Top down or bottom up:  Does an adjudicator need to determine if work was performed? 

What you need to know 

• Earlier this year, the High Court held that adjudication determinations made under security of payment legislation are not subject to judicial review for non-jurisdictional errors of law.
• The Supreme Court of Victoria has now provided further guidance as to when a security of payment determination may be quashed on judicial review. In particular, the Court quashed a determination where the adjudicator had failed to determine whether the construction work the subject of the claim had been performed and the value of that work.
• In addition to judicial review, a recent national review of security of payment legislation has recommended that parties in all Australian jurisdictions should be entitled to seek review by a review adjudicator of determinations involving larger payment claims, subject to a number of statutory preconditions being satisfied.

The fast track adjudication process under the security of payment legislation in force across Australia has been described as "brutally fast" (by the High Court) and as resulting in decisions that are perceived to have been made "contrary to law and/or contrary to supporting evidence".

In light of sentiments such as these, and the often significant consequences of a determination under the "pay now, argue later" philosophy of the legislation, it is perhaps unsurprising that parties on the losing side of an adjudication determination frequently seek review of those determinations.

As a result, since the introduction of security of payment legislation, judges across the country have been occupied with considering in what circumstances parties are entitled to make an application for judicial review of an adjudicator's determination.

Earlier this year, the High Court determined that judicial review is not available for non-jurisdictional errors of law in an adjudication determination: see our Construction Disputes Update dated 26 February 2018 here.

Now, the Supreme Court of Victoria's decision in Nuance Group v Shape Australia [2018] VSC 362 provides further guidance about when a court may quash an adjudication determination.

Nuance Group v Shape Australia [2018] VSC 362

The facts

The key facts of the case were that:

• Nuance contracted with Shape to have Shape demolish, refurbish and fit out an existing retail duty-free space located at Melbourne International Airport.
• Shape issued a payment claim under the Building and Construction Industry Security of Payment Act 2002 (Vic) (the SOP Act) for approximately $3.5 million.
• Nuance issued a payment schedule rejecting the whole of the claim.
• The adjudicator issued an adjudication determination for approximately $1.4 million.
• Nuance made an application for review of the determination on the basis that the adjudicated amount included an "excluded amount" which was prohibited under the SOP Act. Pursuant to s 28G of the SOP Act, that application was referred to a review adjudicator.
• The review adjudicator issued an adjudication review for approximately $1.2 million.

Following the adjudication review, Nuance applied to the Supreme Court of Victoria to have both the original and review determinations quashed, submitting that:

• An adjudicator must comply with the basic and essential requirements of the SOP Act, which amongst other things require determination of (a) whether the construction work the subject of the relevant claim has been performed and (b) the value of that work.
• Rather than making that determination, the adjudicator calculated the adjudicated amount by taking the amount claimed by Shape and then simply deducting from that amount each of the claims that the adjudicator found to be excluded amounts.
• The adjudicator also failed to provide adequate written reasons as required by the SOP Act.
• The review adjudicator fell into jurisdictional error by impermissibly adopting a different method of calculation to the one used by the adjudicator.

The decision

Following review of the relevant sections of the SOP Act, the Court agreed with Nuance that the task of determining a payment claim "at a minimum requires a determination as to whether the construction work the subject of the claim has been performed and its value". In doing so, the Court noted that given the purposes and objects of the SOP Act, and the time-frame within which the adjudicator is required to produce his or her determination, "bare reasons which render the adjudicator’s determination comprehensible will suffice".

The Court also accepted Nuance's submission that, rather than considering the items of construction work in the payment claim and building up the adjudicated amount, the adjudicator had made deductions from the value of Shape’s total claim of amounts that the adjudicator considered should be deducted to reach the final adjudicated amount.

On that basis, the Court found that the adjudicator had failed to undertake the task that was required for a valid and compliant determination under the SOP Act.

The Court additionally accepted that no sufficiently comprehensible reasons had been delivered by the adjudicator, noting that it was necessary for Shape to rely upon a number of separate extraneous documents, created as part of the administration and certification processes under the construction contract, in attempting to piece together the asserted reasoning of the adjudication determination.

The Court rejected Shape's separate contention that by initiating the review adjudication, Nuance had waived its right to thereafter challenge the adjudication by judicial review.

In light of the above, the Court made orders quashing the initial determination. As a review adjudication can only be validly undertaken where the underlying adjudication determination is valid, the review adjudication was also quashed.

Other circumstances in which review is available

As noted above, earlier this year the High Court held that a determination made by an adjudicator appointed under security of payment legislation is not subject to judicial review for non-jurisdictional error. As a result, the circumstances in which an aggrieved party can seek to challenge an adjudication are limited.

In addition to the power of the courts to review determinations for jurisdictional error, the current legislation in Victoria, Western Australia and the Northern Territory provides for limited rights of review by a review adjudicator for specific issues (though the approach adopted differs dramatically across jurisdictions). In Victoria, a party can only apply for a review of a determination where it considers that the original adjudicator has erroneously included or excluded a particular claimed amount from the determination. Alternatively, in Western Australia and the Northern Territory, a party can only apply for review of a determination in circumstances where the adjudicator has dismissed the application on jurisdictional grounds (for example, because the contract concerned is not a "construction contract").

Review of security of payment laws recommends a nationally consistent model

In May 2018, a national review of the States' and Territories' security of payment legislation made 86 recommendations to improve the consistency of the legislation and enhance protection to ensure subcontractors get paid on time for work they have done. If implemented, many of the recommendations would have significant consequences for the construction industry: see our Construction Disputes Update dated 5 June 2018 here.

One recommendation arising out of the national review is that parties to an adjudication should be entitled to make an application for the review of a determination (by a review adjudicator) in cases where:

• the adjudicated amount is at least $100,000 greater than the scheduled amount, or more than $100,000 less than the claimed amount; or
• the adjudicator has rejected the adjudication application.

The national review did not specify whether the grounds for review would be limited to jurisdictional issues or would also provide for a review on the merits. However, the recommendation apparently responds to the need for a practical mechanism to overcome the shortcomings of the rapid adjudication process and is intended to limit the number of aggrieved parties seeking remedy by way of judicial review.

The Australian Government is now working with the States and Territories to consider and respond to the findings and recommendations of the review, but there is currently no time frame for reform.

Until such time as reform occurs, principals and contractors should be mindful of the limited grounds on which review is available for an adjudication determination, and seek to focus any attempted challenge on those grounds.

Authors: Adam Firth, Partner; James Clarke, Senior Associate; and Rebecca Lew, Lawyer.