21 March, 2018
The Australian High Court has considered security of payment legislation and found that adjudication determinations are not subject to judicial review for non-jurisdictional errors of law.
What you need to know
The High Court has held that adjudication determinations made under security of payment legislation are not subject to judicial review for non-jurisdictional errors of law.
The High Court has also held that retention provisions will fall foul of the "pay when paid" prohibition if the release of retention is contingent upon the operation of a head contract.
Although the decisions only relate to security of payment legislation in New South Wales and South Australia respectively, the reasoning is likely to apply to the security of payment legislation in every state and territory.
Introduction
The High Court has considered security of payment legislation and found that adjudication determinations are not subject to judicial review for non-jurisdictional errors of law. The Court also found that some common retention provisions may be prohibited "pay when paid" provisions. Two separate judgments in respect of separate security payment legislation were delivered.
Probuild Constructions (Aust) Pty Ltd v Shade Systems Pty Ltd & Anor [2018] HCA 4
Shade Systems and Probuild Constructions were parties to a construction contract for the supply and installation of external louvres. Shade Systems obtained an adjudication determination in its favour.
Probuild sought an order under section 69 of the Supreme Court Act 1970 (NSW) for the determination to be quashed. The primary judge quashed the determination on the grounds that it contained two errors of law on the face of the record:
first, the finding that there was no entitlement to liquidated damages until practical completion or termination of the subcontract;
and
secondly, the finding that Probuild needed to demonstrate that Shade Systems was at fault for the delay for which it claimed liquidated damages.
The New South Wales Court of Appeal held that the Supreme Court did not have jurisdiction to quash an adjudicator's determination for a non-jurisdictional error of law on the face of the record and that the supervisory jurisdiction of the Court was limited to jurisdictional errors made by the adjudicator (ie errors as to whether the adjudicator had authority to make the determination).
The High Court granted special leave to appeal. It unanimously held that the Supreme Court's jurisdiction to quash non-jurisdictional errors of law on the face of the record had been ousted by the Building and Construction Industry Security of Payment Act 1999 (NSW) (NSW Act).
The majority held that the NSW Act, when read as a whole, evinces a clear legislative intention to exclude the Supreme Court's jurisdiction. This is notwithstanding the fact that the NSW Act does not contain a privative clause expressly providing that an adjudicator's determination is not to be quashed for an error of law. Gageler and Edelman JJ agreed with the conclusion reached by the majority but each gave their own reasons for doing so. Accordingly, the appeal was dismissed.
There were several reasons given by the majority for its conclusion. Those reasons were largely based upon the common features, objects and purpose of security of payment legislation enacted throughout Australia, including that:
- the NSW Act aims to ensure that person who undertakes to carry out construction work under a construction contract is entitled to progress payments promptly and the NSW Act achieves that aim by setting up a scheme that is "coherent, expeditious and self-contained";
- the procedure in the NSW Act is not concerned with finally and conclusively determining the entitlements of the parties but doing so on an "interim" basis;
- the NSW Act is designed to operate quickly consistent with the understanding that "cash flow is the lifeblood of the construction industry" – this is reinforced by the detailed and "brutally fast" time limits that apply at each stage; and
- the NSW Act adopts an informal procedure.
Having regard to the text, context and purpose of the NSW Act, the High Court considered it was clear that the legislature intended to exclude the Supreme Court's jurisdiction to quash determinations for non-jurisdictional error (and that an express clause to this effect was not required).
Maxcon Constructions Pty Ltd v Michael Christopher Vadasz (Trading as Australasian Piling Company) & Ors [2018] HCA 5
Maxcon concerned a subcontract to design and construct piling. Mr Vadasz served a payment claim on Maxcon under the Building and Construction Industry Security of Payment Act 2009 (SA) (SA Act). The adjudicator determined that retention provisions in the subcontract were prohibited "pay when paid" provisions and did not validly permit Maxcon to deduct an amount from the progress payment otherwise due to Mr Vadasz. Maxcon sought an order in the Supreme Court of South Australia that the determination be quashed. It alleged that the adjudicator made an error of law in determining that the retention provisions were "pay when paid" provisions.
The primary judge dismissed Maxcon's application for judicial review. The Full Court again dismissed Maxcon's appeal.
The High Court granted special leave but dismissed Maxcon's appeal on the grounds that the adjudicator made no error of law.
The majority and Edelman J held that the retention provisions in the subcontract were "pay when paid" provisions because the release of retention was contingent upon the operation of a head contract. In particular, Mr Vadasz was not entitled to the release of retention under the subcontract until Maxcon had completed its work under the head contract and a certificate of occupancy had been issued. It followed that the retention provisions were "pay when paid" provisions because the release of retention was "contingent or dependent on the operation" of the head contract.
Gageler J notably did not consider it necessary to determine whether the adjudicator made an error of law because the decision in Probuild applied equally to the SA Act. Edelman J agreed with this reasoning.
Wrong is alright
The High Court has confirmed that, at least for adjudicators, being wrong is alright. It is now clear that a determination made by an adjudicator appointed under the security of payment legislation is not subject to judicial review for a non-jurisdictional error of law. Although there are two distinct "East coast" and "West coast" models of security of payment legislation, the High Court's reasoning is broad and likely to apply equally to security of payment legislation in each state and territory (the West Coast model enacted in Western Australia and the Northern Territory expressly provides for a right of review, limited to review of adjudication applications that have been dismissed on jurisdictional grounds).
A mention for retention
The finding that the retention provisions in Maxcon were prohibited "pay when paid" provisions is of significant practical consequence. It common for subcontractors to provide security by way of retention and for release of retention to be contingent upon some event under a head contract. This is understandable where, for example, a head contractor seeks to ensure that the quality of a subcontractor's work will satisfy practical completion under the head contract. Parties should ensure that their retention provisions are carefully drafted such that they do not amount to "pay when paid" provisions or, alternatively, consider whether other forms of security would be more suitable for their purposes.
For further information, please contact:
Adam Firth, Partner, Ashurst
adam.firth@ashurst.com
