410; [2020] QSC 133, Bond J explained at [35]: The valid exercise of an adjudicator's jurisdiction is not conditioned on the adjudicator reaching what is objectively the correct conclusion on all of the questions of fact or law required by the consideration of the matters set out in s 22. Or, to put it another way, there are many errors of fact and law which might be made by an adjudicator which would not be regarded as going to jurisdiction. … Adjudicators under the Payment Act do not have to get the answer right, but if it is demonstrated that they have not gone about their task by carrying out the active process of intellectual engagement with the issues and the submissions before them that the Payment Act requires, then they will have fallen into jurisdictional error because they will not have done the very thing s 22 of the Payment Act required them to do.
7. An example of an adjudicator falling into jurisdictional error by failing to consider a party's submissions is TWT Property Group Pty Ltd v Cenric Group Pty Ltd [2020] NSWSC 72. There, the adjudicator overlooked the builder's "clear submission" that the excavation carried out was in respect of sandstone and concluded that it was "common ground" that it did not: at [108]. Stevenson J found that the adjudicator could only have reached this conclusion by failing to consider the builder's clear submission to the contrary: at [109]. At [112]-[114]: 112 The error of the adjudicator could not have been a mere misunderstanding of Cenric's submission. Rather it must have been a failure to consider the submissions at all. If the adjudicator had considered Cenric's submissions, … he could not have failed to conclude that the payment claim related to sandstone excavation … 113 This was a breach of natural justice and one which was material. Had the adjudicator considered Cenric's submissions, he was bound to have come to a different view: see Laing O'Rourke Australia Construction Pty Ltd v H&M Engineering & Construction Pty Ltd [2010] NSWSC 818 at [26]-[29] (McDougall J). 114 It was also procedurally unfair for the adjudicator to say that it was "common ground", when it was plainly not, that the payment claim did not include any amount for excavation of sandstone.
8. McNab attaches significance to this decision where, in the adjudication determination at hand, the adjudicator stated that the parties were "in complete agreement", to which I will return at [32].

FACTS

1. On 15 May 2020, McNab and Demex entered into a subcontract under which Demex agreed to undertake demolition work and bulk earthworks at a project in Tweed Heads, for a contract sum of $678,609.90. Demex began work. Asbestos was discovered at the site. Demex continued to work. The payment claims in evidence indicate that there were a significant number of variations, presumably by reason of the discovery of asbestos. For example, on 20 October 2020, Demex issued a payment claim in respect of "test pits" for $11,000.
2. On 15 January 2021, McNab and Demex entered into a second subcontract. Demex agreed to undertake "ACM remediation works" at the Tweed Heads site for a contract sum of $2,198,745.21. That is, there were now two contracts between the parties in respect of the same site, where Demex had already undertaken some "ACM remediation works" under the first contract.

A 'credit'

1. McNab took steps to 'transfer' some of the works performed under the first contract to the second contract. Whether McNab was entitled to do so, or succeeded in doing so, was later the subject of dispute and considered by the adjudicator.
2. On 18 January 2021, McNab's contract administrator, Andrew Holst, emailed a spreadsheet to Demex "with our interpretation of the Credit associated with the Bulk earthworks considering cost completed to date and works being completed as part of the remediation. … I'll give you a call … to run through items required for ACM remediation contract closeout". The attached spreadsheet tallied "Anticipated Credit" for bulk earthworks now being completed within "ACM Scope", totalling $349,760.09. Numerous emails ensued over the following month. Whether the parties reached a consensus was later the subject of dispute and the adjudication determination.
3. On 2 June 2021, Mr Holst of McNab emailed Demex again, submitting a credit variation for the first contract in the amount of $329,965.70 "for works now being completed under the ACM Contract." There is no evidence of a response.
4. On 29 September 2021, McNab project manager, Angus McClanachan, emailed Demex's project manager, Garren Holdsworth, regarding the proposed credit, seeking confirmation that $329,965.70 would be credited for works now included in the second contract. Mr McClanachan advised, "The credit has been constructed in consultation with Demex (by your predecessors) with the below outlining the current agreement." Mr McClanachan asked Mr Holdsworth to consult with the colleagues who had been involved in this process, "We will then pass on a deed of release for signing and process any remaining amount owing." Multiple emails ensued.
5. Of importance, on 30 September 2021, Mr McClanachan emailed a draft payment schedule to Mr Holdsworth for review. Mr McClanachan advised that on receiving the deed of release "we will issue the payment schedule in non-draft form." On 1 October 2021, Mr Holdsworth advised that he agreed with the credit amount and the payment schedule draft and requested that it be issued in final form "and I'll issue the deed of release". Mr McClanachan promptly provided the payment schedule, "on the proviso that the contract sum and variation totals are agreed".
6. As issued, the payment schedule, dated 30 September 2021, comprised six pages and included a "BEW Contract Credit" in the sum of $329,965.70, described as "Credit adjustment Agreed between McNab & Demex as per email correspondence between 30/09/21". The remaining amount to be paid was $55,414.77 (plus GST). Mr McClanachan sought a signed deed of release before payment would be made. The extent to which the payment schedule recorded agreement between the parties as to the extent to which Demex had completed the works under the first contract, and the value of those works, was later the subject of dispute and the adjudication determination.
7. The deed of release was not, however, executed. Nor, as I understand it, was Demex paid the remaining amount under the first contract. Further, by February 2022, problems had emerged in respect of the second contract. McNab complained about Demex's performance and advised that, as Demex had not completed the works, McNab had retained another contractor to do so. On 20 February 2022, Demex issued Payment Claim 13 under the second contract in the sum of $2,197,200.45 (plus GST). It is apparent from Demex's cover letter that the parties were now in hot dispute. On 3 March 2022, McNab claimed that Demex was in default of its obligations under the second contract and advised that the contract was "at an end".

Payment claim

1. On 20 April 2022, Demex issued Payment Claim 8 in respect of the first contract, in the amount of $472,297.33. In the cover email, Demex advised: In this payment claim we have claimed for items that McNab indicated on 2 June 2021 it would remove, by way of variation, from the contract and instruct that work be completed under another contract between McNab and Demex on the same site referenced 18216 Remediation Works. That work was never deleted from the contract by McNab nor did McNab ever instruct that work to be carried out under the contract referenced 18216 Remediation Works. The work was in fact completed under this contract, as evidenced by your previous payment schedule. The work under this contract referenced 18216 is complete. Please issue a certificate of completion accordingly and return retentions held in relation to this contract.
2. The appendices to the payment claim set out the contract works completed to date (said to be 100%) such that $374,435.90 was now owing. In addition, the credit in respect of the works transferred to the second contract was reversed, with the description: There is no agreement in place for this contract to have a negative variation applied. If this value is approved under Contract 2 then Demex reserve[s] the right to revise this position.
3. In short, as I understand it, Demex sought to recover payment for work done under the first contract, where the attempt to credit some of that work to the second contract had not been finalised and where the parties were now in dispute under that contract.

Payment schedule

1. On 5 May 2022, McNab served a payment schedule in respect of Progress Claim 8 in the amount of nil. The payment claim was said to have been made out of time, where Demex last performed work under the first contract in July 2020. Further, the payment claim was said to fail to identify the construction work to which the progress payment related. Further, the payment claim related to two contracts, where the Act required only one payment claim per construction contract each month. McNab described Demex's position as "entirely disingenuous". A negative variation was said to have been acknowledged and agreed by the parties, included by Demex in its previous payment claims. The work claimed was said to have been paid under the second contract.
2. In addition, McNab stated that its payment schedule of 30 September 2021 (see [18]) did not "evidence" that the work was in fact completed under the first contract. Rather, certification of the works as "100% complete" was "merely the necessary accounting to be able to give effect to the agreed negative variation." If the negative variation did not exist, then McNab's valuation of the original works would reduce to reflect the amount of the negative variation and the work actually performed under the first contract. McNab's assessment of the works was then set out.
3. In addition, McNab claimed to be entitled to a setoff in respect of monies owing under the second contract, in the amount of $449,157.26. These figures were said to be itemised in a payment schedule issued on 5 March 2022, which was not in evidence.

Adjudication application

1. On 19 May 2022, Demex lodged an adjudication application, accompanied by a statutory declaration of Mr Holdsworth. Noteworthy, Mr Holdsworth stated that Demex had never received McNab's payment schedule of 5 March 2022, in respect of which McNab claimed a set off.

Adjudication response

1. On 27 May 2022, McNab provided its adjudication response, accompanied by a statutory declaration of Mr McClanachan. The project manager set out his competing version of events in respect of the first and second contracts. In particular, Mr McClanachan stated that the parties had entered into the second contract to include the balance of incomplete, but still required, works under the first contract, together with additional work in respect of asbestos. The parties had agreed, in January 2021, to a "credit" for "the administrative close out" of the first contract and Demex commenced work under the second contract.
2. In its adjudication response, McNab addressed each of its challenges to the adjudicator's jurisdiction before turning to respond to the adjudication application. McNab described Demex's payment claim as "a desperate attempt to claw back costs incurred due to its own mismanagement". An explanation was given of McNab's payment schedule, which presented two alternatives "to demonstrate the nonsense of [Demex's]assertion that because [McNab] certified 100% of the original Subcontract Works as being complete, work was actually complete." McNab submitted that the reality was that the works were only ever certified as complete "to ensure there was no "double dipping" when the balancing credit was certified "below the line"": adjudication response at [8.2.1].
3. McNab proceeded to set out its assessment of the extent of completion of works under the first contract and the value of those works. On the subject of set-off, McNab simply relied on its payment schedule: at [8.1.2].

Adjudication determination

1. On 10 June 2022, the adjudicator gave his determination, comprising 55 pages, concluding that Demex was entitled to be paid in full. I will return to the determination at [41]. McNab now challenges the determination on the basis that, in assessing the value of the work, the adjudicator failed to consider McNab's payment schedule and submissions. In particular, the adjudicator failed to consider that McNab did not agree to Demex's valuation of the works. The adjudicator also failed to consider why it was said by McNab that the valuation in the September 2021 payment schedule did not reflect an agreement by McNab as to the value of the works.

SUBMISSIONS

1. McNab submitted that, whilst the adjudicator found that Demex was entitled to payment of the amount claimed in full, valuation was addressed in only seven paragraphs at [260]-[266] of the adjudication determination. The adjudicator stated at [262]: (emphasis added) The following table establishes the assessment of the subcontract works. The tables provided by the parties shows that they are in complete agreement.
2. The table was a breakdown of amount claimed by Demex for the contract works. The basis for the assertion that the parties were in complete agreement was at [260]: The payment claim of this payment dispute mirrors the payment schedule dated 30 September 2021. The payment schedule dated 30 September 2021 certifies the work as 100 per cent complete.
3. McNab submitted that it did not issue the 30 September 2021 payment schedule in response to Demex's payment claim dated 28 April 2022. Nor was there any agreement between the parties as to the value of the works in either the 5 May 2022 payment schedule or the earlier 30 September 2021 payment schedule. Rather, in the 5 May 2022 payment schedule, McNab set out the percentage of the work which it accepted was complete, which departed significantly from Demex's assertion. Valuations reflecting McNab's assessments were included in the schedules to the payment schedule.
4. McNab submitted that it was not correct for the adjudicator to say that McNab agreed with Demex's valuations in its 30 September 2021 payment schedule, as the figures allowed for by McNab were subject to the 'bulk earthworks credit'. Rather than showing how the credit affected the valuation of each item of contract works, the 30 September 2021 payment schedule applied an overall deduction. This was simply an accounting exercise and did not reflect any agreement on behalf of McNab. It was said the adjudicator failed to address this submission, requiring that the determination be set aside for breach of statutory duty. In such circumstances, it is said to be evident that, in breach of section 22(2)(d), the adjudicator failed to consider McNab's payment schedule and adjudication response and, as a result, there was a jurisdictional error which required the Determination to be set aside.
5. McNab submitted that, despite these issues being addressed in both the adjudication application and adjudication response, these contentions were not addressed by the adjudicator, who did not consider the parties' competing submissions on each line item to form a view on the extent that each element of works was complete. Rather, "without any explanation whatsoever", the adjudicator relied on an incorrect interpretation of a superseded payment schedule to say that there was a complete agreement as to the value of the claim. It was procedurally unfair for an adjudicator to find that something was 'common ground' when it plainly is not: TWT Property Group at [114] (per Stevenson J).
6. Further, McNab submitted that the adjudicator had a duty to come to a view as to what is properly payable on the true merits of the claim: Coordinated Construction at [52] (per Hodgson JA, with whom Ipp and Basten JJA agreed); Laing O'Rourke Australia Construction Pty Ltd v Monford Group Pty Ltd [2018] NSWSC 491 at [2] (per Stevenson J); Pacific General Securities Ltd v Soliman & Sons (2006) 196 FLR 388; [2006] NSWSC 13 at [2] (per Brereton J, as his Honour then was). The adjudicator was required to come to a view as to whether the work the subject of the payment claim was carried out and its value. It was said to be clear from reviewing the determination that he did not do so.
7. Finally, McNab submitted that the adjudicator had failed to address its claim to be entitled to set off $449,157.26 owed by Demex under the second contract. The adjudicator does not address the issue, such that the determination must be set aside.
8. Demex submitted that there was no failure by the adjudicator to adequately consider the payment schedule and adjudication response. All of the material before the adjudicator received extensive consideration and was the subject of lengthy examination in the determination. The real substance of McNab's complaint is about non-appealable factual and legal findings made by the adjudicator, which it disputes. The adjudicator found that, in truth, McNab accepted that the works that were the subject of the payment claim had been performed and had the value claimed. That was a finding which was within the adjudicator's jurisdiction; it is irrelevant whether the adjudicator "got it right". These suggested errors were not jurisdictional and provide no basis on which to set aside the determination. Demex submitted that the basis on which McNab contended that there was a denial of natural justice was unclear, where the adjudicator clearly considered the payment schedule and adjudication response. No denial of natural justice was disclosed by the adjudicator making a finding which McNab considered to be wrong.

CONCLUSION

1. McNab's claim was, with respect, based on a highly selective reading of the determination, in particular, two pages but not the preceding 51 pages. It is helpful - and, indeed, dispositive of McNab's application - to read the entire document.
2. The adjudicator referred on several occasions to the requirements imposed on him by section 22(2). The adjudicator recorded that he had been provided with the adjudication response, which he then proceeded to analyse in some detail, together with the statutory declaration of Mr McClanachan. Having done so, the adjudicator observed at [16]: This is the respondent's side of the story. There are always two sides to every story. Under section 22 of the Act, understanding them becomes a three-edged sword. There is the respondent's side, the claimant's side, and truth in the middle.
3. The adjudication determination is replete with detailed references to the payment schedule and adjudication response. It cannot be said that he did not consider each in detail. Rather, he did not accept McNab's position after what appears to have been a thorough consideration of the submissions and documents provided by both sides. The adjudicator referred extensively to the statutory declarations of Mr Holdsworth and Mr McClanachan and preferred the evidence of Mr Holdsworth.
4. The adjudicator concluded that asbestos was discovered 12 days after commencement of work under the first contract, requiring that work be stopped immediately. An external consultant was retained to identify the nature and extent of the contamination. The consultant concluded that contamination was extensive and far-reaching. This had a significant impact on Demex's scope of work: at [35]. McNab's suggestion that the first contract was mutually abandoned was "not supported by the evidence and does not exist in fact": at [27].
5. The arbitrator did not accept Mr McClanachan's statement that Demex did not complete performance of the first contract, which the arbitrator found was not supported by the evidence: at [42]. The arbitrator did not accept that Demex agreed to McNab's proposal to transfer the performance of the first contract to the second contract, and concluded that there was no connection between the scope of works to be performed under the first and second contract: at [43]-[46], [120]. As there was no agreement to remove work from the first contract and perform the work under the second contract. those works remained part of the scope of works under the first contract: at [191]. McNab accepted that there was no such agreement by submitting the credit variation on 2 June 2021: at [194]-[198], [237].
6. The adjudicator concluded that Demex had completed all of the works under the first contract by June 2021. Further, the adjudicator concluded that the September 2021 payment schedule, properly construed, certified that 100% of the works under the first contract were completed and had the value claimed in the payment claim: at [185], [200]-[201]. The adjudicator concluded that McNab was not entitled to revoke its earlier acceptance, in the September 2021 payment schedule, that all of the works had been performed, without payment under the first contract: at [185] to [188]. The adjudicator did not accept that Demex was "double dipping" but concluded that McNab's project management and administration was "incompetent": at [113]. Further, the reasons which McNab relied upon to withhold payment "were not valid" by reason of these findings: at [232]-[238].
7. After setting out those matters, the adjudicator summarised his process of reasoning and the logic behind his conclusions at [253] to [259]. In short, the adjudicator reasoned that McNab had confirmed that it agreed that the works were fully completed and the value of those works by issuing the September 2021 payment schedule. Further, McNab was not entitled to revoke the September 2021 payment schedule and the assent which it indicated. As such, the arguments advanced by McNab to withhold payment could not be accepted. The finding that the parties were "in complete agreement" as to the completion of the works and its value followed from these conclusions.
8. Both parties made lengthy submissions on the meaning and significance of the September 2021 payment schedule. The adjudicator accepted Demex's arguments, and rejected McNab's contrary arguments, that the September 2021 payment schedule evidenced agreement that the works were complete and that those works had the claimed value. The adjudicator's conclusions reflected his consideration and analysis of the material submitted by the parties, including McNab. He did so after considering the matters set out in section 22(2) of the Act.
9. It may be accepted that an adjudicator must, at a minimum, determine whether construction work has been carried out and its value. Here, the adjudicator was satisfied that the work the subject of the payment claim had been performed and that the value of the work was that claimed in the payment claim. This followed from his conclusion that Demex had completed all of the works by June 2021 and McNab agreed that the works were 100% completed, and the value of those works, by issuing the September payment schedule. Having reached this conclusion, it is unclear why it was necessary for the adjudicator to go through "each line item to form a view on the extent that each element of works is complete", as McNab suggested. The adjudicator did turn his mind to the alternative scenarios proffered by McNab, which he variously described as "doomed to fail", "could not be sustained" and "hopeless": at [190] to [193].
10. As to the suggested failure to consider submissions on set-off, McNab submitted in its payment schedule that it was entitled to set-off an amount said to be owing to it pursuant to a payment schedule issued under the second contract on 5 March 2022. That was all that McNab said on the issue. Demex responded to that contention in the adjudication application, submitting that it had never received a payment schedule dated 5 March 2022 and, therefore, no set-off could arise. That submission was supported by Mr Holdsworth's statutory declaration. Demex also submitted that McNab had no entitlement to set-off in circumstances where it had acknowledged that the works were 100% complete. Other than referring to the payment schedule dated 5 March 2022, McNab made no response to these submissions in its adjudication response.
11. The adjudicator considered this issue and determined it in favour of Demex. The adjudication set out Mr Holdsworth's evidence, which he obviously accepted. The adjudicator accepted Demex's submission that no set-off was available in circumstances where there had, by reason of the September 2021 payment schedule, been an acceptance by McNab that the works were complete. There was no failure to consider the submissions on set-off. Any error which the adjudicator made in the conclusions he reached on that topic are presently irrelevant.

ORDERS

1. For these reasons, I make the following orders: 1. Dismiss Prayers 7 to 11 of the Summons. 2. Discharge the restraint on the first defendant from taking any steps to enforce the adjudication determination, being Order 2 made on 28 July 2022. 3. Order the plaintiff to pay the first defendant'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: 04 November 2022