Did the adjudicator misconstrue the Act leading to a misconception of his functions?
31As discussed, the plaintiff submits that the adjudicator made a legal error by deciding not to take into account the submissions in the reports on the basis that the plaintiff had "included many additional submissions not raised in the payment schedule". It is suggested by the plaintiff that the adjudicator wrongly assumed that the respondent to a payment claim is required to provide "submissions" in its payment schedule, and that section 20(2B) prevents a respondent from including "additional submissions" in its adjudication response. It is suggested that section 20(2B) prohibits additional reasons, not "additional submissions" and for the adjudicator to "exclude those submissions from [his] determination" (at [34]) on this basis is erroneous.
32The defendant submits that this is a wrong characterisation of the adjudicator's reasons and draws attention to paragraphs 31 and 60 of the determination. Instead, it is suggested that the adjudicator identified Dr Bayliss' report as an additional "reason" given by the plaintiff in the payment schedule. It is submitted that a fair reading of paragraph 31, plus the four preceding paragraphs, provides no support for the plaintiff's complaint that the adjudicator wrongly identified the Dr Bayliss' report as an additional submission. Paragraphs 29 and 30 have been reproduced above. Paragraphs 27 and 28 set out the relevant conditions of the contract that were required to be met in order to reach practical completion.
33Did the adjudicator view the reports as additional submissions or as additional reasons ? In my view, paragraphs 31 to 34 of the adjudicator's reasons are instructive. The adjudicator stated that he could not "take those submissions and or material into account as valid reasons why payment has been withheld." It is clear he viewed the reports as additional submissions that had not been properly contemplated in the reasons stated in the payment schedule. This conclusion is supported by paragraphs 11, 15 and 18 of the reasons for decision. The adjudicator has clearly set out what he considered were the reasons provided by the plaintiff in the payment schedule:
"11. The respondent has raised several reasons in its Payment Schedule why it believes the Claimant is entitled to $Nil of the claimed amount. Those reasons are as follows:
11.1 Progress Certificate dated 28 January and annexed as A2 of the Payment Schedule, issued by the Superintendent in response to the Claimant's Progress Claim 20, has a proposed payment to the Claimant in the sum of $48,414.72 (including GST);
11.2 The Respondent submits that at the time the Superintendent issued the Certificate, the works had not reached Practical Completion;
11.3 Offset for liquidated damages in the sum of $14,797.50 (excluding GST); and
11.4 Offset for defective painting works in excess of the subtotal balance of $29,215.88 (excluding GST), leaving $Nil owing to the Claimant."
34At paragraph 15, the adjudicator stated:
"In fact, in my view, the only reason stated by the Respondent in the Payment Schedule as to why it is withholding payment is that the total amount to be set off for the Liquidated Damages (delays) and rectification of purported defective works will exceed the claimed amount in the Payment Claim."
35At paragraph 18, the adjudicator stated:
"...I am therefore satisfied that the Project Manager breached Clause 37.2(a) of the AS4000-1997 Contract and no valid reasons have been provided by the Respondent why the Claimant is not entitled to the full value of each item as claimed."
36The plaintiff submits that the payment schedule only needs to state "the essence of 'the reason' for withholding payment", i.e. "to identify the scope of the dispute" and pointed to the decision of Mason P in Clarence Street Pty Ltd v Isis Projects Pty Ltd [2005] NSWCA 391, (2005) 64 NSWLR 448:
"[27] When he turned to address the first issue, the trial judge applied by analogy the reasoning of Palmer J in Multiplex Constructions Pty Ltd v Luikens & Anor [2003] NSWSC 1140 at [76]-[78]. Palmer J had said:
'76 A payment claim and a payment schedule are, in many cases, given and received by parties who are experienced in the building industry and are familiar with the particular building contract, the history of construction of the project and the broad issues which have produced the dispute as to the claimant's payment claim. A payment claim and a payment schedule must be produced quickly; much that is contained therein in an abbreviated form which would be meaningless to the uninformed reader will be understood readily by the parties themselves. A payment claim and a payment schedule should not, therefore, be required to be as precise and as particularised as a pleading in the Supreme Court. Nevertheless, precision and particularity must be required to a degree reasonably sufficient to apprise the parties of the real issues in the dispute.
77 A respondent to a payment claim cannot always content itself with cryptic or vague statements in its payment schedule as to its reasons for withholding payment on the assumption that the claimant will know what issue is sought to be raised. Sometimes the issue is so straightforward or has been so expansively agitated in prior correspondence that the briefest reference in the payment schedule will suffice to identify it clearly. More often than not, however, parties to a building dispute see the issues only from their own viewpoint: they may not be equally in possession of all of the facts and they may not equally appreciate the significance of what facts are known to them. This will be so especially where, for instance, the contract is for the construction of a dwelling house and the parties are the owner and a small builder. In such cases, the parties are liable to misunderstand the issues between them unless those issues emerge with sufficient clarity from the payment schedule read in conjunction with the payment claim.
78 Section 14(3) of the Act, in requiring a respondent to "indicate" its reasons for withholding payment, does not require that a payment schedule give full particulars of those reasons. The use of the word "indicate" rather than "state", "specify" or "set out", conveys an impression that some want of precision and particularity is permissible as long as the essence of "the reason" for withholding payment is made known sufficiently to enable the claimant to make a decision whether or not to pursue the claim and to understand the nature of the case it will have to meet in an adjudication.
[28] To similar effect are the following remarks of Davies AJA (Handley JA and Stein JA concurring) in Hawkins Construction (Aust) Pty Ltd v Mac's Industrial Pipework Pty Ltd [2002] NSWCA 136 at [20]:
[Section 13] should not be approached in an unduly technical manner ... The terms used by subs (2) of s 13 are well understood words of the English language. They should be given their normal and natural meaning. As the words are used in relation to events occurring in the construction industry, they should be applied in a common sense practical manner.
[29] In this Court, the parties were agreed that these principles were generally applicable to the resolution of the first issue.
[30] In Multiplex , Palmer J was considering the requirements for a valid payment schedule. The function of that document is apparent from the statutory scheme to which reference has already been made. Section 14(2) provides that the payment schedule must identify the payment claim to which it relates, and must indicate the amount of the payment (if any) that the recipient of the payment claim proposes to make. Section 14(3) requires the recipient to indicate why payment in full is withheld and the reasons for doing so. The joinder of issue thus achieved sets the parameters for the matters that may be contested if an adjudication under the Act ensues (cf s 20(2A) and (2B)).
[31] I respectfully agree with the principles stated by Palmer J in Multiplex . I would however point to two matters that need to be borne in mind when they are applied to a situation such as the present, ie testing the validity of a payment claim. The first is that a "payment claim" is no more than a claim. It must comply with s 13, but (unlike a payment schedule) it is not its function to identify the scope of a dispute. Many claims will not be disputed, but if they are, it is a matter for the respondent to the payment claim to state the extent and reasons for failing to pay the sum withheld.
[32] Secondly, I draw attention to the fact that Palmer J is referring (at [78] of his reasons) to s 14(3), which states matters that the respondent to the payment claim "must indicate". This is also the language of s 13(2)(b). By contrast, s 13(2)(a) (with which the present appeal is concerned) defines what the claimant "must identify". It is however unnecessary in the present case to consider the difference between identification and indication."
37The decision was approved by the Court of Appeal in Perform (NSW) Pty Ltd v Mev-Aus Pty Ltd [ 2009] NSWCA 157 per Giles JA:
" [47] Clarence Street Pty Ltd v Isis Projects Pty Ltd was concerned with s 13(2) of the Act and whether a payment claim "identified" the relevant construction work. Section 13(2) also requires that the payment claim "indicate" the amount of the progress payment claimed to be due. The President noted at [29], as to similar effect as the discussion by Palmer J, the remarks of Davies AJA (Handley and Stein JJA agreeing), in Hawkins Construction (Australia) Pty Ltd v Mac's Industrial Pipework Pty Ltd [2002] NSWCA 136 at [20], that s 13 should not be approached in an unduly technical manner and-
The terms used by subs (2) of s 13 are well understood words of the English language. They should be given their normal and natural meaning. As the words are used in relation to events occurring in the construction industry, they should be applied in a common sense practical manner.
[48] So in Multiplex Constructions Pty Ltd v Luikens brief reference to prior correspondence could suffice, and in Coordinated Construction Co Pty Ltd v Climatech (Canberra) Pty Ltd [2005] NSWCA 229 at [42] Basten JA said of "identify" in s 13(2) that, on a purposive construction, a payment claim must be accompanied by such supporting documentation as makes it reasonably comprehensible to the other party "unless it has already been provided".
[49] The same approach should be taken to s 14(3). "Indicate" is an ordinary word, to be applied in a common sense practical manner and often where the provider and the recipient of the payment schedule will have debated a claim to payment in prior correspondence. In Multiplex Constructions Pty Ltd v Luikens Palmer J's discussion was directed to the precision and particularity of the indication, rather than to indication by reference to another document, but it necessarily involved that reference to prior correspondence can indicate the provider's reasons. While it should not be forgotten that the payment claim should be intelligible to the adjudicator as well as the recipient, a sufficient indication between the parties can be explained before the adjudicator by supply of the correspondence. As Mason P said in Clarence Street Pty Ltd v Isis Projects Pty Ltd at [30], the joinder of issue achieved through the payment claim and the payment schedule "sets the parameters for the matters that may be contested if an adjudication under the Act ensues (cf ss 20(2A) and 20(2B))"; but it sets it as between the parties, and primary regard should be had to the parties' communications.
[50] In my opinion, indication within s 14(3) does not exclude what the adjudicator described as incorporation by reference of material extrinsic to the payment schedule. The adjudicator appears to have thought that provision involving physical receipt meant that regard could not be had to anything not physically received with the payment schedule. That can not be so. As a simple illustration, a payment schedule will commonly refer to provisions of the construction contract; it would make no sense that the construction contract, or the relevant provisions, had to be set out in full or attached although known to the parties and the basis for their relationship. It would equally be neither common sense nor a practical application of s 14(3) to deny indication by reference to correspondence in which reasons have been fully set out simply because a copy of the correspondence is not physically attached to or provided with the payment schedule.
[51] The respondent submitted to the effect that the meaning of "indicate" was informed by s 20(2B) in its reference to reasons which have been "included in the payment schedule provided to the claimant". It said that the Act contemplated a single document within which the reasons were included, and that uncertainty in what was included through incorporation by reference was contrary to the "fast track" process for which the Act provided. I do not see textual enlightenment in the reference to inclusion of reasons - they are included because indicated. Questions of certainty come within whether what is done is indication.
[52] It will be a question of fact whether, in the particular circumstances, reference to material extrinsic to the payment schedule is an indication of reasons. Reference to a memorandum internal to the provider of the payment schedule could not indicate reasons for the purposes of s 14(3); reference to a conversation, without giving its substance, is unlikely to do so; reference to a long-past letter not readily to hand might not do so; but there is no reason why reference to a recent and specific letter received by the recipient of the payment schedule should not do so. The recipient is thereby informed, and can decide whether or not to pursue the claim and understand the case it will have to meet in an adjudication, and being informed in that way is well within the meaning of "indicate".
[53] In Pacific General Securities Ltd v Soliman and Sons Pty Ltd [2006] NSWSC 13 ; (2006) 196 FLR 388 at [71] Brereton J was "inclined to accept, without deciding, that a payment schedule may 'sufficiently indicate' reasons for withholding payment by reference to reasons previously advanced in an earlier payment schedule, if appropriately worded ... ". His Honour's inclination was correct, as was his observation that it was not sufficient to incorporate reasons advanced in previous payment schedules, adjudication responses or otherwise so that the claimant could not know whether all or any and if so which of the grounds previously advanced were now relied on. In the present case, in my opinion the March payment schedule indicated as reasons for the $nil being less than the claimed amount and for withholding payment the reasons in the February payment schedule, in substance, the claimed backcharges, at the least as in relation to the $209,968.68 if not as to the entirety of the claimed amount."
38At paragraph 34 of the reasons, the adjudicator states that the plaintiff had made it quite clear in the payment schedule that testing had been undertaken in relation to the quality and compliance of the painting works and that that awareness could have only come from the Bayliss report. The adjudicator then goes on to state that that report is very detailed and it should have been made available to the defendant in the payment schedule. In fact the plaintiff only had a draft report of Dr Bayliss available when it provided its payment claim on 8 March 2011. The final report, not surprisingly, only became available on 25 March 2011. The adjudicator stated that the plaintiff should have reduced its arguments in its adjudication response to the thickness of the paint and not relied on the reports.
39The payment schedule states:
"21. The respondent says that the works have still not reached practical completion.
2.2 Without limitation the Respondent relies on the document "DEFECT IDENTIFICATION/RESOLUTION REGISTER" bearing the marking "Last Update: 16/02/11" which is annexed and marked A3.
2.3 Where by interpretation that document indicates that an item must be rectified for practical completion to be reached, the respondent says that said item must be so rectified for practical completion to be reached under the contract.
...
3.2 The Respondent understands that testing has been undertaken in relation to the quality and compliance of said painting works as undertaken. The respondent understands that the results of that testing are that the said painting works are substantially defective and do not comply with the contract specifications. Specifically, the Respondent understands that the thickness of the said paint application if complying with the specifications would on average be 2.5 times the thickness of the said paint applied.
3.3 The respondent also refers to the other deficiencies identifies in Annexure A3.
...
3.7 Considering that the Respondent is of the view that more than 13.76% of those works are defective, and moreover that the deficiencies in Annexure A3 must also be accounted for...
3.9 For the avoidance of doubt, in reaching its conclusions as to the value of defective work in relation to the said painting works, the Respondent has relied on its understanding that the external building paintwork should be on average 2.5 times its thickness as applied.
3.10 The Respondent has also relied on the quotation from Skillco Design & Construct annexed and marked A4, which provides a cost for undertaking external building painting works in accordance with the original contract specification ..."
40Clearly, 20(2B) prohibits additional reasons, not "additional submissions". T he adjudicator did not allow the report because he apparently believed they raised new issues, reasons or submissions and the defendant did not have an opportunity to respond to the report in its adjudication application.
41In my view, the payment schedule and in particular its references to Annexure A3, the Skillco quotation, the reference to the testing in paragraph 3.2 were appropriately worded and specific enough to 'sufficiently indicate' the reasons for withholding payment. I do not agree that the Bayliss report contained additional 'reasons'.
42However, even if the adjudicator was incorrect, had he correctly considered section 20(2B) of the Act at paragraphs 31 to 35 of his reasons? I think the defendant is correct in submitting that one must focus on the substance rather than the form of the adjudicator's statements. The adjudicator expressed his understanding of ss 14(3) and 20(2B) of the Act. The adjudicator's view was that, consistent with the policies of fairness and promptness, the full reports should be included with the payment schedule to allow a claimant to properly articulate an adjudication application and prevent a fresh case being brought about in reply after that application was made. The defendant says that the adjudicator did not misconstrue the Act in a way that led to a misconception of his functions.
43Unfortunately, the adjudicator did not appreciate how the courts have interpreted the use of the word "indicate" in s 14(3) and the difference between "reasons" and submissions" when used in the legislation.
44Although the Act's provision for claims and responses has been compared to similar court processes, it is not a complete analogy. Under the Act, there is, firstly, a process for making a claim for payment and receiving a response. The response must be payment, part payment or no payment. In the latter two circumstances reasons must be advanced. The second set of provisions deal with resolving a resulting dispute by an adjudicator.
45Thus the second set of provisions does not follow a court process format of claim, defence and reply. That is because the earlier processes should have sufficiently alerted the claimant to what were the reasons for non-payment. The claimant starts with the benefit of knowing already what is the defence to his claim.
46The circumstances of the present matter illustrate the point. By the time the claimant came to make his adjudication application he knew full well that there was a challenge to the thickness of the coat of paint. It was within his power to include with his adjudication application any expert reports or other material to support his claim that the paint achieved the correct thickness.
47This then leaves the respondent to reply with his expert material. There is always the residual power of the adjudicator to call for further submissions under section 21(4) of the Act.
48In my view, the adjudicator has confused the use of reasons and submissions in sections 14(3), 20(2)(1) and 20 (2B) of the Act. As a result he misconstrued the Act.
49This conclusion means that the adjudicator misapprehended the nature of or limits on his functions and powers, which was a jurisdictional error. The next question for consideration is whether the determination is void on other grounds submitted by the plaintiff.