The Probuild decision: Finding the balance in NSW construction industry payments - Construction & Planning

This month's decision by the NSW Supreme Court in Probuild¹ could change the commercial claims environment for construction and engineering in NSW. Does it herald change for the better?

From roads and rail to housing and hospitals, the engineering and construction order book for NSW is returning to health. And this time, the claims environment is regulated.

In 2014, the NSW government largely abolished the 'opt in' approach to security of payment² in response to concerns that use of optional security of payment rights had provoked commercial backlash. As a result, claims for payment for construction in NSW are now mostly attended by statutory adjudication and summary judgment rights.

In this context, the NSW Supreme Court's recent decision in Probuild is a potential game changer.

THE PROBUILD DECISION

"Judicial review ... is available to quash a determination made by an adjudicator where an error of law that leads to an adjudicated amount that is different from what would have been determined but for the error of law appears on the face of the record."

So held the Hon. Justice Emmett AJA, sitting as a judge at first instance.³ Probuild had responded to a payment claim with a payment schedule indicating a nil payment as they were entitled to liquidated damages. Shade Systems applied for adjudication. The adjudication determination (so it was subsequently held) proceeded on an erroneous construction of the contract's liquidated damages clause, resulting in a requirement that Probuild pay an amount without deduction of liquidated damages.

Probuild called upon the Court to quash the adjudication determination on the basis that there was an error on the face of the determination (albeit a non-jurisdictional one).⁴

Emmett AJA examined long-standing authorities such as Brodyn,⁵ which held that judicial intervention into adjudication determinations could only occur in instances of a breach of "the basic and essential requirements" which were "laid down for the existence of an adjudicator's determination".⁶ In other words, errors of jurisdictional fact.

However, the Court also noted that the High Court's decision in Kirk⁷ had cast doubt on Brodyn. Emmett AJA favoured a narrow application of Brodyn, namely, to addressing the question whether a person who contracted to do work without a licence in contravention of the Home Building Act was precluded from receiving progress payments under the Security of Payment Act.⁸

Emmett AJA also cited the decision of Basten JA in Chase Oyster Bar,⁹ concluding that there was nothing in the security of payment legislation which constrained the Court's jurisdiction to review an adjudicator's determination, which would otherwise require express language or at least a clear and unambiguous implication.¹⁰

WHY THE PROBUILD DECISION COULD MAKE A DIFFERENCE

Probuild will not mean that all errors in a determination are susceptible to review. It is also by no means certain that the decision in Probuild will take root.¹¹

But if it does, it could change the face of security of payment in NSW and help to reform the state's industry claims culture.

The model before Probuild

The Society of Construction Law Australia (SOCLA) has reported that the east coast security of payment model was "susceptible of unfairness in that it is in the commercial interests of the ANAs (i.e. Authorised Nominating Authorities) and hence their appointees to aim their marketing at their prospective applicant clients".¹² Limited review rights of the decisions arising from this system have enabled the enforcement of determinations based on reasons that are often doubtful and sometimes wrong, and seem to trend in favour of the claimant.

SOCLA's research revealed that adjudication determinations are not trusted as reliable by the industry.¹³ That mistrust would seem to be a natural companion for a system that is perceived as unfair, leads to protracted disputes, fractured relationships and the commercial backlash that government has sought to eradicate.

Following the Wallace review,¹⁴ Queensland enacted changes to the model by abolishing the concept of the private ANA. In NSW, according to Fair Trading's December 2015 discussion paper, 56.67% of those surveyed voted that NSW should adopt the Queensland model of an Adjudication Registrar to replace ANAs, with only 18.53% voting against.

CONSTRUCTION INDUSTRY PAYMENT: IS JUDICIAL REVIEW THE PROBLEM OR THE SOLUTION?

There is an alternative to legislative intervention. Enabling the review of adjudication determinations for error of law on the face of the record will help to address the perceived imbalance.

At the very least, allowing decisions that are plainly wrong at law to be addressed quickly, cheaply and efficiently through short form judicial review must surely be preferable to long, costly, fully contested disputes. Importantly, NSW's superior court charged with this function¹⁵ is increasingly recognised as the model for efficiency in addressing commercial cases.

Furthermore, greater reviewability of adjudication determinations better aligns the commercial interest of ANAs with outcomes that are correct at law. Risk of judicial review will encourage the market to swing behind the ANAs whose adjudicators reliably withstand legal challenge.

Similarly, one might expect the prospect of judicial review to deter significant claims based on complex propositions of law from finding their way to adjudication in the first place.

As to prevention of adjudication determinations that are wrong at law, industry focussed judicial review could be expected over time to generate a published body of law that is available to adjudicators and the commercial community, which can only improve the calibre of determinations and thus their reliability.

Reviewability for error of law on the face of the record, should it survive, will be a healthy step towards restoring industry trust in the statutory scheme. In consequence, it may assist the NSW government to achieve its policy objective of reforming payment practices within this important economic engine, through the security of payment scheme.

Footnotes

¹ Probuild Constructions (Aust) Pty Ltd v Shade Systems Pty Ltd [2016] NSWSC 770.

² See Schedule 1, clause 6 of the Building and Construction Industry Security of Payment Amendment Act 2013 (NSW), which removed the requirement to endorse payment claims, except for exempt residential construction contracts.

³ Probuild Constructions (Aust) Pty Ltd v Shade Systems Pty Ltd [2016] NSWSC 770 at [74].

⁴ Ibid [26]. Noting Probuild's challenge based on a denial of natural justice did not succeed.

⁵ Brodyn Pty Ltd t/as Time Cost and Quality v Davenport [2004] NSWCA 394.

⁶ Ibid at [55].

⁷ Kirk v Industrial Court of New South Wales (2010) 239 CLR 531.

⁸ Ibid at [64]-[65].

⁹ Chase Oyster Bar Pty Ltd v Hamo Industries Pty Ltd (2010) 78 NSWLR 393.

¹⁰ Ibid at [73].

¹¹ It is a decision at first instance which at the time of publication remains open to appeal. Regardless of whether an appeal is heard, it may or may not be distinguished by fellow first instance judges.

¹² "Report on Security of Payment and Adjudication in the Australian Construction Industry: Australian Legislation Reform Sub-Committee June 2014".

¹³ Ibid at page 8.

¹⁴ http://www.aph.gov.au/About_Parliament/Parliamentary_Departments/Parliamentary_Library/pubs/rp/RP9697/97rp16

¹⁵ Supreme Court Act 1970, section 69.

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