Construction of clause 12 and issue estoppel
73The first basis of State Water's challenge to Mr Sive's determination is that it depended on a construction of clause 12.1 of the contract inconsistent with the construction given to that clause in Mr Wilson's determination, and was therefore arrived at contrary to an issue estoppel arising from the earlier determination. State Water also submitted that if alternatively Mr Sive did not rely on clause 12 in arriving at his determination, it meant that he failed to have regard to the provisions of the construction contract (s 22(2)(b)), that such a failure amounted to a failure to act in good faith (in the relevant sense), and that his adjudication determination should therefore be set aside. In this context, "good faith" requires adjudicators to demonstrate "an effort to understand and deal with the issues", "[put] their minds to the comprehension and their wills to the discharge of their duty" (Timwin Construction v Facade Innovations (2005) 21 BCL 383; [2005] NSWSC 548 at [38]-[40] per McDougall J) and undertake an "active process of intellectual engagement" (Laing O'Rourke Australia Construction v Handm Engineering and Construction [2010] NSWSC 818 at [39] per McDougall J). Since State Water's two submissions are related, it is appropriate to deal with them together.
74Clause 12.1 provides:
12 Latent Conditions
12.1 Definition
Latent Conditions are-
(a) physical conditions on the Site or its surroundings, including artificial things but excluding weather conditions or physical conditions which are a consequence of weather conditions at the Site, which differ materially from the physical conditions which should reasonably have been anticipated by the Contractor at the time of the Contractor's tender if the Contractor had-
(i) examined all information made available in writing by the Principal to the Contractor for the purpose of tendering; and
(ii) examined all information relevant to the risks, contingencies and other circumstances having an effect on the tender and obtainable by the making of reasonable enquiries; and
(iii) inspected the Site and its surroundings; and
(b) any other conditions which the Contract specifies to be Latent Conditions.
75The italics and strike-out in the text are in original formatting, to show the agreed additions and deletions made by the parties to the standard form of contract.
76Mr Wilson had previously held that clause 12 did not allocate the risks associated with flooding upon State Water, but rather that "physical conditions which are a consequence of weather conditions are excluded from the definition of Latent Conditions" (Mr Wilson's adjudication determination at [122]). However, Mr Sive (at [9(b)]) formed the contrary view that clause 12 "allocates the risk associated with the physical conditions complained of by [Civil Team] squarely upon [State Water]".
77As a matter of fact, it is clear that these constructions are directly opposed to one another; and as a matter of law, the doctrine of issue estoppel can apply to adjudication determinations (Dualcorp Pty Ltd v Remo Constructions Pty Ltd [2009] NSWCA 69; (2009) 74 NSWLR 190 at [68] per Macfarlan JA with whom Handley AJA agreed). However, an issue estoppel will only arise from a previously decided issue of fact or law if that decided issue was a necessary component of the reasoning process leading to the conclusion reached (Blair v Curran [1939] HCA 23; (1939) 62 CLR 464).
78Clearly, Mr Wilson's interpretation of clause 12 was necessary for, and indeed conclusive in relation to, the outcome of his adjudication determination. But to determine whether Mr Sive's admittedly contrary interpretation of clause 12 played any role in the process leading to the outcome of his adjudication determination, it is necessary to examine the reasoning process in Mr Sive's adjudication determination and the background material relevant to it, including Civil Team's payment claim, State Water's payment schedule, Civil Team's adjudication application and State Water's adjudication response.
79Civil Team raised a number of issues in its payment claim of 18 June 2013. The claim totalled $6,333,553.76 including GST (though the payment claim only shows an amount of $5,890,001.36, due to an arithmetical error in arriving at the total amount of the payment claim). State Water alleged, and Civil Team accepted, that some of those issues were dealt with in Mr Wilson's earlier determination. Civil Team therefore ultimately only pressed one issue, described as "Issue 1 - Variation Costs for Contract Insurance" (Issue 1), in its adjudication application.
80Civil Team provided, with its payment claim of 18 June 2013, a letter addressed to State Water explaining the basis of the Issue 1 claim:
1 BACKGROUND
On 23 April 2010, CTE [i.e. Civil Team] notified the Superintendents Rep and the Principal [i.e. State Water] that the contract works insurance were to be provided by the Principal, however, CTE offered two options to the Principal which were;
a) The client [i.e. Civil Team] to procure the contract works insurance and provide CTE details of such insurance prior to commencement of works on the site; or
b) CTE to procure the contract works cover as a variation and valued under the provisions of Clause 40 of the General Conditions of Contract (GCC) and subject to mark-up.
On 25 May 2010, CTE received advice from the Superintendents Rep to obtain a quotation for the insurance of the works for the sum of $5 million and that this will be a variation to the contract. On 31 May 2010 CTE then received an instruction to procure the works insurance pursuant to clause 40 of the GCC as variation.
2 CONTRACTUAL BASIS OF CLAIM
The Superintendents Rep instructed CTE to take out the above insurance cover and subsequently paid the value through a variation under clause 40 of the contract. Therefore, any further cost incurred by CTE under this insurance policy falls within the ambit of the variation and the cost, plus overhead and profit, is due to CTE from the Principal. There is no dispute that the works insurance was a variation to the contract and Superintendents Rep has valued and paid for all necessary extensions to the insurance as a result of the Latent condition caused delays.
3 VALUATION OF WORKS INSURANCE VARIATION
Pursuant to clause 40.2 of the GCC, CTE is claiming the additional costs incurred for the excess of all repair works carried out and claimed under the works insurance to date. Also claimed is the difference between the claimed amount for expediting and mitigation which has a maximum allowance of $50,000.
...
Accordingly CTE is claiming an amount of $329,166.91 plus mark-up of 22.5% giving a total of $403,229.46 excl GST.
81State Water provided its payment schedule, on 1 July 2013, in which it proposed to pay only $173,830.45 (including GST), pointed out that the majority of the claim was the subject of the earlier adjudication determination by Mr Wilson, and provided the following reasons for non-payment of Issue 1:
Issue 1 - Insurance - Scheduled amount $nil
7.1 SWC notes that CTE appears to have made an error in its payment claim by failing to include the amount claimed for Issue 1 entitled - 'Variation 1 additional costs' ($443,552.40) in the total sum being claimed. This is evident by the formula for the total sum in the Payment Claim. As the amount has not been included in the total amount indicated as 'the amount that the claimant claims to be due' pursuant to section 13(2)(b) of the Building and Construction Industry Security of Payment Act SWC contends that it is not recoverable.
7.2 In addition to the jurisdictional argument above, SWC contends that it requires CTE to provide proof of insurance for the periods being claimed as well as proof of payment for the relevant insurance policies. Furthermore, in accordance with clause 21.4 of the Contract, SWC request to see any insurance payments received from an insurer. SWC requests that CTE provides this documentation to assist with verifying its claim. Therefore in absence [sic] of such information being provided SWC certifies the amount payable in respect of this issue as $nil.
82In its adjudication application dated 15 July 2013, Civil Team clarified that the only issue it disputed was Issue 1, for which it sought $443,552.40 (including GST), and then addressed each reason for non-payment advanced by State Water in relation to Issue 1 in paragraphs [7.1] and [7.2] of State Water's payment schedule.
83Essentially, Civil Teal argued, in response to the reasons for non-payment in State Water's paragraph [7.1], that the mistaken arithmetical omission of Issue 1 from the grand total figure in its payment claim was irrelevant, because Issue 1 was nonetheless clearly indicated in the spreadsheet provided with Civil Team's payment claim, and all that is required by the statutory language is that the claimed amount be "indicated" (s 13(2)(b)) but not necessarily stated.
84In response to the reasons for non-payment in paragraph [7.2] of State Water's payment schedule, Civil Team submitted that it had already supplied a copy of the relevant insurance policy to State Water after the variation in 2010 (but in any event it re-attached a copy of the policy to its submissions), and that it was not obliged to provide proof of payment of insurance premiums to State Water (but again that in any event the conduct of Civil Water and the insurer unequivocally demonstrated that there was insurance in place and that the premiums were being paid).
85Civil Team based its entitlement to the Issue 1 claim on a variation effected pursuant to clause 40 of the contract. I understand Civil Team's reasoning to be as follows. On 25 May 2010, State Water advised Civil Team to obtain a quotation for insurance of the works for the sum of $5 million, that this would be treated as a variation under clause 40 of the contract, and that State Water would pay the cost of obtaining such insurance. The insurance policy obtained by Civil Team, and approved by State Water on 31 May 2010, specified maximum amounts recoverable in respect of particular heads of loss, arising from any one indemnifiable event. The policy responded to losses, which resulted from flooding over a period of some years, but did not cover the entirety of the quantum of the loss. The amount claimed by Civil Team in its Issue 1 claim represents that uncovered loss. Civil Team submitted that, had State Water valued the works reasonably and fairly, as it was allegedly obliged to do, State Water could have, but failed to, either instruct Civil Team to obtain a type of policy affording sufficient cover in the light of the value of the works, or advise Civil Team of the inadequacy of cover, to enable Civil Team to obtain its own policy to respond to any shortfall.
86In its adjudication application, Civil Team also submitted that the contract obliged State Water to insure the works. I should note at this point that in my view, the contract contained no clause to that effect, nor could counsel for Civil Team point to any clause to that effect. It would appear that, when amending the standard form of contract, the parties deleted clause 18 (or the part of it) which would otherwise have required State Water to insure the works.
87State Water provided its adjudication response on 24 July 2013. Among other things, State Water repeated its argument as to the significance of the arithmetical error I have already referred to (at [6.3]-[6.6] of State Water's adjudication response), challenged Civil Team's characterisation of the claim as one for a variation (at [1.1]), asserted (correctly in my view) that the contract did not impose on State Water an obligation to insure the works (at [1.2]), and submitted that the procurement by Civil Team, at the request and expense of State Water, of insurance for the works, pursuant to a variation of the contract under clause 40, entitled Civil Team to claim from State Water the costs of the insurance, but not shortfalls in cover (at [6.21]-[6.29]). State Water also submitted that Mr Sive was bound by the construction of clause 12 given by Mr Wilson in the previous determination between the parties which allocated the risk of loss from weather conditions to Civil Team, not State Water (at [6.7]-[6.12]) and that even more generally the contract allocated responsibility for the care of the work on Civil Team, not State Water (at [6.13]-[6.20]).
88Mr Sive issued his adjudication determination on 30 July 2013. After dealing with some introductory matters (including his appointment, some background to the dispute, the material provided to him, and matters as to jurisdiction), he rejected a submission by State Water that Civil Team failed to include sufficient particulars in its payment claim, and he also confirmed that State Water's payment schedule complied with the requirements of the Act.
89As I understand the adjudication determination, it appears that Mr Sive gave consideration to clause 12 of the contract, gave it an interpretation inconsistent with that given to it in Mr Wilson's previous determination, but ultimately considered it was unnecessary to rely on it, as Civil Team's claim could be decided on the basis of the alleged variation effected under clause 40 of the contract (at least as he understood it). It does appear however that Mr Sive's interpretation of clause 12, which impermissibly conflicted with that of Mr Wilson, affected his consideration of a jurisdictional issue (at [9(b)]), but not his determination of the substance of the claim (as I think appears when one carefully considers the structure of his determination). However, State Water does not challenge Mr Sive's decision with respect to the jurisdictional issue.
90From the structure of the headings in Mr Sive's adjudication determination, which gives some insight into his thought process, it appears that Mr Sive's reasons for accepting Civil Team's position commence from paragraph [32], under the heading "Reason for Determination". Mr Sive recognised that "[t]he issue in dispute between the parties relates only to 'Issue 1 - Variation 1'", and identified the provisions in the contract dealing with insurance, and the provision in the contract permitting variations. Mr Sive considered that the effect of the agreed variation to the contract, by which Civil Team was required to procure insurance, at the expense of State Water, was that any loss in excess of the amount covered by the insurance was to be borne by State Water, and that State Water's failure to procure further or better insurance to cover any excess losses should therefore be borne by State Water. Although clause 12 of the contract was drawn to Mr Sive's attention in State Water's submissions, and its meaning was considered in his adjudication determination (at [9(b)]), it appears, from Mr Sive's reasoning process, that his ultimate conclusion was reached purely on the basis of what he understood to be the effect of a variation to the contract pursuant to clause 40.
91That appears from paragraph [36], where Mr Sive says (among other things):
[36] ... I am satisfied that the payment dispute between the parties is attributable to the conduct of the respondent in instructing the claimant to purchase "primary insurance" under a variation order and in electing to go bare with respect to the "excess" insurance which would have provided coverage after the primary insurance is no longer on the risk.
92Although paragraph [36] commences with the words "[a]s discussed more fully and completely under the heading Jurisdictional Issue", and the earlier discussion there does refer to clause 12 of the contract, it still seems to me that the overwhelming factor driving the adjudicator's decision was his understanding of the effect of the variation under clause 40, independently of the meaning of clause 12. That view is fortified by paragraph [37], where Mr Sive identifies the provisions of the contract which he understands to be relevant to the dispute, and makes reference to clause 40 (among other clauses) but not to clause 12. Finally, that understanding of Mr Sive's reasons is consistent with the manner in which Civil Team presented its case (see [38]-[46] and [72]-[74] of Civil Team's adjudication application).
93In my view, Mr Sive did bona fide, in accordance with the authorities, consider the meaning of clause 12 of the contract. Although he arrived at a construction of clause 12 which was possibly incorrect, and certainly inconsistent with Mr Wilson's previous adjudication determination, such a construction only influenced his decision with respect to a jurisdictional argument raised by State Water (which is not now challenged by State Water), but not his decision as to State Water's liability to meet any relevant shortfall in insurance coverage. Although the "theme" of the construction of clause 12 is perpetuated to some extent in his subsequent reasoning, it is not, in my view, a necessary component of his reasoning process. Mr Sive's ultimate decision rests on his understanding of the effect of the insurance variation made by the parties pursuant to clause 40 of the contract. The effect of the insurance variation necessarily raises facts and circumstances peculiar to the particular case, which were not referred to in State Water's payment schedule of 1 July 2013. State Water decided not to put forward in its payment schedule as a reason for non-payment that the insurance variation simply did not have the effect contended for by Civil Team. Rather, State Water relied on an arithmetical error (which Mr Sive rejected) and on other matters relating to proof of payment of premiums (which Mr Sive also rejected).
94Accordingly, I do not accept State Water's contentions as to issue estoppel, or an alleged failure on the part of the adjudicator to act in good faith insofar as that allegation relates to clause 12.