What does this mean for you?
It’s now even harder to overturn an adjudication decision.
Article written by Andrew Shields, Director of Shields Legal.
Demex Pty Ltd v McNab Building Services Pty Ltd [2023] NSWCA 261
Key takeaways
The general attributes of procedural fairness required of an adjudicator acting under the SOP Act must accommodate themselves to the terms and structure of the statutory scheme in question.
In an adjudication the material which the adjudicator is to consider is limited by the relevant SOP legislation. The timeframe for raising and resolving claims under the Act is tightly confined; and the decision of the adjudicator is only an interim one and does not affect any right that the parties may have under the construction contract. Adjudicators may be expected to bring their experience and expertise to bear in making their determinations.
Only if there has been a substantial denial of procedural fairness by an adjudicator in determining an adjudication application will there be jurisdictional error under the SOP Act. This will turn on the particular circumstances of each case. However, generally invalidity would only be reached if there was a significant departure from the requirements of procedural fairness, and that departure could be characterised as leading to substantial practical injustice in all the circumstances.
In this matter the adjudicator attributed some significance to a contractual document in support of his conclusion where such use had not been foreshadowed by either party or the decision-maker and he did not ask for submissions on its use. While that does give rise to a question about whether procedural fairness has been accorded, in the circumstances of this case – where the adjudicator used the document in a confirmatory way, it does not represent a substantial denial of procedural fairness constituting jurisdictional error.
While the adjudicator went further than necessary in himself calculating the conversion rate applied by Demex and satisfying himself that that rate was reasonable, this caused McNab no prejudice as McNab was no worse off than it would have been if the adjudicator had not addressed the issue.
A decision of a Court of Appeal in another state will be persuasive to Courts in Queensland.
Facts
In January 2021, McNab Building Services Pty Ltd (“McNab”) entered into a subcontract with Demex Pty Ltd (“Demex”) to undertake remediation earthworks at a site in Tweed Heads. As part of the works undertaken by Demex, large quantities of asbestos contaminated materials were removed (exported) offsite and clean fill was imported.
In May 2022, Demex submitted a payment claim for $2.8 million for work up to 3 March 2022. Demex’s claim attached a table which identified volumes of material and also attached a range of supporting documents. Under the contract, claims for the relevant work were to be measured in cubic meters. The evidence provided by Demex of the work done was largely expressed in terms of weight (tonnes). Those amounts had then been converted into cubic metres in the payment claim.
On 15 June 2022, McNab submitted a payment schedule challenging the amounts claimed by Demex, proposing to pay nil and asserting that Demex owed it nearly $1.35 million. In its subsequent adjudication response, it criticised the approach adopted by Demex in calculating that amount it said it was owed but did not proffer any alternative approach to converting weight into volume.
On 28 July 2022, the adjudicator found that the amount of the progress payment to be paid by McNab to Demex was $1,390,882.42. He calculated for himself the conversions rate that Demex had applied for the import and export amounts (of 1.96 m3/tonne and 1.6 m3/tonne respectively), that being a matter of simple arithmetic based on information in Demex’s claim. As regards the import conversion rate, he stated that the rate used was reasonable in light of industry standards. As regards the export conversion rate, he found support for the rate adopted by Demex in a contractual document.
McNab challenged the determination in the Supreme Court, alleging jurisdictional error by breach of procedural fairness in relation to the approach taken by the adjudicator to the conversion rates. The primary judge, Black J, upheld the challenge. In subsequent orders his Honour declared that the adjudication determination was void and quashed it. Demex appealed that decision.
Judgement
Kirk JA, with Mitchelmore JA and Adamson JA agreeing allowed the appeal, and set aside orders 1, 2 and 4 of the Supreme Court. His Honour, in his judgment, addressed the legal principles of procedural fairness in the context of the NSW SOP Act, summarised the adjudicator’s determination, the findings of the primary judge, the issues raised on appeal and then considered whether the adjudicator had denied McNab procedural fairness by accepting Demex’s conversion rates in the process determining that:
Adjudicators may be expected to bring their experience and expertise to bear in making their determinations;
the general requirement of procedural fairness that might ordinarily be applied to a decision-maker exercising statutory power is attenuated in the context of the SOP Act. “If the (SOP) Act requires that a particular measure of procedural fairness be provided, then it is that standard which must be met, otherwise the decision will be invalid. Whether procedural fairness has been afforded turns first on a matter of statutory construction to determine what measure of procedural fairness the (SOP) Act impliedly requires”;
In an adjudication under the SOP Act, “a conclusion of invalidity would only be reached if there was a significant departure from what would ordinarily be the requirements of procedural fairness for a person exercising a statutory power, and where that departure could be characterised as leading to substantial practical injustice in all the circumstances. This approach reflects the fact that the Act provides for a “rough and ready” process (Chase Oyster Bar at [208]), not intended readily to be held invalid on judicial review.” (my bolding);
With respect to the export items, Demex applied a conversion factor that was necessarily implicit in its payment claim and again in its adjudication response. As the adjudicator indicated, Demex’s “calculation is straightforward and plausible”. It was entirely reasonable for the adjudicator to conclude that Demex had provided sufficient information and methodology as to how it arrived at the amount claimed;
“Given experienced parties, and the tight time frames under the legislative scheme, there is no requirement that every step in a payment claim or adjudication application must be spelt out in express words.”;
“Although Demex had not explained in terms what conversion rate it was using, it was obvious that it was employing conversion rates to translate those of its truck dockets in tonnes into a volumetric claim, which rates could be calculated with ease.” And it was clear that McNab understood the conversion rates applied and made no submissions to the Adjudicator and provided no submission as to why some particular conversion rates were or were not appropriate. “Instead, it put to the adjudicator that he should not perform such a calculation. As explained, that point seemed to be founded on its main argument, namely that relying on truck dockets to perform the conversion was unreliable and that the appropriate method was a survey approach.” (my bolding);
“Thus even on a more general approach to procedural fairness, McNab cannot complain that it was not given a fair opportunity to address the conversion rate issue because it was not spelt out in express terms by Demex. As regards the statutory scheme here, it certainly cannot be said that there has been a substantial denial of procedural fairness in this regard, taking account of all of the circumstances.” (my bolding);
McNab, referring to the decision of McDougall J in Musico v Davenport [2003] NSWSC 977, to the effect that if the adjudicator decides a dispute on a basis that neither party has contended for then procedural fairness would require that the adjudicator notify the parties in order to provide them the opportunity to put submissions on the issue. His Honour, found that the adjudicator decided the issue in a way implicitly contended by Demex, which McNab disputed in general but without proposing any specific alternative approach beyond its survey method;
His Honour found that the adjudicator by “(R)elying on a document in support of a conclusion where that potential reliance had not been foreshadowed by either party or the decision-maker does give rise to a question about whether procedural fairness has been accorded. However, in the circumstances of this case, and taking account of the statutory context, the adjudicator’s invocation of item 40 does not represent a substantial denial of procedural fairness such as to constitute jurisdictional error. (my bolding)”;
Additionally, His Honour found that “McNab was on notice of the use of a conversion rate which was readily calculable by anyone, let alone an entity of its sophistication, and chose to make no submissions on what that rate should be. In those circumstances it was not procedurally unfair for the adjudicator to refer to a contractual document as a means of satisfying himself that Demex’s approach was defensible.”;
With respect to the adjudicator calculations his Honour found at [96] that:
“The adjudicator went further than necessary in himself calculating the conversion rate applied by Demex and satisfying himself that that rate was reasonable. That he did so caused McNab no prejudice as McNab was no worse off than it would have been if the adjudicator had not addressed the issue, let alone in circumstances where it had had reasonable notice of the issue and had chosen to make no submissions on the point. It cannot be said that there was substantial practical injustice in all the circumstances. (my bolding)”;
His Hound found that the primary judge gave insufficient weight to the statutory context, with its imperatives against readily finding jurisdictional error due to the compressed time period for the adjudicator under the SOP Act (my bolding);
In respect of the adjudicator not requesting further submissions his Honour found:
“Where only 10 business days are generally allowed for the determination to be made, even a delay of a few further days is significant in the context of this statutory scheme. And it is always easy to say in hindsight in any particular case that if only a further opportunity to be heard had been given, then the claimed problem could have been avoided. But to accept too readily that an adjudicator’s reasoning process goes beyond what was reasonably regarded as in play is to encourage litigation seeking to identify such errors, at the cost of the quick, interim decision-making that the Act seeks to achieve.”; and
With respect to the adjudicator using his own experience and expertise His Hound found at [102]:
“A fair reading of the adjudicator’s reasons is that he only employed his industry knowledge in a confirmatory way, saying “[o]n review of industry standard tonnage to m3 conversion factors, I find that used by the Claimant to be reasonable”. “As explained above at [23]-[24], adjudicators may be expected to bring their experience and expertise to bear in making their determinations. To confirm the reasonableness of this aspect of claim based upon his experience gives rise to no relevant unfairness in the circumstances of this case.” (my bolding).
Parting words
It is the writer’s opinion that this is a significant decision, which confirms that the grounds for overturning an adjudicator’s determination are narrowing once again. Now, even the once often used jurisdictional arguments against an adjudicator’s decision are being eroded by the courts.
It seems the courts are more and more often taking the approach that if a party to a contract has the ability to commence proceedings for breach of contract in a court or tribunal then it should do so if it really wants to reverse an adjudicator’s decision, as that is where the merits of all the issues can be determined.
Please give us a call if we can help or you need assistance, as we are always looking to protect your interests.
Andrew Shields
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