//
[2018] WASC 60
General information, not legal advice.
Supreme Court of WA
2018-02-22
Pritchard J
Original judgment source is linked above.
1 PRITCHARD J: This is an application for judicial review of a decision of the respondent (Adjudicator) made under the Construction Contracts Act 2004 (WA) (Act) (Decision).[1]
2 Total Eden is an irrigation, agriculture and landscaping contractor. It was a contractor on an agriculture project known as the Woodie Woodie Agriculture Project (Project). Total Eden's role was to supply and install irrigation equipment for the project. ECA Systems was subcontracted by Total Eden to supply and install the electrical and process control works, which permitted the operation of the irrigation system to be monitored and controlled remotely.
3 The Decision was a determination by the Adjudicator, which required Total Eden to pay $92,853.74 to ECA Systems. That figure comprised an amount for which Total Eden was said to be liable under a payment claim, plus interest on that amount, and GST, and a component representing ECA Systems' costs of preparing the application to the Adjudicator, in the sum of $1,681.82.
4 Total Eden contends that the Adjudicator made a number of jurisdictional errors in reaching the Decision.
5 For the reasons which follow, I am satisfied that the Decision was infected by jurisdictional error, and that it should be quashed. In these reasons for decision, I deal with the following matters:
6 The Adjudicator advised the Court that he did not intend to take part in the proceedings, but would abide by any order of the Court, other than as to costs.
7 The solicitors for ECA Systems also advised the Court that ECA Systems did not intend to take any further part in the proceedings and would abide by any order of the Court, save as to costs (as to which it wishes to be heard, if necessary). Consequently, the Court was without a contradictor on the application for judicial review.
8 The factual background to the application for judicial review was set out in documents annexed to an affidavit of Mr Gandhi, on which Total Eden relied.
9 The agreement pursuant to which ECA Systems agreed to carry out electrical contracting work for Total Eden was described as a contractor supply agreement (Agreement), which the parties entered into in January 2014.[2] The Agreement provided that the Purchaser (that is, Total Eden) wished to obtain the Services from the Supplier (that is, ECA Systems) 'in accordance with the terms and conditions of this agreement'. The Agreement contemplated that the Supplier would be engaged to provide specified services from time to time, as set out in a subcontract order.
10 The particular works which resulted in the claim for payment, which was the subject of the Decision, were the subject of an initial quotation issued by ECA Systems in May 2014 (quotation).[3] There were then some negotiations between the parties in relation to the scope of works to be performed, and the price for those works.
11 By November 2014, the parties had reached agreement on the works to be provided, and the cost. On 3 November 2014, Total Eden issued a document headed 'Sub Contract Agreement' (to which the parties referred as a Purchase Order) in relation to the Project, and indicated a price of $153,352 for the works, plus GST.[4] However, it appears that there was a subsequent variation to the works, and the agreed cost, so that, on 21 November 2014, Total Eden issued a Sub Contract Agreement (again referred to as a Purchase Order) in relation to the original contract price of $153,352, plus variations of $16,500, so that the final value of the contract price was $169,852, plus GST.[5]
12 The parties, and the Adjudicator, proceeded on the basis that the contract between the parties encompassed the terms set out in the Agreement and in the variations made to it up to 21 November 2014 (Contract).[6]
13 ECA Systems commenced performing the works on site in March 2015, and they were commissioned in March 2016.[7]
14 ECA Systems submitted an invoice to Total Eden, dated 11 August 2016, for what appears to have been part of the works, totalling $80,640, exclusive of GST (Invoice).[8] The Invoice stated that the payment terms were '14 days'. Total Eden did not pay the Invoice within that time. However, ECA Systems accepted, in the course of the adjudication, that the Agreement required payment within 14 days of the end of the month, in which a tax invoice was issued.[9] On that basis, payment of the Invoice was required by 14 September 2016. In the alternative, ECA Systems claimed that the implied terms in div 5 of sch 1 to the Act applied, which required payment of the payment claim within 28 days of its receipt (that is, by 8 September 2016).[10]
15 By 6 October 2016, Total Eden had not paid the Invoice. On the same day, ECA made an application for adjudication under the Act. It relied on the Invoice as a payment claim, and on Total Eden's failure to pay that claim as the basis for the existence of a payment dispute, for the purposes of the Act.
16 The final part of the factual background which must be mentioned is that Total Eden claimed that, from about January 2016, there were complaints by its client (Principal) in relation to the works performed by ECA Systems. Eventually, a representative of the Principal advised that it would not pay certain invoices submitted by Total Eden for the works, totalling $134,730.64 'on account of loss and damage the Principal suffered due to ECA's failure in connection with its electrical and process control works'.[11]
17 On 18 October 2016, Mr Sanjin Mecevic, the Contracts Manager for Total Eden, wrote to ECA Systems to advise that its Principal had refused payment of Total Eden's invoices, in the sum of $134,730.64, and to require payment of that sum from ECA Systems. That demand for payment was made in reliance on an indemnity clause in the Agreement, which was in the following terms:
5.3 Indemnity
The Supplier shall indemnify, and keep indemnified, the Purchaser from and against all costs, expenses, loss, liability or damage, whatsoever and howsoever, whether directly or indirectly and whether or not foreseeable, suffered or incurred by the Purchaser, and any liability whatsoever in respect of any action, claim, proceeding brought or threatened to be brought (including all costs and expenses which the Purchaser may suffer or incur in disputing any such action, claim or proceeding) in respect of, in relation to or in connection with:
(a) the provision of the Services;
(b) any act or omission of the Supplier in the provision of the Services; or
(c) a breach of this Agreement or any laws by the Supplier.
The Supplier must pay to the Purchaser all losses, liabilities, costs and other expenses referred to above, whether or not the Purchaser has paid or satisfied them. All indemnities given by the Supplier pursuant to this Agreement are ongoing and will survive termination of the Agreement.
Without prejudice to Total Eden's rights under the [Agreement] or otherwise, Total Eden may set off that amount against any amount(s) that may be found to be due to ECA. For the avoidance of doubt, Total Eden denies that there are any amount(s) due to ECA in respect of the Project or otherwise.
19 I turn to consider the Decision of the Adjudicator.
20 In the Decision, the Adjudicator concluded, pursuant to s 31(2)(b) of the Act, that 'on the balance of probabilities ... [Total Eden] is required to pay $92,853.74 including interest, costs and GST to [ECA Systems] within 5 working days of this determination in respect of the payment dispute within the application'.[13]
21 The figure of $92,853.74 represented the total of the sum of $80,640 in respect of the Invoice (the 'payment claim' for the purposes of the adjudication under the Act), together with interest on that amount to the date of the determination, plus GST, and an award of costs. Those costs comprised the sum of $1,681.82 for ECA Systems' preparation costs for the adjudication, and $1,500, which represented ECA Systems' share of the Adjudicator's fee.
22 The Adjudicator accepted the parties' agreed position, namely that the Agreement and the Purchase Order (as varied) constituted the Contract between them, and that that Contract was a 'construction contract' for the purposes of the Act.[14]
23 The Adjudicator accepted that the Invoice constituted a 'payment claim' for the purposes of the Act.[15] He held that there was a 'payment dispute' under the Act, because it was clear that the amount claimed in the payment claim had not been paid.[16] He also held that that payment dispute had arisen under the Act on 14 September 2016, or, alternatively, on 8 September 2016 (if the implied terms in div 5 of sch 1 to the Act applied).[17] On either basis, the application for adjudication had been served within the 28 days after the payment dispute arose, as required by s 26(1) of the Act.[18]
24 The Adjudicator's reasons which are relevant to the grounds of review are set out at [45] [54] and [58] [60] of the Decision. It is convenient to set those paragraphs out here (original emphasis):
[45] Having now determined that pursuant to s 31(2)(a) I do not need to dismiss the application, I can now proceed pursuant to s 31(2)(b) to otherwise determine on the balance of probabilities whether any party to the payment dispute is liable to make a payment, or to return any security to the other party.
[46] In the following I shall provide the reasons for my determination of the payment claim along with my calculation of interest and costs to be awarded, if any.
Determination of the Payment Claims
[47] Whilst the 'Sub Contract Agreement General Terms' include provisions for the payment of a payment claim, it does not include any written provisions as to how and when [Total Eden] is to respond to [ECA's] payment claim. Therefore, the terms under Schedule 1 Division 5 of the Act must be implied.
[48] Whilst the response includes [Total Eden's] reasons as to why it rejects [ECA's] payment claim and why it has not made payment, these are reasons that were required by the Act to have been communicated to [ECA] within 14 days from the submission of the payment claim by [ECA] to [Total Eden]; ie by 25 August 2016.
[49] [Total Eden's] letter 18 October 2016 stating that it ' ... denies that there are any amount(s) due to ECA in respect of the project or otherwise' was issued too late in accordance with the implied provisions of the Act.
[50] Since [Total Eden] did not respond to the payment claim within the required time, pursuant to Schedule 1 Division 5 s 7(3)(b) of the implied provisions of the Act 'Within 28 days after a party receives a payment claim, the party must ... pay the whole amount of the claim ... unless the claim has been rejected or wholly disputed in accordance with subclause (1) ...' ... .
[51] In the instance where a payment claim has not been rejected or disputed within the required time, the payment claim effectively becomes what is often referred to as a 'deemed certificate' and the respondent is required by the Act to pay the payment claim in full even if it later contends that it has valid reasons for not doing so.
[52] Despite [Total Eden's] persuasive arguments against 'deemed certification', the Act and the tribunal/courts are quite clear on this matter. I also believe this to be a 'commercially sensible' position and in no way an 'abdication' of an adjudicator's responsibility to make a determination.
[53] I find it entirely reasonable for a party to a construction contract to expect payment in full for a payment claim when it has not received any notice of dispute or rejection of the payment claim prior to the date for payment under the contract. In my opinion, adherence to basic contract administration procedures such as this is fundamental, commonplace, fair and reasonable etiquette, and not in any way difficult for parties to a construction contract to comply with.
[54] For the preceding reasons, I determine that [Total Eden] is required to pay the payment claim in full. ... In the following sections, I decide if interest and costs are to be awarded.
...
Costs
[58] [ECA] has requested the award of the adjudicator's costs as well as its own application preparation costs of $1,850.00 including GST for on account of the frivolous and vexatious conduct on the part of [Total Eden].
[59] In respect of costs, the Act states ... ;
[60] [Total Eden's] late defence for not making payment was always bound to fail since it did not comply with the implied provisions of the Act. I determine this to constitute frivolous and vexatious behaviour causing [ECA] to incur costs it would otherwise not have had to. Therefore I determine that pursuant to s 34(2) [Total Eden] should pay all of the costs incurred by [ECA] in this adjudication.
25 Total Eden says that the adjudicator made six jurisdictional errors, namely:
(a) $1,681 on account of ECA's 'preparation costs'; and
(b) $1,500 on account of the adjudicator's 'fee',
the adjudicator misconstrued s 34(2) of the Act and acted unreasonably.
26 It will be convenient to deal with grounds 2, 3 and 4 together, and with grounds 5 and 6 together.
4. Judicial review of decisions made under s 31(2)(b)
27 The jurisdictional errors which Total Eden contends were made by the Adjudicator arose in that part of the Decision in which the Adjudicator purported to exercise his functions under s 31(2)(b) of the Act. That subsection relevantly provides:
(2) An appointed adjudicator must, within the prescribed time or any extension of it made under section 32(3)(a) -
(b) ... determine on the balance of probabilities whether any party to the payment dispute is liable to make a payment, or to return any security and, if so, determine
(i) the amount to be paid or returned and any interest payable on it under section 33; and
(ii) the date on or before which the amount is to be paid, or the security is to be returned, as the case requires.
28 The function required to be performed by an adjudicator under s 31(2)(b) is to 'determine on the balance of probabilities whether any party to the payment dispute is liable to make a payment'. The 'determination' that the adjudicator is required to make is, having regard to the definition of that term in the Act, a determination of the 'merits of a payment dispute'.[19] In Laing O'Rourke Australia Construction Pty Ltd v Samsung C and T Corporation,[20] Mitchell J summarised the function of an adjudicator under s 31(2)(b) of the Act in the following paragraphs, with which I respectfully agree:
The language of s 31(2)(b) and associated definitions indicates that the question the adjudicator is required to address is a legal question. The provision refers to a legal standard of proof. The subject of the payment dispute is a claim made under a construction contract for payment of an amount in relation to the performance of the contractor's obligations under the contract. In that context the 'liability' referred to in s 31(2)(b) of the Act must be a legal liability. The question which the adjudicator is required to address is whether a party is legally liable to pay a claim made under a construction contract.
Further, as Beech J observed in the passage from Alliance Contracting ... the adjudicator's power is confined to accepting, wholly or in part, or rejecting that the recipient of a payment claim must pay that claim to the party which made it.
Determining the merits of a payment dispute will require the adjudicator to apply the relevant law to the terms of the contract which are before him or her and the facts concerning the performance of relevant obligations as he or she finds them to be.
...
... the liability to make the relevant payment must be ascertained by reference to the terms of the construction contract which are before the adjudicator. The adjudicator will fail to perform that task, and will misapprehend his or her statutory function, if the adjudicator determines the merits of the payment dispute otherwise than by reference to the terms of the construction contract which are before him or her. To act in that manner is to exceed the authority conferred by s 31(2)(b) of the Act.
29 An adjudicator's determination under s 31(2)(b) of the Act is amenable to judicial review on the basis of jurisdictional error.[21] (However, if an adjudicator makes an error in construing, and then applying, a construction contract in order to determine the liability of a party under s 31(2)(b) of the Act, that error will not constitute a jurisdictional error.[22])
30 Well established categories of jurisdictional error which may be made by inferior courts and analogous bodies include mistakenly asserting or denying the existence of jurisdiction; misapprehending or disregarding the nature or limits of the decision maker's functions or powers (in a case where the decision maker correctly recognises that jurisdiction does exist); acting in circumstances where a fact, event or requirement, on the existence, occurrence or satisfaction of which the existence of the decision maker's jurisdiction depended, did not exist, or occur, or was not satisfied; failing to take into account a consideration that the statute required be considered or taking into account a consideration that the statute mandated be ignored; misconstruing the statute establishing the decision maker's jurisdiction and thereby misconceiving the nature or the function which the decision maker is performing or the extent of the decision maker's powers; making a decision in bad faith; and making a decision in breach of natural justice.[23] An error of this kind will render a decision invalid, and, generally speaking, liable to be quashed.
31 It is convenient to commence by considering grounds 2, 3 and 4 of the grounds of review.
5. Grounds 2, 3 and 4: whether the Adjudicator fell into jurisdictional error in failing to take into account Total Eden's claim to an entitlement to set off a sum against the amount claimed by ECA Systems
32 There is no doubt that the Adjudicator failed to take into account Total Eden's claim to a set off. That much is apparent from [49] of the Decision. He did not take into account the set off claim because he concluded that it was not open to Total Eden to rely upon that claim in the adjudication. Although the Adjudicator did not explain his reasoning in detail, it appears that he came to that view because he concluded that all of the terms in div 5 of sch 1 to the Act were implied into the Contract, and because of the way in which he construed those terms. There were three stages in the reasoning which led the Adjudicator to the conclusion that Total Eden was not entitled to rely on its set off claim, to support its contention that it was not liable to pay the payment claim:
(a) whether any of the terms in sch 1 to the Act were implied into the Contract;
(c) the meaning of those terms, and their application in this case.
33 In my view, the Adjudicator erred in the second and third stages of his reasoning.
(a) The first stage of the Adjudicator's reasoning whether any of the terms in sch 1 to the Act were implied into the Contract
34 The first stage in the Adjudicator's reasoning was his consideration of whether the Contract contained any of the implied terms in sch 1 to the Act. The Adjudicator appears to have concluded that s 17 of the Act applied. It provided:
The provisions in Schedule 1 Division 5 about when and how a party is to respond to a claim for payment made by another party are implied in a construction contract that does not have a written provision about that matter.
35 The ordinary meaning of the word 'respond' includes 'to answer; give a reply in words', 'to make a return by some action as if in answer', and 'to say in answer; reply'.[24] That suggests that the inquiry under s 17 is whether the construction contract contains a provision dealing with the time frame in which, and the manner by which, a party who receives a payment claim should provide a reply or answer to the other party. That meaning is broad enough to include a response by way of payment of the claim itself. However, the immediate context within which s 17 appears militates against that conclusion. Section 18 of the Act provided:
The provisions in Schedule 1 Division 5 about the time by when a payment must be made are implied in a construction contract that does not have a written provision about that matter.
36 As s 18 is directed to payment of the payment claim, in my view, s 17 should be construed as referring only to other kinds of responses to a payment claim, namely disputes or objections to the payment claim, or to the party's liability to pay the payment claim.
37 That construction of s 17 is also supported by the broader statutory context. Under the Act, an application for an adjudication must be brought within 28 days after the dispute arises.[25] Section 6 of the Act determines when a payment dispute arises, and includes, in s 6(a):
by the time when the amount claimed in a payment claim is due to be paid under the contract, the amount has not been paid in full, or the claim has been rejected or wholly or partly disputed
38 In other words, the two responses to a payment claim, which are contemplated by s 6(a) of the Act, are payment of a payment claim, and the rejection or disputation of a payment claim, whether in whole or part. It is important to know when either of those two events occurs. Hence, the Act implies terms into construction contracts which do not expressly deal with either of those things. Section 18 of the Act implies terms into a construction contract which does not make written provision for the time by when a payment must be made. In my view, within that context, the phrase 'when and how a party is to respond to a claim for payment made by another party' in s 17 of the Act must be understood to mean the timeframe within, and the manner in which, a party must respond to a payment claim, otherwise than by paying it that is, by notifying the other party of a dispute about, or objection to, the payment claim.
39 The Adjudicator concluded (at [47]) that, although the Agreement included provisions for the payment of a payment claim, it did not include any written provisions as to how and when Total Eden was to respond to that claim. That was correct. The Contract provided for the time within which a payment claim was to be paid. Clause 7.1 of the Agreement provided:
The Supplier is to issue to the Purchaser each month a valid tax invoice (for GST purposes) for the Fees accrued by the Supplier during the preceding month (the Invoice) and the Purchaser will pay each Invoice (provided that it is correctly rendered) within 14 days of the end of the month in which it is rendered.
40 However, the Contract did not contain any provision for how Total Eden could object to, or dispute, either the amount of an invoice submitted by ECA Systems, or its liability to pay that amount.
(b) The second stage in the Adjudicator's reasoning which terms in sch 1 were implied into the Contract
41 The second stage of the Adjudicator's reasoning appears to have concerned which of the terms in div 5 of sch 1 to the Act were implied into the Contract. The Adjudicator concluded that all of the terms in div 5 of sch 1 were implied into the Contract.[26]
42 In my view, that conclusion was erroneous. The only terms in div 5 of sch 1 which may be implied into a construction contract, by virtue of the operation of s 17, are those which are the subject of s 17 itself that is, provisions 'about when and how a party is to respond to a claim for payment made by another party'. Accordingly, it is necessary to have regard to div 5 of sch 1 and to identify those of its provisions which deal with 'when and how a party is to respond' (that is, when and how a party is to notify of a dispute or objection to a payment claim).
43 Division 5 of sch 1 to the Act is in the following terms:
In this Division -
payment claim means a claim -
(a) by the contractor to the principal for payment of an amount in relation to the performance by the contractor of its obligations under this contract; or
(b) by the principal to the contractor for payment of an amount in relation to the performance or nonperformance by the contractor of its obligations under this contract.
(a) believes the claim should be rejected because the claim has not been made in accordance with this contract; or
(b) disputes the whole or part of the claim,
the party must, within 14 days after receiving the claim, give the claimant a notice of dispute.
(a) be in writing; and
(b) be addressed to the claimant; and
(c) state the name of the party giving the notice; and
(d) state the date of the notice; and
(e) identify the claim to which the notice relates; and
(f) if the claim is being rejected under subclause (1)(a) - state the reasons for the belief that the claim has not been made in accordance with this contract; and
(g) if the claim is being disputed under subclause (1)(b) - identify each item of the claim that is disputed and state, in relation to each of those items, the reasons for dispute it; and
(h) be signed by the party giving the notice.
(3) Within 28 days after a party receives a payment claim, the party must do one of the following, unless the claim has been rejected or wholly disputed in accordance with subclause (1) -
(a) pay the part of the amount of the claim that is not disputed;
(b) pay the whole of the amount of the claim.
(4) If under this contract the principal is entitled to retain a portion of any amount payable by the principal to the contractor -
(a) subclause (3) does not affect the entitlement; and
(b) the principal must advise the contractor in writing (either in a notice of dispute or separately) of any amount retained under the entitlement.
44 It is apparent that cl 7(1) and cl 7(2), read with cl 6, are the provisions in div 5 of sch 1 which deal with disputes and objections to payment claims.
45 At first blush, it might be thought a little odd that s 17 results in the implication into a construction contract of only part of the provisions of div 5 of sch 1, and, in particular, that it results in a bifurcation of cl 7 itself. However, in my view, s 18 of the Act confirms that that is the position. If s 18 of the Act applies, only those provisions in div 5 of sch 1 'about the time by when a payment must be made' are implied into a construction contract. It is apparent that only cl 7(3), which must be read in conjunction with cl 7(4) and cl 6, deals with the time within which a party is required to pay a payment claim.
46 The approach adopted in s 17 and s 18 of the Act may be contrasted with that taken in s 13 to s 16, and s 19 to s 22 of the Act. Each of those sections deals with the implication of terms in a discrete division within sch 1 to the Act. A different approach was taken in s 17 and s 18. Each of those sections deals with the implications of terms from div 5 of sch 1, which deal with specified matters the time and manner of notification of disputes, and the time for payment of payment claims in circumstances where one clause (cl 7) contains provisions concerning those matters.
47 The conclusion I have reached was also reached by Le Miere J in Cooper and Oxley Builders Pty Ltd v Steensma,[27] where his Honour said:
Section 16 requires that the entirety of the provisions in sch 1 div 4 are to be implied in contracts which contain no written provision about how a party is to make a claim for payment. Section 17, in contrast, implies in a construction contract that does not have a written provisions about 'that matter', that is, when and how a party is to respond to a claim for payment, not the entirety of the provisions in sch 1 div 5 but only the provisions in div 5 about when and how a party is to respond to a claim for payment.
48 Despite having observed that the Contract did include provisions for the payment of a payment claim, the Adjudicator concluded that all of the provisions in div 5 of sch 1 to the Act including cl 7(3), which deals with when payment must be made were to be implied into the Contract. An immediate practical difficulty with that approach was that it gave rise to an internal inconsistency between the Contract's written and implied terms. As I have already observed, the operation of cl 7.1 of the Agreement meant that Total Eden was obliged to pay the Invoice by 14 September 2016. However, the implication of cl 7(3) of sch 1 into the Contract meant that the Contract also required that payment within 28 days of Total Eden's receipt of the payment claim, namely on or about 8 September 2016. That inconsistency was acknowledged by the Adjudicator,[28] but it did not cause him to reconsider whether cl 7(3) should be implied into the Contract.
49 In my view, the Adjudicator erred in concluding that cl 7(3) was implied into the Contract. The error made by the Adjudicator was an error in understanding what s 17 of the Act required him to do, which then led him to ask the wrong questions in construing the Contract, and in applying s 31(2)(b) of the Act. In that sense, the Adjudicator's error in the second stage of his reasoning constituted a jurisdictional error.
(c) The third stage in the Adjudicator's reasoning the meaning and operation of cl 7
50 Having concluded that the entirety of cl 7 of sch 1 was implied into the Contract, the third stage of the Adjudicator's reasoning involved his construction of cl 7. He concluded that that clause meant that any objection Total Eden wished to raise in respect of the payment claim (that is, the Invoice) had to be made within 14 days of the submission of the Invoice, namely by 25 August 2016.[29] (That time frame appears to have derived from the implication of cl 7(1) of sch 1 as a term in the Contract.)
51 Total Eden did not raise any objection to the Invoice within that time frame. Instead, it objected to the Invoice by its letter of 18 October 2016, the terms of which are set out above. I should add that in the course of the Adjudication, Total Eden also disputed any liability to pay the Invoice. In its response to the application for adjudication, Total Eden claimed that it was entitled to set off any monies due to it from ECA Systems, against any monies it owed ECA Systems.[30]
52 The Adjudicator held that the objection to payment which was set out in Total Eden's letter of 18 October 2016 'was issued too late in accordance with the implied provisions of the Act' (original emphasis).[31] The Adjudicator then relied on cl 7(3) to conclude that, if a party who receives a payment claim does not give a notice of dispute within 14 days of its receipt, that party is then obliged to pay the total amount of the payment claim within 28 days. However, the Adjudicator appears to have concluded that, even if that party later contended that it had a valid reason for refusing payment, that reason could not be taken into account by an adjudicator in determining the liability of that party for the purposes of s 31(2)(b) of the Act.[32]
53 In reaching that conclusion as to the construction of cl 7(3), the Adjudicator appears to have relied on the words 'unless the claim has been rejected or wholly disputed in accordance with subclause (1)'. In addition, the Adjudicator likened the operation of cl 7(3), in the way in which he construed it, to cases involving a 'deemed certificate'. What the Adjudicator meant by that was not explained, but it appears to have been a reference to the position adopted by the parties to some construction contracts (although not in this case) whereby an independent party will be appointed to certify that the amount claimed under a claim for payment is properly made, after which payment of that claim will be required, irrespective of whether a party later claims it has valid reasons to dispute its liability to pay. In addition, the Adjudicator considered that his construction of cl 7(3) namely that it meant that a party would be required to pay a payment claim in full, if that party did not give a notice of dispute within the specified time was not an unreasonable outcome, and was 'common-place, fair and reasonable etiquette'.[33]
54 In my view, the Adjudicator fell into error in his construction of cl 7(3) of sch 1 to the Act, for the following reasons.
55 First, in my view, nothing in the language of cl 7(3) supports the construction adopted by the Adjudicator. That subclause deals solely with the time within which a payment claim must be paid, whether in whole or in part. If a party has not disputed a payment claim (in accordance with the procedure for doing so in the construction contract, or with implied terms cl 7(1) and 7(2)), then it is required to pay the whole, or the undisputed part, of the payment claim within 28 days of receipt of the payment claim. As I have already observed, the role played by cl 7(3) is to make clear the time within which payment of the payment claim must be made, so that there will be no doubt about when a payment dispute arises, and thus no doubt about the time within which an applicant must bring an application for an adjudication under the Act.
56 Secondly, in my view, the words 'unless the claim has been rejected or wholly disputed in accordance with subclause (1)' operate as an acknowledgement of the alternative way in which a 'payment dispute' will arise for the purposes of the definition in s 6(a) of the Act. The presence of those words assists to avoid the potential for confusion about when the time frame for commencing an adjudication begins to run, including in those cases where a payment claim is partly disputed.
57 Thirdly, as I have already observed, the Adjudicator appears to have concluded that cl 7(3) operated to preclude Total Eden from advancing any argument before him as to why it was not liable to pay the payment claim, because it did not notify a dispute or objection within 14 days of the payment claim (as required by cl 7(1)). However, the Adjudicator appears to have misunderstood that if cl 7(3) applied, it was implied into the Contract, and became one of the terms of the Contract. It did not directly bear on the Adjudicator's determination of liability under s 31(2)(b), except to the extent (if any) that the implication of that term into the Contract affected Total Eden's liability under the Contract. The operation of cl 7(3), as an implied term, did not alter Total Eden's liability to pay ECA Systems pursuant to the Contract. Clause 7(3) of sch 1 merely creates an obligation to make a payment within a particular time frame, for the purposes of determining the existence of a 'payment dispute' under the Act.
58 In performing his role of determining, on the balance of probabilities, whether any party was liable to make a payment, the Adjudicator's task was to identify and construe the provisions of the Contract bearing upon that question, and apply those to the facts as he found them. The liability which an adjudicator is required to consider under s 31(2)(b) of the Act is the ultimate liability of the party to make a payment under the construction contract (although, of course, an adjudicator is only required to make a determination on the balance of probabilities, and for the purposes of the Act).
59 The Adjudicator failed to undertake that assessment of Total Eden's liability by reference to the terms of the Contract, and any applicable legal principles. In this case, Total Eden's claim was that it was entitled to set off, against the payment claim, the monies it claimed ECA Systems owed to it, pursuant to the indemnity in cl 5.3 of the Agreement. Total Eden claimed that it was entitled to be indemnified in the sum of $134,730.64, which was the amount its Principal had refused to pay, due to ECA Systems' defective performance of the works. The basis for the set off whether a statutory entitlement to set off,[34] or to an equitable set off[35] was not made entirely clear in Total Eden's submissions,[36] although it appears more likely that what was contemplated was an equitable set off. Whatever the position, even if cl 7(3) was properly implied into the Contract in this case, it either could not, or did not, exclude Total Eden's recourse to a claim of set off.
60 To the extent that a statutory right of set off might have been available to Total Eden, a party cannot contract out of a statute.[37] In so far as Total Eden sought to rely on an equitable set off, a claim of that kind operates as a substantive defence, and provides immediate justification for refusal to pay a debt otherwise due.[38] The right to claim an equitable set off can be excluded by contract between the parties.[39] However, the usual principle of contractual construction is that clear words are needed to rebut the presumption that a contracting party does not intend to abandon any remedies for breach of the contract which arise by operation of law.[40] Accordingly, a contractual term would need to very clearly express, whether by express words, or possibly by necessary implication, the parties' intention that any right to an equitable set off was excluded.[41] Subclause 7(3) does not deal expressly with the entitlement of a party to a construction claim to dispute its liability to make a payment claim, nor does it expressly exclude any rights to claim an equitable set off. Nor, in my view, do the words 'unless the claim has been rejected or wholly disputed in accordance with subclause (1)' convey with the necessary clarity an implication that failure to dispute a claim within the time frame specified in cl 7(1) is intended to preclude reliance on equitable remedies.
61 Fourthly, in so far as the Adjudicator sought to draw an analogy between the operation of cl 7(3) and the position under those construction contracts which provide for certification, by a third party, of the amount owing by a principal to a contractor, the position under those contracts[42] the effect of which turns on the construction of their particular clauses was irrelevant to the construction of cl 7(3). Similarly, the Adjudicator's conclusion that the requirement to give a notice of dispute, or otherwise to pay in full, was common, fair or a matter of etiquette, did not advance the construction of cl 7(3), when the exclusion of a claim of set off was not supported by the words used in that subclause. It may be that by referring both to 'deemed certificates' and to common practice, all that the Adjudicator was seeking to convey was that the construction of cl 7(3) which he preferred was a commercially sensible one.[43] Even if it were relevant to the construction of cl 7(3),[44] any such consideration could not take primacy over the meaning of the words used in cl 7(3) itself.
62 The error made by the Adjudicator in the construction of cl 7(3), in my view, led him to misunderstand the nature of his function under s 31(2)(b) of the Act. It meant that he excluded any consideration of Total Eden's set off claim, which it had claimed meant that it was not liable to pay ECA Systems.
63 Section 32 of the Act makes clear that an adjudicator is to reach their determination after taking into account the matters raised in the applicant's claim, and, if a respondent serves a response to the claim, the matters raised in the respondent's response. A respondent to an application for adjudication may use a claimed set off as a defence to the claim made against it.[45] In that event, the adjudicator is required to take into account the respondent's response to the applicant's claim for payment, including the merits of any set off claim, in reaching a determination under s 31(2)(b) as to the liability of the respondent to pay the applicant the amount of the payment claim.[46] In this case, the Adjudicator's conclusion that it was too late for Total Eden to raise its set off claim meant that the Adjudicator failed to determine Total Eden's liability according to the terms of the Contract. A failure by the adjudicator to take into account a respondent's response to a claim, including the merits of any set off, constitutes a jurisdictional error because it constitutes a failure to take into account a matter which the Act requires an adjudicator take into account in determining the payment dispute.[47] That does not mean that an adjudicator is bound to accept a party's claim to set off. The adjudicator is required to assess the merits of the set off claim (just as they are required to assess the merits of the payment claim made by an applicant) in reaching an overall determination as to whether, on the balance of probabilities, a party to a payment dispute is liable to make a payment to the other party.
64 The nature of the jurisdictional error made by the Adjudicator is aptly identified in grounds 2 and 3 of the grounds of review. Those grounds of review should be upheld.
65 That conclusion means that it is unnecessary to deal with ground 1, but as the ground was argued, and for the avoidance of confusion at any future stage, it is appropriate to briefly set out my reasoning for why that ground of review should be dismissed.
6. Ground 1: Whether the adjudicator made a jurisdictional error in failing to determine Total Eden's liability to pay as at the date of the Decision
66 Total Eden contends that the Adjudicator failed to perform his function under s 31(2)(b) of the Act because he failed to make a determination of its liability as at the date of the Decision, and, instead, determined its liability as at 25 August 2016 (which was the date by which Total Eden was required to respond with a notice of dispute).[48]
67 Section 31(2)(b) clearly requires that an adjudicator determine the question of the liability of any party to make a payment as at the date of the adjudicator's determination. That conclusion is supported by four considerations.
68 First, the terms of s 31(2)(b) are expressed in the present tense. The adjudicator is to determine, on the balance of probabilities, whether any party to the payment dispute is liable to make a payment.
69 Secondly, if the question for the adjudicator was whether liability existed at a date prior to the date of the determination, it would have been necessary to very clearly identify that point of reference. Neither s 31(2)(b), nor any other provision of the Act, identifies an alternative point at which liability for the purposes of s 31(2)(b) is to be ascertained.
70 Thirdly, if it were the case that the adjudicator was required to focus on liability at some point prior to the adjudicator's determination, that could potentially result in absurd outcomes, such as in a case where a party failed to pay a payment claim when payment fell due, but paid the amount of the payment claim in full, together with interest, shortly prior to the determination. In a case of that kind, an adjudicator would not be entitled to take that payment into account in determining liability to pay the payment claim.
71 Finally, authority supports the conclusion that the determination of liability is to be made as at the date of the adjudicator's determination. In Hamersley HMS Pty Ltd v Davis,[49] Beech J held that the Act requires an adjudicator to determine the question of liability as at the date of the adjudication, and not at the date of the application for adjudication (as had occurred in that case). Justice Le Miere expressed the same view in Cooper and Oxley Builders Pty Ltd v Steensma.[50]
72 However, I am not persuaded that the error the Adjudicator made in this case was to fail to consider Total Eden's liability as at the date of the Decision. To my mind, it is clear that the Adjudicator purported to make a determination of Total Eden's liability as at the date of the Decision. The problem was that, in doing so, he erroneously excluded from his consideration the argument advanced by Total Eden as to its entitlement to set off the sum that it claimed ECA Systems owed to it. As I have explained, in reaching that conclusion, the Adjudicator misconstrued the Act, and misunderstood the nature of his function under the Act, but not in relation to the point in time when he was required to ascertain Total Eden's liability.
7. Grounds 5 and 6: whether the Adjudicator fell into error in concluding that it was open to him to require Total Eden to pay ECA Systems' preparation costs and its share of the Adjudicator's fee, under s 34(2) of the Act
74 The Adjudicator concluded (at [60]) that Total Eden should pay all of the costs incurred by ECA Systems in the adjudication. The costs he ordered Total Eden to pay were an amount of $1,681.82 (exclusive of GST), which ECA Systems claimed as its 'preparation costs', and the sum of $1,500, which was half of the Adjudicator's fee (which had been paid by ECA Systems).
75 The starting point in relation to costs is that the parties to a payment dispute bear their own costs in relation to an adjudication of the dispute.[51] Under s 34(2) of the Act, the only basis on which an adjudicator may order that a party must pay some or all of the costs of the adjudication is if the adjudicator is satisfied that a party to a payment dispute incurred costs of the adjudication 'because of frivolous or vexatious conduct on the part of, or unfounded submissions by, another party'. The Adjudicator concluded that Total Eden's 'late defence for not making payment' by which he appeared to refer to Total Eden's claim to a set off, which was made after the time for giving a notice of dispute 'was always bound to fail since it did not comply with the implied provisions of the Act'. That conclusion was erroneous, for the reasons I have given. That was the only basis on which the Adjudicator relied in concluding that Total Eden's conduct was 'frivolous or vexatious'.
76 In this case, Total Eden advanced a legal submission that it had a defence to ECA Systems' payment claim, and that it was, therefore, not liable to pay the payment claim, on the basis of a claim of set off. In the circumstances I have described, there was no proper basis for describing that conduct as frivolous or vexatious.
77 In my view, in those circumstances, the Adjudicator's decision to require Total Eden to pay ECA Systems' costs, on the basis that Total Eden's conduct was 'frivolous or vexatious', constituted a manifestly unreasonable exercise of the discretion he had under s 34(2) of the Act,[52] and thus involved a jurisdictional error.
78 Ground 6 of the grounds of review will be upheld on that basis.
79 It is unnecessary to deal with the separate question raised by ground 5 of the grounds of review.
80 Grounds 2, 3 and 6 of the grounds of review will be upheld.
81 The entirety of the Adjudicator's Decision should be quashed.
82 The parties' solicitors should confer in relation to the orders which should be made, and, in particular, in relation to any issue about the costs of these proceedings, with a view to submitting a consent minute. (The parties should also confer about the orders which should be made in relation to the application by ECA Systems for enforcement of the Decision, which was remitted to this Court, pursuant to orders I made on 9 February 2017,[53] and which application has been stayed, pending determination of the present proceedings.)
83 In the event that the parties are unable to reach agreement, I will list the matter for a short hearing.
[1] The Decision was made on 1 November 2016. The Decision was made pursuant to the Act as at 12 August 2016. The Act has since been amended. References to the Act herein refer to the Act (as at 12 August 2016).
[2] Annexure G1 to the affidavit of Mr Gandhi dated 19 December 2016, 16 23.
[3] Annexure G1 to the Affidavit of Mr Gandhi dated 19 December 2016, 24 27.
[4] Annexure G2 to the Affidavit of Mr Gandhi dated 19 December 2016, 51, 91 92.
[5] Annexure G1 to the Affidavit of Mr Gandhi dated 19 December 2016, 28 29.
[7] Annexure G2 to the Affidavit of Mr Gandhi dated 19 December 2016, 52.
[8] Annexure G1 to the Affidavit of Mr Gandhi dated 19 December 2016, 15.
[10] Construction Contracts Act 2004 (WA) sch 1 div 5 cl 7(3).
[11] Annexure G2 to the Affidavit of Mr Gandhi dated 19 December 2016, 52.
[12] Annexure G2 to the Affidavit of Mr Gandhi dated 19 December 2016, 115.
[14] No reliance appears to have been placed on the terms and conditions set out in the quotation, and for present purposes I have assumed that those terms did not form part of the Contract.
[19] Laing O'Rourke Australia Construction Pty Ltd v Samsung C and T Corporation [2015] WASC 237 [209] (Mitchell J).
[20] Laing O'Rourke Australia Construction Pty Ltd v Samsung C and T Corporation [2015] WASC 237 [210] [212], [219] (Mitchell J).
[21] See, for example, Hamersley Iron Pty Ltd v James [2015] WASC 10 (Beech J).
[22] Cf Perrinepod Pty Ltd v Georgiou Building Pty Ltd [2011] WASCA 217 [118] (Murphy JA, Martin CJ agreeing); Laing O'Rourke Australia Construction Pty Ltd v Samsung C and T Corporation [2015] WASC 237 [245] (Mitchell J).
[23] Kirk v Industrial Court of New South Wales [2010] HCA 1; (2010) 239 CLR 531 [60]; Craig v South Australia [1995] HCA 58; (1995) 184 CLR 163, 179; Re State Administrative Tribunal; Ex Parte McCourt [2007] WASCA 125; (2007) 34 WAR 342 [13] [16]; A v Corruption and Crime Commissioner [2013] WASCA 288; (2013) 306 ALR 491 [88] - [92].
[27] Cooper and Oxley Builders Pty Ltd v Steensma [2016] WASC 386 [39] (Le Miere J).
[30] Annexure G2 to the Affidavit of Mr Gandhi dated 19 October 2016, 37.
[34] See the discussion of the statutes of set off in Hazcor Pty Ltd v Kirwanon Pty Ltd (1995) 12 WAR 62, 67 (Kennedy J, Malcolm CJ & Murray JJ agreeing), and in Heydon, Leeming and Turner, Meagher, Gummow and Lehane's Equity: Doctrines and Remedies (5th ed, 2015) [39-030].
[35] For a general discussion of the principles in relation to equitable set off, see James v Commonwealth Bank of Australia [1992] FCA 420; (1992) 37 FCR 445, 457 462; Hazcor Pty Ltd v Kirwanon Pty Ltd (1995) 12 WAR 62, 67 68 (Kennedy J, Malcolm CJ & Murray JJ agreeing)
[36] Total Eden's submissions ([41] and ff) referred both to rights of set off at common law and in equity.
[37] See the discussion in Heydon, Leeming and Turner, Meagher, Gummow and Lehane's Equity: Doctrines and Remedies (5th ed, 2015) [39-035].
[38] Federal Commerce and Navigation Co Ltd v Molena Alpha Inc [1978] QB 927, 982 (Goff LJ); Hanak v Green [1958] 2 QB 9.
[39] See, for example, O'Brien v Bank of Western Australia Ltd [2013] NSWCA 71 [93] [107].
[40] Concutt Pty Ltd v Worrell [2000] HCA 64; (2000) 176 ALR 693, 699 (Gleeson CJ, Gaudron & Gummow JJ).
[41] For examples, see O'Brien v Bank of Western Australia Ltd [2013] NSWCA 71 [95] [104]; Grant v NZMC Ltd [1988] NZCA 135; [1989] 1 NZLR 8; and see also the discussion in Heydon, Leeming and Turner, Meagher, Gummow and Lehane's Equity: Doctrines and Remedies (5th ed, 2015) [39105].
[42] See, for example, Devaugh Pty Ltd v Lamac Development Pty Ltd [1999] WASCA 280.
[43] Cf Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd [2015] HCA 37; (2015) 256 CLR 104 [121] (Bell & Gaegler JJ); Electricity Generation Corporation t/a Verve Energy v Woodside Energy Ltd [2014] HCA 7; (2014) 251 CLR 640 [35] (French CJ, Hayne, Crennan & Kiefel JJ), [53] (Gaegler J).
[44] Cf Construction Contracts Act 2004 (WA) s 23.
[45] See, for example, Cooper and Oxley Builders Pty Ltd v Steensma [2016] WASC 386 [22] (Le Miere J).
[46] Cooper and Oxley Builders Pty Ltd v Steensma [2016] WASC 386 [22], [34] (Le Miere J).
[47] Cooper and Oxley Builders Pty Ltd v Steensma [2016] WASC 386 [23] (Le Miere J).
[49] Hamersley HMS Pty Ltd v Davis [2015] WASC 14 [50].
[50] Cooper and Oxley Builders Pty Ltd v Steensma [2016] WASC 386 [33] (Le Miere J).
[52] Minister for Immigration and Citizenship v Li [2013] HCA 18; (2013) 249 CLR 332.
[53] Total Eden Pty Ltd v ECA Systems Pty Ltd [2017] WASC 58.
(2007) 34 WAR 342
(2013) 306 ALR 491
(1995) 12 WAR 62
(1992) 37 FCR 445
(2000) 176 ALR 693
(2015) 256 CLR 104
(2014) 251 CLR 640
(2013) 249 CLR 332
(2010) 239 CLR 531
(1995) 184 CLR 163