MTR Corporation (Sydney) NRT Pty Ltd v Thales Australia Ltd

Supreme Court of NSW|2020-08-11|Before: Stevenson J

Solicitors: McCullough Robertson Lawyers (Plaintiffs) Marque Lawyers (First Defendant) File Number(s): 2020/176787

Judgment

The plaintiffs, MTR Corporation (Sydney) NRT Pty Ltd and UGL Rail Services Pty Ltd are parties to a construction contract ("the Contract") with the first defendant, Thales Australia Pty Ltd. The Contract is dated 3 August 2015 and relates to works on the Sydney Northwest Rail Link. In the Contract, the plaintiffs are referred to, together, as "SJV". I shall do the same.
The Contract concerns, relevantly, the installation by Thales of "I/O points". I/O points are electronic components whose function is to integrate third party equipment and systems in the Sydney Metro system.
On 5 June 2020, an adjudicator under the Building and Construction Industry Security of Payment Act 1999 (NSW) ("the Act") awarded Thales an amount of $25,246,170.25.
SJV submits that the determination was affected by a number of jurisdictional errors.

Ground 1 - the I/O Points modification claim

Thales claimed $32,249,377.10 for what it described in its Payment Claim as the "I/O Points Modification Claim".
SJV contends that, in relation to this claim, the Adjudicator denied it procedural fairness because she decided Thales's claim on the basis that had not been advanced by either party; Thales in particular.
The Adjudicator was obliged to afford the parties procedural fairness. [1] Where the denial of procedural fairness is material, it is open to judicial review. [2] Where an adjudicator makes a determination on a basis for which neither party contended, and without giving the parties an opportunity to make submissions on the question, a breach of natural justice arises. [3]
The Contract provided for a number of ways by which the Contract could be modified.
The first was an "SJV Initiated Modification" under cl 29.
The next was a "Significant Contractor [ie Thales] Initiated Modification" under cl 30.
The third was a modification under cl 57. Clause 57 provided, relevantly, that, if SJV gave Thales a direction, other than under cl 29, and that direction amounted to a "Modification" for the purpose of the Contract, Thales could make a claim thereby arising by giving a particular form of notice.
The Contract also included a "Central Control System Particular Specification" ("the Specification"). Clause 3.7 of the Specification dealt, in terms, with the "Scope of I/O Points" and Thales's obligations.
Subclause 3.7.4.1 dealt with "Allowance for I/O Points changes". It provided that where SJV's contractors imposed "revised requirements" in relation to physical and field I/O Points, each of these changes was to be "evaluated" in accordance with Schedule 29 of the Contract. Schedule 29 made detailed provision for the amounts to be paid to Thales in relation to any such changes.
SJV contends that Thales only put its claim in relation to I/O Points as a claim for a "Modification" under cl 57 of the Contract, and that there was a joinder of issue on the claim so put.
SJV contends that, nonetheless, the Adjudicator decided the I/O Points question in favour of Thales on another basis; namely, as an adjustment to the Contract Price under cl 3.7 of the Specification.
In those circumstances, SJV made this submission: "The Adjudicator's reasons disclose grave procedural unfairness. This was a claim for more than $32,000,000. It had been expressly put on a particular basis by Thales, ie as a cl 57.1 claim. [SJV] had responded to the claim on the basis that it was put (by, for example, asserting that there was non-compliance with the procedures in cl 57.1)."
On behalf of SJV it was submitted that: 1. what the Adjudicator should have done had she rejected the sole basis of Thales's claim [4] but perceived that another basis might be available [5] , was "simple" and that "she could and should have sought further submissions from the parties"; and 2. had she done so, there were a number of arguments SJV would have wished to put in relation to the cl 3.7 point, such that the adjudicator's failure was material.
SJV's complaint about the Adjudicator is directed in particular to what she said at [25] and [26] of the determination: "25. Despite the inconsistencies, contradictions and other issues in the drafting of clause 3.7 of the [Specification], it is clear and, indeed, common ground, that the parties also agreed that the original contract price, which is to say the amount set out at Part 1 of Schedule 2 only, covered 4,000 hardwired points and 56,000 software points or, if Option 6 was exercised, 4,500 hardwired points and 59,500 software points, and that the contract sum would be adjusted if a different number were required and provided independently of any change in the scope of works, which is to say, independently of any true variation, or, using the terminology employed in the Significant Contract, independently of any Modification, just as might occur where actual quantities differ from estimated quantities under a Bill of Quantities type arrangement. 26. The I/O points claim is accordingly not a claim made in respect of a Direction that constitutes or involves a Modification. It is simply a claim for an adjustment to the contract price based on the difference between the actual number of I/O points provided and the number allowed for in clause 3.7 of the [Specification] or, again in the terminology employed in the Significant Contract, a claim in respect of a Direction or fact arising out of, or in connection with, the Significant contractor's activities or the deed."
As I have read these paragraphs, the Adjudicator was stating that although Thales had brought alternative claims under cl 57 of the Contract and under cl 3.7 of the Specification, the correct characterisation of its claim was under cl 3.7. Indeed, the Adjudicator then proceeded at [31] to [39] deal with the matter on that basis.
An analysis of SJV's claim that, in so doing, the Adjudicator decided the matter favourably to Thales on a basis that was not argued by either party, and by Thales in particular, necessitates consideration of the Payment Claim, the Payment Schedule, the Adjudication Application and the Adjudication Response.

The Payment Claim

In the Payment Claim, under the heading "Short form description", Thales described its claim as "I/O Points Modification Claim". Thales included in its Payment Claim an invoice it sent SJV on 16 March 2020 which described its claim in the same way.
However, on the same page as the description at [23], and under the heading "Description of the construction work (or related goods and services)" Thales described its claim as follows: "Claim for additional I/O Points configured by Thales beyond its contractual obligations."
The Payment Claim did not, in terms, refer to cl 3.7.4.1 of the Specification. However, I accept the submission put forward on behalf of Thales that Thales's description of the claim was apt to refer to a claim under cl 3.7.4.1 of the Specification.
The reference by Thales to its claim being a "Modification" claim may point to the conclusion that its claim was, or included, a claim under one or of the provisions to which I have referred at [10] to [13] above.
However, the broader description of that claim as being "for additional I/O Points by Thales beyond its contractual obligations" bespoke an alternate claim under the Specification. That was certainly a conclusion open to the Adjudicator; the determination of the parameters of a payment claim being a matter for her. [6]

The Payment Schedule

In the Payment Schedule, SJV disputed Thales's entitlement to rely upon a Modification under any of cll 29, 30 or 57 of the Contract.
SJV referred to cl 3.7.4.1 of the Specification but in the context of its claim that there should be a judgment on the Contract price in its favour of some $1.2 million.

The Adjudication Application

In the Adjudication Application, under the heading "Claim for Additional Input and Output (I/O Points)" Thales developed detailed arguments by reference to cl 3.7 of the Specification including, at [81]: "If the required number of points to satisfactorily supply the OTS Works (CCS) exceeds the number of points referred to in cl 3.7.1.1, as addressed below, cll 3.7.4.1(a) and (b) of the [Specification] provide the contractual machinery for evaluating the change."
Thales was making clear at this point that it was contending that a basis upon which it was entitled to be remunerated in relation to I/O Points was cl 3.7.4.1 of the Specification. It was certainly open to the Adjudicator to so construe this part of the Adjudication Application.
SJV placed particular reliance upon later passages in the Adjudication Application including the following passages which appeared at [91] and [92] under the heading "Threshold Matters": "In its Payment Schedule (at [3.8] - [3.17], [3.21] - [3.23]), SJV asserts that the I/O Point claim is not a valid Compensation Event under the [Contract] and is not a valid Modification under the [Contract] and Thales has no entitlement to the I/O Point Claim under cl 26, 29 or 30 of the [Contract]. Thales has never suggested the I/O Point claim was made under those provisions. It is brought under cl 57.1 of the [Contract], as was clear to SJV from at least June 2019."
SJV relied upon this passage as demonstrating that Thales made its I/O Point Claim only under cl 57.1 of the Contract.
I do not read this passage in the Adjudication Application that way.
It appears to me that Thales was here answering a contention advanced by SJV in the Payment Schedule that Thales was not entitled to maintain its I/O Point Claim under the provisions identified at the first of these two paragraphs: ie under cll 26, 29 or 30 of the Contract.
I do not read these passages as Thales somehow resiling from its earlier stated claim under cl 3.7.1 of the Schedule. It was certainly open to the Adjudicator to so construe the Adjudication Application.

Adjudication Response

SJV recognised, in its Adjudication Response, that Thales was making its I/O Points Claim under cl 3.7.4.1 of the Schedule. Thus, at [28.2] SJV stated, in terms: "Thales relies on cl 3.7.4.1 of the [Specification] to claim an adjustment to the Contract Price."
In making that submission, SJV made reference in a footnote to the passage in Thales's Adjudication Application that I have set out at [30].
Indeed, SJV went on to argue that not only was Thales not entitled to make a claim under cl 3.7.1.1 of the Specification, but that SJV was entitled to a deduction of the Contract Price thereunder.
Thales was advancing its I/O Points Claim under cl 3.7.1.1, as an alternative to a claim under cl 57 of the Contract.
The passages from the determination I have set out at [20] above show that the Adjudicator construed Thales's Adjudication Application as arguing the matter two ways, under cl 3.7 of the Specification and under cl 57 of the Contract.
In those passages, the Adjudicator was expressing the view that the true basis of Thales's claim was under the Specification and not under cl 57 of the Contract.
That may or may not have been correct. Any error here made by the Adjudicator was within jurisdiction.
But the Adjudicator was not deciding Thales's case on a basis that it had not advanced. She preferred one basis to the other.
I see no lack of procedural fairness on the Adjudicator's behalf.

Ground 2 - Claim that Thales "did not carry out the work"

SJV contends that the Adjudicator failed to afford it procedural fairness in that she failed to "consider substantial clearly articulated arguments put to her and thereby failed to have regard to the express mandatory considerations referred to in s 22(2) of the Act".
Section 22(2) of the Act requires the Adjudicator to "consider" the matters there enumerated, including the payment schedule and all submissions made by respondents in support of the payment schedule. That requires an adjudicator to engage in "an active intellectual process" [7] and "a process of evaluation, sufficient to warrant the description" of the matters being taken into consideration. [8]
Before the Adjudicator, SJV contended that Thales had not correctly accounted in accordance with cl 3.2 of the Specification for the actual number of I/O Points because, amongst other things, it included certain software I/O Points "which should not have been included because Thales did not carry out the work".
SJV expanded on that contention in its Adjudication Response where it stated: "…as explained by Mr Sit in his statutory declaration: (a) Thales refused to carry out the work to modify the existing [Programmable Logic Controller]; and (b) as a result, around six months before First Passenger Service, SJV made the decision to carry out this work, and SJV has claimed the cost of this work against Thales. This meant that rather than Thales carrying out modification work, this was carried out by SJV. One particular significance of this is that, as explained by Mr Sit in his statutory declaration, this meant that the modification work became an external interface to Thales' works, rather than Thales carrying out the work as internal [Central Control System] works to migrate the software and to integrate the software with the new [Central Control System]."
The Adjudicator commenced considering this argument at [67] of the determination where she said: "The third issue raised in respect of the claimant's I/O point count is whether it properly includes the [relevant] software I/O points when the claimant 'did not carry out the work'."
The Adjudicator continued, at [68]: "In the adjudication application, [Thales] addresses this issue briefly and only after first noting that it doesn't understand [SJV]'s position. Doing the best that I can with the submissions that have been made, the essence of [Thales]'s position appears to be that: … (b) it carried out that work; and (c) regardless of what work it was required to do, or actually did, the only matter relevant to the I/O point count is that the ECRL interface generated I/O points that were communicated to the CCS and configured by [Thales]."
SJV submitted: "The Adjudicator did not, however, return to the issue of whether Thales had in fact carried out the work that it claimed it had carried out. The Adjudicator's reasons do not reveal any consideration of that submission or the evidence relating to it, and it should be inferred that the Adjudicator did not consider this matter."
However, the passages in the Determination that follow those I have set out show that the Adjudicator did consider the matter.
Thus she said at [69] to [71]: "In the adjudication response, the primary reason [SJV] advance for excluding the … software I/O points from the software I/O point count is that: a. [Thales] modified the … software and interfaced this software with the MCS; b. the … modifications therefore 'became an external interface…rather than [being carried out as internal works]'; and c. if carried out as internal works, the I/O points 'should not be counted' because it 'does not constitute effort on a per I/O point basis'. This issue was not raised in the payment schedule and, as such, constitutes a new reason, which I am precluded from considering. [SJV] also submit that the interface between ECRL and [Central Control System] contains a significant number of non-field I/O points. However, although this issue is now raised specifically in relation to the interface between the ECRL and [Central Control System], it is supported by the same material I have already considered and dismissed."
The material that the Adjudicator said in the last sentence I have set out that she had "already considered and dismissed" related to a count of I/O Points that a Mr Ni had conducted on behalf of Thales.
The Adjudicator had considered that count and said at [44]: "As already discussed above, [SJV maintains] in the payment schedule, that field I/O point count has not been conducted in accordance with the [Contract] as it: (i) includes non-field I/O points; (ii) includes ungrouped EAC I/O points; (iii) includes certain … software I/O points in its count but did not provide same; and (iv) has not used the correct baseline."
The Adjudicator then proceeded to discuss SJV's contention and concluded at [52] that Thales had not miscounted the I/O Points.
The Adjudicator concluded, at [72]: "There being no other challenges to [Thales'] I/O point count that I am permitted to consider, I am satisfied that Mr Ni's calculations … provide a proper basis for calculating the contract sum adjustment to be made as a result of the actual number and type of I/O points provided."
The Adjudicator may not have been correct to come to this conclusion. If she erred, any such error was one made within jurisdiction.
I am not, however, persuaded that the Adjudicator did not give consideration to the arguments put. The fact that the Adjudicator determined that she could not take account of points made by SJV in its adjudication response that it had not raised in its payment schedule [9] shows that she did. In my opinion, the Adjudicator did "evaluate" SJV's contentions, in the manner I have set out. Her "evaluation" may not have been correct, but any error in that regard did not deprive her of jurisdiction.

Ground 3 - claims for modifications

SJV contends that the Adjudicator failed to come to a view or to consider the true merits of Thales's claims for modifications concerning: 1. a Change of Station Portal Clock - $24,000; 2. a "Transmission Network Optical Distribution Frame" - $131,657.82; and 3. Help Point Background Image Change - $72,124.
Between [99] and [196] of the Determination, the Adjudicator dealt with 22 modification claims made by Thales.
Eleven of those claims were for "Modifications instructed by way of Modification Order" and 11 further claims were said by Thales to arise from a "Direction by SJV other than a Modification Order".
The Adjudicator's analysis of these claims occupies some 16 pages of the 57 page Determination.
SJV's contentions relate to just three of these claims two of which, (b) and (c), the Adjudicator dealt with together.
In relation to items (b) and (c) above, the Adjudicator said at [163]: "[Thales] claims $131,657.82 and $72,124 for these works respectively. [SJV] allow nil for each but raise no substantive grounds in the payment schedule. In the adjudication response, [SJV] submit that they are unable to properly assess or respond to the quantum claimed. These are new reasons that I am precluded from considering. However, in case I err in approaching the matter in that way, I note that I am, in any case, not at all satisfied that [SJV] are unable to properly assess or respond to the quantum claimed. As [SJV] do not dispute that the works in question constitute or involve a Modification, or the quantum claimed, I allow the full amount claimed for this item."
The Adjudicator's remarks in the last sentence of [163] need to be considered in the light of what she said earlier (at 150]). The Adjudicator there noted that SJV had, in its Payment Schedule, rejected a number of Thales's claims on the grounds that Thales had not substantiated the claimed amount.
At [152] she said: "While I appreciate that payment schedules are often drafted in tight frames, I am not prepared [to] read [SJV]'s reasons other than literally. This means, for example, that I am not prepared to infer from any of the above reasons, or all of them taken together, that [SJV] were unable to answer the claims or that quantum was in issue. It is one thing, for example, to state that a claim is not substantiated and quite another to state that the amount claimed is excessive. If [SJV] intended to say that they did not understand the claim well enough to be able to respond to it, they ought have said so, but they haven't said that. This is no doubt because each claim was in fact well known to [SJV]."
I do not think it is a fair reading of the Determination to conclude that the Adjudicator failed to come to any view about Thales's claim concerning these items. Rather, the conclusion I would draw is that the Adjudicator determined, that is formed the view, that as a matter of fact, the quantum of these matters was not in dispute.
I read the Adjudicator as having concluded, that is formed the view, that the circumstances of these claims were "well known" to SJV, and that if there was something that could be said to contradict them, SJV would have put those matters forward.
As for the Change of Station Portal Clock issue, the Adjudicator recorded at [166] that the only substantive reason offered by SJV to meet that claim was that it had been the subject of a release of 16 November 2018. The Adjudicator considered the terms of the release and concluded that she was not satisfied that it had effect in relation to the Station Portal Clock.
The Adjudicator then concluded at [171]: "As [SJV does] not dispute that the works in question constitute or involved a Modification, or the quantum claim, I allow the full amount claimed for this sum."
The Adjudicator may or may not have been correct in her conclusion concerning the ambit of the 16 November 2018 release.
But it cannot be concluded, in my opinion, that she did not give proper consideration to the claim.
The reality and scope of the task before the Adjudicator needs to be considered here. She was faced with an enormous amount of material that she was obliged to consider in the very tight time frames mandated by the Act. SJV called extensive evidence to contradict quantum on many parts of Thales's claim, including evidence of a quantity surveyor. It deserts reality to isolate the Adjudicator's consideration of just three of the 22 modification claims made by Thales and assert a lack of consideration by her of those claims without seeing them in the context of the larger task faced by the Adjudicator.

Ground 4

SJV claimed a deduction or set-off in the order of $800,000 for costs incurred in providing power to the Electronic Ticketing System. This was a matter in respect of which SJV bore the onus.
SJV contends that the adjudicator "failed to decide whether this set-off had been made out".
The Adjudicator dealt with this claim at [239] and [240] as follows: "[239] In the adjudication response, [SJV] appear to assert that the work in question was taken out of [Thales]'s scope of work or, alternatively, that [SJV] provided power to the electronic ticketing system pursuant to a separate agreement with the claimant. Once again, I am not satisfied that these reasons were raised in the payment schedule. They are accordingly new reasons which I am precluded from considering. [240] [SJV] also refers me to the relevant Interface Requirements Schedule and provides further details of the works. In light of the further details provided in the adjudication response, it is clear that the claim concerns a great deal more than [Thales] thought it did. In circumstances where there is no suggestion that [Thales]'s undertaking of the claim was anything other than reasonable, it follows that [SJV] failed to apprise [Thales] of the case it had to answer in respect of the claimed deduction. [SJV] also failed to address the timing of the works and the impact, if any, of the release of its claims."
SJV focused on the statement made by the Adjudicator at [240] that Thales had evidently, although reasonably, misunderstood SJV's claim by reason of SJV having failed properly to apprise Thales of it.
At [239] the Adjudicator concluded that she was not able to take into account SJV's contentions there recorded. No doubt the adjudicator had in mind s 20(2B) of the Act.
SJV's submissions also overlook the last sentence of [240] where the Adjudicator concluded that SJV had "failed to address the timing of the works and the impact, if any, of its release of claims". Although the Adjudicator did not here state in terms that she considered this failure determinative of SJV's claim for a deduction or set-off, that appears to me to be implicit in what she said.
That may, or may not, have been a sufficient basis to reject SJV's claim.
But it shows that the Adjudicator did not reject the claim solely on the grounds of some alleged "misunderstanding" by Thales.

Conclusion

For these reasons, my conclusion is that SJV's challenge to the determination fails.
It is therefore unnecessary for me to consider the vexed question, to which I adverted in Diona Pty Ltd v Downer EDI Works Pty Ltd [10] , of whether the Court has discretion to mould relief to allow parts of a determination unaffected by jurisdictional error to survive.
The parties should bring in short minutes to give effect to these reasons.

Endnotes

eg Probuild Constructions (Aust) Pty Ltd v DDI Group Pty Ltd [2017] NSWCA 151 at [54] (McColl JA; Beazley ACJ and Macfarlan JA agreeing).
Laing O'Rourke Australia Constructions Pty Ltd v H&M Engineering Construction Pty Ltd [2010] NSWSC 818 at [26]-[29] (McDougall J).
Musico & Ors v Davenport & Ors [2003] NSWSC 977 at [108] (McDougall J).
which SJV contended was only under cl 57.
ie under cl 3.7 of the Specification.
Icon Co (NSW) Pty Ltd v Australia Avenue Developments Pty Ltd [2018] NSWCA 339 at [17] (Basten JA citing Downer Constructions (Australia) Pty Ltd v Energy Australia (2007) 69 NSWLR 72; [2007] NSWCA 49 at [87] (Giles JA).
Musico & Ors v Davenport & Ors (supra) at [117].
Cockram Construction Pty Ltd v Fulton Hogan Construction Pty Ltd [2018] 97 NSWLR 773; [2018] NSWCA 107 at [41] (Meagher JA, Barrett AJA agreeing) citing Weal v Bathurst City Council [2000] NSWCA 88 at [80] (Giles JA, Priestley JA agreeing); Azriel v NSW Land & Housing Corporation (2006) 67 NSWLR 256; [2006] NSWCA 372 at [49] (Basten JA, Santow and Ipp JJA agreeing).
See [54] above.
[2020] NSWSC 480. 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: 27 August 2020

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