Patrick Stevedores Operations No. 2 Pty Ltd v McConnell Dowell Constructors

The issues 22The proceedings raise 3 broad issues:

• whether McConnell Dowell was entitled to serve a payment claim in respect of the amount payable under cl 39A.2 of the contract;
• whether McConnell Dowell was entitled to withdraw its first adjudication application and make a new adjudication application in respect of its payment claim dated 30 June 2014;
• whether the Second Adjudicator erred in his determination of the second adjudication application in a way that entitles Patrick to the relief that it seeks.

Was McConnell Dowell entitled to serve a payment claim? 23The answer to this question depends on the correct construction of s 8 of the Security of Payment Act. That section provides: (1) On and from each reference date under a construction contract, a person: (a) who has undertaken to carry out construction work under the contract, or (b) who has undertaken to supply related goods and services under the contract, is entitled to a progress payment. (2) In this section, reference date, in relation to a construction contract, means: (a) a date determined by or in accordance with the terms of the contract as the date on which a claim for a progress payment may be made in relation to work carried out or undertaken to be carried out (or related goods and services supplied or undertaken to be supplied) under the contract, or (b) if the contract makes no express provision with respect to the matter-the last day of the named month in which the construction work was first carried out (or the related goods and services were first supplied) under the contract and the last day of each subsequent named month. "Progress payment" is defined in s 4 to mean: a payment to which a person is entitled under section 8, and includes (without affecting any such entitlement): (a) the final payment for construction work carried out (or for related goods and services supplied) under a construction contract, or (b) a single or one-off payment for carrying out construction work (or for supplying related goods and services) under a construction contract, or (c) a payment that is based on an event or date (known in the building and construction industry as a "milestone payment"). 24Patrick submits that Payment Claim No 13 was not a valid payment claim for the purposes of the Security of Payment Act because there was no reference date in respect of which the payment claim was made. In addition, it submits that the claim was not a payment claim within the meaning of the Act because it was not a claim for a "progress payment" within the meaning of the Act. 25Before dealing with McConnell Dowell's contentions directly, it is necessary to make some observations about s 8. 26First, although s 8 states that an entitlement to a progress payment arises on and from a reference date, it is implicit in that section that a contractor is entitled to progress payments in respect of work to which the section applies (that is, construction work performed under the contract and the supply of all related goods and services under the contract). Under s 8(2), the parties are free to choose reference dates on and from which progress payments are to be made. However, if they do not do so (that is, if the contract "makes no express provision with respect to the matter"), then s 8(2)(b) itself fixes one or more reference dates. 27Second, although the Security of Payment Act is concerned to ensure that contractors are paid progress payments, it is not concerned to ensure that they are paid immediately for any work that they do. Rather, it is concerned to ensure that they are paid periodically and promptly so that they are not out of pocket for significant sums of money while ensuring that excessive administrative burdens are not placed on those liable to pay for the work. It is for that reason that the obligation to make progress payments is tied to reference dates and that s 13(5) of the Act provides that a claimant cannot serve more than one payment claim in respect of each reference date. 28Third, it is accepted that the reference dates provided by the contract and those provided by the Security of Payment Act are mutually exclusive: Quasar Constructions NSW Pty Ltd v Demtech Pty Ltd [2004] NSWSC 116; (2004) 20 BCL 276 at [18], [21] per Barrett J. That is, if the contract provides one or more reference dates in respect of particular construction work or the supply of related goods and services, then s 8(2)(b) does not apply. However, that does not mean that, in certain circumstances, the two subsections cannot operate in respect of the same contract. If, for example, a contract provided reference dates in respect of part of the construction work to be performed under the contract but not all of it, then the contractual provisions would apply to the construction work to which they were expressed to apply, but s 8(2)(b) would apply to other construction work in respect of which no contractual right to a progress payment was provided for. Generally, a principal cannot avoid the obligation to make progress payments in respect of some construction work by failing to specify a reference date in respect of it. 29Fourth, it is accepted that the reference dates provided for under s 8(2)(b) continue notwithstanding termination of the contract. On the other hand, reference dates provided by the contract may cease following termination. Hodgson JA (with whom Mason P and Giles JA agreed) explained the position in these terms in Brodyn Pty Ltd t/as Time Cost and Quality v Davenport [2004] NSWCA 394; (2004) 61 NSWLR 421 at [63]: [Section] 8(2) of the Act does not provide that reference dates cease on termination of a contract or cessation of work. This may be the case under s 8(2)(a) if the contract so provides but not otherwise; while s 8(2)(b) provides a starting reference date but not a concluding one. In my opinion, the only non-contractual limit to the occurrence of reference dates is that which in effect flows from the limits in s 13(4): reference dates cannot support the serving of any payment claims outside these limits. See also Allpro Building Services Pty Ltd v C&V Engineering Services Pty Ltd [2009] NSWSC 1247 at [10] per McDougall J. 30Fifth, although "progress payment" is a defined expression in the Act, it is doubtful that s 8 was intended to pick up that definition: see Interpretation Act 1987 (NSW), s 6, which provides that "[d]efinitions that occur in an Act or instrument apply to the construction of the Act or instrument except in so far as the context or subject-matter otherwise indicates or requires". Section 8 of the Security of Payment Act states that a contractor is entitled to progress payments in respect of construction work under a construction contract and in respect of the supply of related goods and services. The section simply says that a contractor is entitled to periodic payments for the work that it does. Section 13 provides that a person who claims to be entitled to a progress payment under s 8(1) may serve a payment claim; and the Act provides a mechanism for the adjudication of that claim and the recovery of any amount adjudicated to be owing. The definition of "progress payment" makes it clear that a payment is still a progress payment for the purposes of s 13 even if it is a claim for the final payment, a single payment or a milestone payment. What ss 8 and 13 and the definition of "progress payment" must be understood as saying is that a person who carries out construction work under a contract is entitled to progress payments for work done and goods and services supplied and is entitled to use the mechanism provided for by the Act to recover those payments; and that those payments include the final payment, one-off payments and milestone payments payable in respect of the construction work and related goods and services. 31Against that background, it is possible to turn to Payment Claim No 13. 32It is not altogether easy to fit a claim under cl 39A.2 of the contract into the structure of the Security of Payment Act. Clause 39A.2 contemplates a one-off payment calculated in accordance with that clause. The starting point for the claim is the calculation of the amount due under that clause. However, the starting point of a claim under the Act is s 8. That section requires the identification of construction work carried out under the contract and the supply of related goods and services. The question is whether the contract makes provision for progress payments in respect of that work and the supply of those goods and services. 33The first question, then, is whether the items that are the subject of a claim under cl 39A.2 can be described as construction work under the contract or the supply of related goods or services. The second is, if they can, whether the contract makes provision for progress payments in respect of them and, if so, the precise terms on which it does so. If the contract does not, then provision is made by s 8(2)(b) for the fixing of reference dates and by s 9 for the amount payable. 34Clearly, construction work done pursuant to the contract, including construction work performed between the last reference date before termination and termination, is construction work performed under the contract. The same is true of related goods and services supplied during that time. 35However, I do not think that plant and materials ordered by McConnell Dowell in order to comply with its contractual obligations, or the costs of removing equipment from the site, can be described as construction work under the contract or the supply of related goods or services. If plant and materials were ordered by McConnell Dowell, then that was done to put McConnell Dowell in a position where it could comply with its contractual obligations. It was not itself construction work or the supply of related goods or services. It is true that s 39A.2 states that title to the plant and materials vests in Patrick on payment. But the Security of Payment Act is concerned with supply before payment, not with a transfer of title consequent on payment. Similarly, the removal of equipment from the site is not construction work under the contract. It is an activity that follows that construction work coming to an end as a result of termination of the contract. The payment specified in Item 31A is minimal. It bears no relationship to construction work. 36Much of McConnell Dowell's claim relates to work done prior to the last reference date provided for under the contract before termination. The contract clearly provided for progress payments in respect of that work. Indeed, a claim could have been made in respect of that work on prior reference dates identified in the contract. Why that did not happen is not explained. In those circumstances, it is clear that s 8(2)(b) of the Security of Payment Act does not apply since the contract provides reference dates in respect of that work. Two questions, however, remain. The first is whether the contract continued to provide reference dates following termination. The second is the position in relation to work done during the period between the last reference date before termination and termination. 37I accept Patrick's submissions in relation to the first question. Whether or not a contractual term operates after termination is a question of construction: Photo Production Ltd v Securicor Transport Ltd [1980] AC 827. In the present case, the right to receive progress payments is governed by cl 37 of the contract. Only cl 37.6 is expressed to survive termination. It is plain that the parties specifically turned their mind to the question which provisions of cl 37 should continue to operate following termination. The fact that they stated that cl 37.6 survives termination is a strong indication that they did not intend the other provisions of cl 37 to continue to operate. There is no reason why the balance of cl 37 should survive termination. The clause does not regulate the liability of the parties or otherwise make provision for what should happen following termination. The parties specifically make provision in cl 39A for what should happen following termination for convenience. It would be odd if they also intended the payment mechanism under the contract to continue to operate. 38That leaves the question of what happens in relation to work done after the last reference date under the contract and before termination. In my opinion, the contract still provided a reference date in respect of that work at the time the work was performed because, at that time, the contract was still on foot. Consequently, there is no room for the operation of s 8(2)(b). The fact that the contract was terminated before the reference date in respect of that work arrived does not alter the position. It simply means that no reference date in respect of that work can arise. That result does not seem to me to be inconsistent with the purpose of the Security of Payment Act. As I have said, the purpose of the Act is not to ensure that a contractor is paid for work as soon as it is done. Nor do I think it is to ensure that a contractor is paid everything it is owed promptly. Rather, the purpose of the Act is to provide a practical mechanism to ensure that contractors receive progress payments for the work that they do. It seems to me that purpose is achieved even if, because of the way in which the contract and Act operate, the contractor is not entitled to use the mechanism provided for by the Act to recover a payment for work done shortly before termination. 39It follows that no part of the amount claimed by McConnell Dowell was a claim for a progress payment within the meaning of the Security of Payment Act either because the claim was not a claim for construction work under a construction contract (or for the supply or related goods or services) or because there was no reference date in respect of which the claim could be made. As a result, neither adjudicator had jurisdiction to determine McConnell Dowell's payment claim. For that reason, Patrick is entitled to the primary relief that it seeks.

Was McConnell Dowell entitled to serve a second adjudication application? 40Having regard to the conclusions I have reached, this question does not arise. However, given that the issue was argued before me, I should say something about it. 41The answer to the question turns on the application of s 26 of the Security of Payment Act. That section relevantly provides: (1) This section applies if: (a) a claimant fails to receive an adjudicator's notice of acceptance of an adjudication application within 4 business days after the application is made, or (b) an adjudicator who accepts an adjudication application fails to determine the application within the time allowed by section 21(3). (2) In either of those circumstances, the claimant: (a) may withdraw the application, by notice in writing served on the adjudicator or authorised nominating authority to whom the application was made, and (b) may make a new adjudication application under section 17. (3) Despite section 17 (3) (c), (d) and (e), a new adjudication application may be made at any time within 5 business days after the claimant becomes entitled to withdraw the previous adjudication application under subsection (2). 42In my opinion, the First Adjudicator, by failing to determine a number of McConnell Dowell's claims, failed to determine the application within the 10 business days allowed for by s 21(3). As McDougall J said when faced with a similar issue in Cornerstone Danks Street Pty Ltd v Parkview Constructions Pty Ltd [2014] NSWSC 866 at [36]-[37]: Completion of Annexure 1 was possible only because the adjudicator, after 13 May 2014, completed his consideration of the matters in dispute, not by turning his mind independently to the issues that had not been dealt with, but, rather, by the expedient of adopting Cornerstone's position as stated in its payment schedule in respect of each of those items. In the circumstances, it seems to me that the adjudicator did not comply with his statutory obligation to determine the amount of the progress payment within the time fixed by s 21(3) of the Act. 43The position in the present case is indistinguishable. Although the First Adjudicator purported to determine McConnell Dowell's claim, it is clear that he did so by adopting a value of zero for those items he did not consider. In doing so, he did not perform his statutory duty by determining the claim within the time limit specified in s 21(3). In those circumstances, if the payment claim had been a valid one, McConnell Dowell would have been entitled to exercise its rights under s 26.

Other grounds of review 44Patrick challenges the Second Adjudicator's determination on a number of other administrative law grounds. Again, having regard to the conclusions I have reached, it is not strictly necessary to consider those grounds. However, again since they were argued, it is appropriate that I say something about them. 45The grounds fall into three categories. First, it is said that the Second Adjudicator committed a jurisdictional error because he refused to consider Patrick's claim for a set-off in respect of amounts it was entitled to retain from amounts payable to McConnell Dowell following the service of payment withholding requests under s 26A of the Security of Payment Act. Second, it is alleged that the Second Adjudicator denied Patrick natural justice by deciding a number of claims on a basis that was not put by either party or decided those matters in a way that was so unreasonable or irrational as to amount to jurisdictional error. Third, it is alleged that the Second Adjudicator denied Patrick natural justice by failing to consider its submissions regarding the operation of the time bar contained in cl 41.5 of the contract and the use that could be made of an expert's report prepared by Hinds Blunden that McConnell Dowell served as part of its payment claim. 46As to the question of set-off, s 26A permits a subcontractor who has made an adjudication application to serve on the principal contractor a payment withholding request in respect of money owing by the principal contractor to the respondent to the adjudication application and, if it does so, the principal contractor is required under s 26B to retain out of money owed to the respondent the amount of money to which the payment claim relates. In this case, Patrick had been served with three payment withholding requests in respect of money that was payable by it to McConnell Dowell. Patrick claimed a set-off in respect of those amounts. It is not disputed that two of the payment withholding requests were resolved before Patrick served its adjudication response. Moreover, it is accepted that any obligation to retain money in respect of the third payment withholding request came to an end on 9 September 2014, which was the day before the Second Adjudicator made his determination. It follows that the Second Adjudicator's refusal to consider the question of a set-off was not material to his decision. In those circumstances, I accept McConnell Dowell's submission that the Second Adjudicator's error did not involve an error of law in the required sense or, if it did, the Court ought, in its discretion, refuse to grant any relief in respect of it since it had no consequences for his determination. 47The second ground relates to the approach the Second Adjudicator took to claims for work said to have been completed under the contract. The contract was a fixed price contract. Exhibit 18 to the contract contained a summary of the work to be done under the contract and the value to be assigned to that work. The exhibit did not form part of the contract, and a note to the exhibit stated that "This Price Breakdown of the Lump Sum Price is included only for the purpose of evaluating progress claimed to be assessed for payment by the Principal". The price breakdown included a bill of quantities showing the anticipated quantities required, the price per unit and the total price. So, for example, there is an item "Supply and install new conduits as detailed". Under that item are listed various types of conduit expected to be needed to satisfy that requirement, the cost per unit and the total expected cost. That total expected cost was the amount allowed for that component of the fixed price contract. Patrick submits that, in making submissions to the adjudicator, both parties proceeded on the basis that the issue before the adjudicator was the percentage of work done in respect of each identified component. It submits that the parties accepted that McConnell Dowell was entitled to recover that proportion of the price shown for each component of work that reflected the percentage of the actual work it had done. So, to take a simplified example, if McConnell Dowell had installed 80 percent of the new conduit as detailed in the relevant drawings, it was entitled to recover 80 percent of the amount allowed for that component of the work. The issue between the parties was the percentage of work done in relation to a number of components. Patrick submits the Second Adjudicator did not, however, take that approach. Instead, he calculated the amount payable to McConnell Dowell as that proportion of the work done compared to the work contemplated by the bill of quantities. Again, to take a simplified example, if the amount allowed for the installation of conduit was calculated on the basis that 10,000 metres was required and if the adjudicator was satisfied that 8,000 metres had been installed, he allowed an amount of 80 percent of the amount allowed for the installation of conduit. The adjudicator did that even if it turned out that, in order to comply with the relevant drawings, 12,000 metres of conduit had to be installed with the result that only two thirds of the work had been completed. Patrick says, with some force, that the adjudicator, in adopting the approach he did, misunderstood the contract. More significantly in the present context, it submits that neither party contended that that was the correct approach and the adjudicator did not give the parties an opportunity to make submissions on the approach he proposed to take. If he had done so, Patrick says that it would have made a submission pointing out to the adjudicator that he had misunderstood the contract. In not giving Patrick that opportunity, the adjudicator denied it natural justice. 48McConnell Dowell makes three submissions in response to Patrick's contention. First, it seeks to demonstrate that the adjudicator did not take the approach that Patrick said that he did. Second, it submits that the bill of quantities was made available to the adjudicator and, consequently, it was open to him to take it into account. Third, it submits that Patrick has not demonstrated that any denial of natural justice had a material effect of the adjudicator's decision. 49As to McConnell Dowell's first point, in my opinion, the adjudicator did take the approach that Patrick contends he did. The clearest statement of that approach is the following (para 94 of the Determination): The relevant measure is the quantity of work in the BOQ [bill of quantities] that has actually been carried out. To demonstrate, if the BOQ shows 100 widgets but the revised drawings show 110, the valuation is for 100% of the BOQ amount once the 100 widgets are completed and it is not relevant that there are still another 10 to be provided to comply with the revised drawing which, if applied in this way would show 90.9% complete. The true position under the contract is that, absent a variation, the work is only 100 percent complete when the work is complete in accordance with the revised drawing. 50As to McConnell Dowell's second point, the mere fact that the adjudicator was provided with a copy of the bill of quantities does not mean that he was entitled to use it in any way he thought fit. Not all the material that was before the adjudicator was before me. However, it is apparent from Appendix 1 to Patrick's "Reply to the Purported Adjudication Application" that the issue between the parties in relation to the relevant items was the extent to which the work was complete as measured against McConnell Dowell's contractual obligations, not measured against the bill of quantities. There were various reasons why the parties were at odds on the percentage of work that had been completed. One issue, for example, concerned the question whether McConnell Dowell's obligation included an obligation to carry out testing and to provide maintenance and operation manuals. It claimed that the testing and the provision of manuals amounted to five percent of the work in relation to each item, whereas it was McConnell Dowell's position that those matters were not required as part of the relevant items. Irrespective of which party was correct, the point is that the dispute was what was required by the contract, not the allowance in the bill of quantities. In my opinion, the task of the adjudicator was to resolve the issues identified by the parties. It was not open to him to take the approach that he did without giving the parties an opportunity to be heard on that approach. 51As to McConnell Dowell's third point, Patrick provided the Court with the schedule summarising the extent to which it said various items were complete and McConnell Dowell's position in relation to those items. It was not suggested that the summary is inaccurate. It indicates that an amount of approximately $1.9 million was in dispute on the basis of what percentage of the work had been done. Of course, that does not demonstrate that that amount was the extent of the adjudicator's error. The adjudicator may well have accepted some of McConnell Dowell's contentions even assuming that he had been convinced that he should not have adopted the approach he took. However, in my opinion, the schedule demonstrates that the amount in issue was material; and the adjudicator's failure to give Patrick an opportunity to be heard in relation to the approach he proposed to take was a material denial of natural justice. 52Patrick makes a separate complaint about a conclusion the adjudicator reached in relation to one item where he chose a figure (92 percent) for the extent to which the item was complete that was different from the figures contended for by either party. However, in my opinion, the adjudicator was not obliged to accept the contention of one party or the other. Rather, he was obliged to reach a conclusion on the degree to which the work was complete having regard to the information before him and the submissions of the parties. That is what he did in relation to that item. 53A large part of McConnell Dowell's claim (in excess of $30 million) related to variations. One issue that Patrick raised in relation to those claims was that the variations did not occur under cl 36 or cl 41 and, consequently, they were barred under cl 41.5. In particular, Patrick submitted that McConnell Dowell had failed to give the notices required by cl 41.1 in respect of the variations it claimed. Patrick contends that the Second Adjudicator failed to consider its submissions on that issue. 54The Second Adjudicator said this in relation to the time bar: 136. I have not construed the time bar in clause 41 as widely as applied by the Respondent in that a variation direction needs to be no more than a direction in writing given by the Principal's Representative that expressly directs the Contractor to do one of the following in respect of the work under the Contract (WUC): (a) increase, decrease or omit any part of WUC; (b) change the character or quality of any part of WUC; (c) change the levels, lines, positions or dimensions of any part of WUC; (d) carry out additional work; (e) demolish or remove material or work no longer required by the Principal. 137. I do not read clause 41.2(c) as requiring the Principal's Representative direction to vary WUC to be endorsed by the Principal's Representative with specific words. By way of example, the clause does not provide that a variation direction to which clause 41.2(c) applies is limited to a direction which is endorsed with something along the lines of 'these drawings are acknowledged by the Principal's Representative to be a variation under subclause 36.1' or which is acknowledged by separate or accompanying correspondence with words to that effect. That is not what the clause says and, in circumstances in which the Contract is evidently drafted with the precision and sophistication as it is, it would have been a simple matter to state that in the Contract had that been the intention of the parties. (footnote omitted) 55In other places, the adjudicator expands on what he says in paras 136 and 137. So, for example, in para 371, when discussing a particular variation claim, he says: The issue regarding no variation direction being given in writing is raised in the Payment Schedule. Drawings were issued to the Contractor for the variations claimed and that is sufficient to meet the requirements for a variation direction in writing. This also avoids the time bar in clause 41 of the Contract. 56It is apparent from these paragraphs that the adjudicator took the view that a variation direction could be said to have been expressly identified as a variation direction if it had the characteristics identified in para 136 and that the acknowledgment required by cl 41.2(c) did not have to use express words if, on its face, the direction amounted to a variation. 57Whether or not the adjudicator was correct or not is not to the point. He addressed the operation of cls 36 and 41. He reached conclusions on their meaning. He explained the reasons for his conclusions. It was not necessary for him to accept the interpretation contended for by one or other of the parties. 58Finally, McConnell Dowell served a report from Hinds Blunden in support of its claim. In some cases, the amount claimed was greater than the amount supported by the report. As an alternative submission, Patrick submitted that the adjudicator should have accepted the amount set out in the Hinds Blunden report. It submits that it was denied natural justice because the adjudicator did not deal with that submission and, in particular, did not explain why he accepted the amount claimed by McConnell Dowell rather than the amount supported by its own expert. 59I do not accept that submission. The adjudicator was entitled to accept McConnell Dowell's submissions whether or not those submissions were supported by the Hinds Blunden report. He was obliged to give reasons for doing so having regard to the nature of the task that he was undertaking. He was not obliged to explain why he rejected any number of possible alternatives.

Orders and costs 60The orders of the Court are: (1)Declare that the determination made by the third defendant dated 18 August 2014 is void. (2)Declare that the determination made by the second defendant dated 10 September 2014 is void. (3)Direct that the money paid into court by the plaintiff be released to the plaintiff forthwith. 61The plaintiff has been wholly successful. In those circumstances, there should also be an order that the first defendant pay the plaintiff's costs.

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: 16 October 2014