19 Jun 2014

The Proper Limits of Adjudicators’ Discretion under the Construction Contracts Act 2004

Across Australia, security of payment legislation empowers adjudicators to “determine” payment claims under construction contracts.  In WA, “payment claim” is broadly defined.  This often creates misunderstandings about the proper scope of an adjudicator’s enquiry in determining a pay dispute, especially when read with provisions such as subsection 35(2) of the Construction Contracts Act 2004 (“CCA”).


 


Superficially, these provisions may be misunderstood, even by experienced adjudicators, as having the effect that the adjudicator can rely upon whatever fact or method he or she thinks fit.  This misconception may be reinforced by the absence of any express statutory limit on the nature of the evidence the adjudicator is to consider when adjudicating the payment claim.


 


However, there are clear limits on an adjudicator’s powers, not specifically referred to in the security of payment legislation, but by reason of the contract which governs the contractor’s work and both parties’ interim rights to payment.  Indeed, before substantial or practical completion of the works under contract, the contractual payment regime is the only recourse a contractor has for payment claims because its obligations under a construction contract are presumed by the law to be entire obligations.


 


Security of payment legislation does not change the legal presumption that the construction contract is an entire contract.  The legislation’s only material effects on the contractual payment regime are:


(a)       to normalise the contractor’s right to progress payments and imply into the contract, a procedure for claiming such payments where the contract makes no such express provision;


(b)       to prohibit the inclusion of certain payment terms; and


(c)       to empower adjudicators to enforce interim rights to payment.


 


Security of payment legislation does not, in the process, change the character of interim payment rights into anything other than contractual rights. Support for this proposition and an analysis of its implications follows.  CCA provisions are referenced throughout by way of example only, as the relevant provisions have equivalents in security of payment legislation around Australia.


 


Under some construction contracts, a payment certificate will be conclusive of the relevant payment claim. This is so, notwithstanding CCA section 35(2)(b)  Under CCA section 35(2)(b), a payment certificate which does not “[relate] to the final amount payable under the contract and [have] the effect of finalising the contract” is said, as a matter of law, to “have such evidentiary weight as the appointed adjudicator thinks fit”, rather than “to be taken to be conclusive evidence of its contents”. 


 


The quoted words may be read as giving the adjudicator discretion to decide what evidentiary weight to give to a progress payment certificate.  This is a discretion with no express statutory limits.  However (and this is the crucial point), the absence of any express statutory limit on this discretion does not mean the discretion is unlimited in its operation.  For the discretion to be unlimited in its operation, the CCA would have to positively provide that there should be no fetter on the discretion.  But the statute says no such thing.  All paragraph 35(2)(b) and its equivalents mean is that the statute itself must not be read to limit the adjudicator’s discretion to decide what evidentiary weight, if any, to accord a progress payment certificate.  Respectfully, adjudicators who end the analysis at this point forget that the payment certificate derives its legal force and effect, not from the security of payment legislation, but from the contract.


 


If it is the contract that gives force and effect to payment certificates as evidence of the contractor’s interim rights to payment, then it must also be the contract that defines the legal and evidentiary limits of those certificates. In any given circumstance, the contract may make the certificate determinative, or merely indicative along with other evidence, of the existence and amount of a contractor’s or principal’s interim right to payment.


 


In AS 4000 – 1997, there are provisions which make payment certificates determinative, and provisions which make them merely indicative, of the existence and value of a party’s interim right to be paid.  An example of the former is subclause 37.2(a), whereby the principal becomes contractually bound to make a progress payment to the contractor once the superintendent has certified its “opinion” as to the amount to be paid.  An example of the latter is subclause 37.2(b), whereby the contractor will only be contractually bound to make a payment to the principal if:


 


(a)          that payment is due under some other provision of the contract; and


 


(b)          the superintendent has “assessed” the amount payable under that other provision.


 


The “opinion” certified under subclause 37.2(a), if formed in good faith, will not be susceptible to review by an adjudicator and will therefore render the certificate determinative of the certified payment claim.  In that case, despite CCA subsection 35(2), the certificate must “be taken to be conclusive evidence of its contents”  unless it is invalid under the contract.  For example, if the superintendent has exceeded his or her contractual powers when issuing a payment certificate under that clause, then in determining the payment claim, the adjudicator will be empowered – indeed, required – to rely on other evidence as to the value of the works. Such circumstances may arise where there is evidence that, for example:


 


(a)              the superintendent holds no genuine opinion that the amount so certified reflects the value of the contractor’s works;


 


(b)              the superintendent takes no account of a relevant consideration or gives weight to an irrelevant consideration when assessing the value of those works; or


 


(c)              the superintendent’s payment certificate is so manifestly unreasonable on its face that no reasonable superintendent, acting in good faith, could possibly have so certified.


 


In such cases, the adjudicator would be charged by the Act merely to correct the superintendent’s error by determining the contractor’s payment claim in accordance with the contract. Thus conceived, the adjudicator’s role involves nothing more than administrative review of decisions made in the actual or purported exercise of contractual power with respect to contractual payment claims, that is, all interim or progress payment claims made up to, but excluding, the final payment claim.  The final payment claim is excluded because it is it the first and only claim for payment of the lump sum contract price, as a debt which finally accrues to the contractor upon substantial performance of its entire obligation to complete the works under the contract .


 


Otherwise, a payment certificate issued under a construction contract and based on the superintendent’s genuinely held belief as to the existence and value of the contractor’s right to a progress payment has contractual force.  If the contract also gives it conclusive force, that is what it will have. The adjudicator is in that case bound by statute to give effect to it as conclusive evidence of its contents.  Section 35 of the CCA does not change this position, despite words which may, on a superficial reading, and taken out of context, appear to say the opposite.


 


Contrast a claim by the principal for payment under AS 4000 – 1997, subclause 37.2(b), of the cost “incurred” in rectifying defective works under subclause 29.3. In determining a claim by the principal for payment of rectification costs assessed and certified by the superintendent, an adjudicator may well take into account, in addition to the payment certificate, evidence that, for example:


 


(a)  the certified costs were not actually incurred;


 


(b)  the certified costs were incurred in performing works under the contract, but those works do not actually constitute rectification works for the purposes of subclause 29.3; or


 


(c)  those works comprise rectification works but as a whole, exceed, either in cost or in scope, what was necessary to restore the defective works to the standard required under the contract.


 


These exemplify the circumstances which subsection 35(2) contemplates in allowing adjudicators to take more than just payment certificates into account when determining progress payment claims. 


 


The foregoing analysis derives authoritative support from Beech J.’s observations in O’Donnell Griffin Pty Ltd v John Holland Pty Ltd [2008] WASC 58.  First, consider his Honour’s observations at [59]:


 


“It was not part of the adjudicator’s function to determine the merits of the substantive dispute between the parties. In the context of an adjudication of a payment dispute, the merits means no more than whether, in the events that had happened, one party to a construction contract was liable to make a payment to the other party”.


 


This quoted passage follows a recital, at [51], of the operative provisions of subclauses 37.1 and 37.2 of the contract. In that case, the clauses were contained in the subcontractor’s equivalent of AS4000 – 1997.   In this context, what else could His Honour have meant by “liable to make a payment to the other party” than liable to make that payment under the construction contract?  Remember that the Act itself provides no independent source of liability to pay for incomplete works.  It goes no further than to imply, by the provisions of Part 2, Division 2, certain terms into the construction contract where no relevant term otherwise exists.


 


Now consider the following passage from the second reading speech of the Construction Contracts Bill (WA), as quoted by Beech J. at [38]:


 


When a party to a construction contract believes it has not been paid in accordance with the contract, the Bill provides a rapid adjudication process that operates in parallel to any other legal or contractual remedy. The rapid adjudication process allows an experienced and independent adjudicator to review the claim and, when satisfied that some payment is due, make a binding determination for money to be paid. The rapid adjudication process is a trade-off between speed and efficiency on the one hand, and contractual and legal precision on the other. Its primary aim is to keep the money flowing in the contracting chain by enforcing timely payment and sidelining protracted or complex disputes. The process is kept simple, and therefore cheap and accessible, even for small claims. In most cases the parties will be satisfied by an independent determination and will get on with the job. If a party is not satisfied, it retains its full rights to go to court or use any other dispute resolution mechanism available under the contract. In the meantime, the determination stands, and any payments ordered must be made on account pending an award under the more formal and precise process(emphasis added).


 


In the emphasised portions of this passage, the Hon. Minister makes it clear that:


 


(a)       the Bill (which is now the CCA and has equivalents in every State) is concerned only with liability for payment under a construction contract (as defined in the Act); and


 


(b)       the effect of the rapid pay dispute provisions is not to confer any separate statutory right to payment on either party, but merely to “enforce” (to use the Hon Minister’s own language) the rights contractors already have under a construction contract.


 


Conclusion


 


It is regrettably common for parties, lawyers and adjudicators to read too much into CCA subsection 35(2) and its equivalents.  Superficially, and divorced from its context, CCA subsection 35(2) appears to mean that an adjudicator has an unlimited discretion to take into account any evidence whatsoever and to disregard or minimise the contractual effect of the superintendent’s payment certificate if it seems right to do so.  However this interpretation fails to appreciate that it is the contract which determines the basis on which an interim payment is due, from which party and in what amount. This conclusion flows from the following fundamental principles:


 


(a)          the presumption at law that a contractor is not entitled to payment until completion of the entire contract;


 


(b)          the language of CCA, section 40, which characterises progress payments as interim payments on account only;


 


(c)          the general structure of the CCA as an Act governing the content and administration of construction contracts rather than establishing a regime which either supersedes or operates independently alongside the contractual payment regime;


 


(d)          the fact that adjudications are regulated by one part of a single Act concerned solely, as even its name suggests, with regulating the content, administration and performance of construction contracts;


 


(e)          the language of CCA, section 25, whereby the adjudicator’s discretion is enlivened only “if a payment dispute arises under a construction contract” (emphasis added);


 


(f)           Beech J.’s judgment in O’Donnell Griffin Pty Ltd v John Holland Pty Ltd [2008] WASC 58; and


 


(g)          The second reading speech in relation to the Construction Contracts Bill.


 


This is general information only, and does not constitute specific legal advice. Murray Thornhill is the Director at HHG Legal Group with the Litigation/Commercial Law team. Daniel Morris is a Senior Associate with the Litigation/Commercial Law team at HHG Legal Group. If you would like further details in relation to this information, please contact HHG Legal Group on 1800 609 945 or email our office.

 

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