Two recent High Court cases have confirmed that you cannot set aside an adjudication determination under the security of payment legislation merely because of an error of law, such as a mistake by an adjudicator in interpreting a contract, at least in NSW and South Australia. The position in relation to other jurisdictions may be the same, but is yet to be confirmed.
Case Study 1: Probuild v Shade Systems – an incorrect interpretation of a liquidated damages clause
One of the cases before the High Court involved a claim by a subcontractor (Shade Systems) against a head contractor (Probuild). You can find the case here.
The dispute arose when Probuild withheld an amount from the subcontractor in respect of liquidated damages.
When the subcontractor applied for adjudication under the security of payment legislation, the adjudicator disallowed Probuild’s off-setting claim. This was because the date of practical completion had not yet arisen and, on the adjudicator’s interpretation of the contract, this meant that liquidated damages could not be calculated and applied.
Although the court found that the adjudicator had made an error in interpreting the contract, it decided that this was not enough to have the determination set aside. Consequently, the determination was allowed to stand despite the mistake.
Case Study 2: Maxcon v Vadasz – an incorrect characterisation of a paid-when-paid clause
In the second case before the High Court, the head contractor (Maxcon) withheld an amount from a subcontractor (Vadasz) by way of cash retention. You can find this case here.
The subcontractor argued that the retention operated as a paid-when-paid provision and was therefore invalid. This was because, on the subcontractor's argument, the contract effectively made the subcontractor's entitlement to receive the retention contingent upon the operation of a separate contract (the head contract).
The adjudicator agreed with the subcontractor's interpretation and ruled that it was entitled to the retention. Maxcon applied to have the adjudication determination set aside.
The High Court ruled that there was no error of law, essentially because it agreed with the adjudicator's characterisation of the clause.
However, one of the judges in the case also pointed out that even if the clause was not a paid-when-paid provision and the adjudicator had incorrectly found otherwise, the adjudicator's determination should nonetheless have been allowed to stand.
Why shouldn't errors of law result in an adjudication determination being set aside?
In reaching its decision in both the Probuild case and the Maxcon case, the court emphasised the underlying objective of the Act - namely the facilitation of cashflow down the contracting chain.
The court found that allowing adjudication determinations to be set aside for errors of law would frustrate this objective. The court determined that the intention of the legislation was to prioritise speed of payment - even if this meant giving effect to adjudication determinations that were plainly wrong. The only potential exception is where the error of law involves a jurisdictional error (which we explain here).
In reaching its conclusion, the court noted that the legislation deliberately does not include express rights of appeal. It also contemplates informal procedures, such as calling a conference of both parties without legal representation. It did not consider the process to be one that is ‘conducive to lengthy consideration by an adjudicator of detailed submissions on all questions of law’.
In context
These cases demonstrate how difficult it is for adjudication determinations to be set aside. They confirm that the purpose of the legislation is to promote cashflow, even if that means giving effect to adjudication determinations that are wrong.
To set aside an adjudication determination in NSW or South Australia (and possibly in other jurisdictions as well), you will need to establish a ‘jurisdictional error’. That is, an error where the adjudicator does something that he or she is not empowered to do – such as issuing an adjudication determination without there being an adjudication application, or a construction contract, or an available reference date. (There are other types of jurisdictional error, as we explain here.)
In the absence of a jurisdictional error, you are likely to be bound by the adjudicator’s determination – even if it contains mistakes.
And although you may have the right to recover any overpayment by taking action under the contract, often that will be commercially unviable (for example, because of the amount in dispute or because the contractor is insolvent).
Lessons
Key takeaways from these decisions are:
1. Choose and manage your contractors carefully, and use carefully prepared contracts, to reduce the risk of payment disputes arising in the first place.
2. Try to resolve any payment disputes at an early stage, without allowing them to escalate to a security of payment adjudication.
3. If you receive a payment claim and there is any chance of the contractor applying for adjudication, make sure you provide a fully detailed payment schedule. This will maximise the number of arguments you will be able to put to the adjudicator.
4. If a contractor makes an adjudication application, ensure that your adjudication response is as good as it can be, articulating your position as clearly and forcefully as you can. This may be your last chance to avoid having to make an irrecoverable payment to the contractor, even if it is a payment to which the contractor may not be contractually entitled.
