Can an adjudicator determine a payment in favour of a respondent on its counterclaim? Alliance Contracting Pty Ltd v James [2014] WASC 212

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25 June 2014 | By Chris Ryder (Partner)

The recent decision by Justice Beech of the Western Australian Supreme Court in Alliance Contracting Pty Ltd v James [2014] WASC 212 has clarified the scope and operation of section 31(2) of the Construction Contracts Act 2004 (WA) (the Act). That section, relevantly, empowers an adjudicator to determine whether ‘any party’ to a payment dispute is liable to make a payment. The question before the Court was whether use of that phrase opened the way for a respondent to counterclaim and for the adjudicator to determine a net payment in favour of the respondent.

Summary

This decision is important because it stands as authority for the proposition that a determination by an adjudicator (pursuant to section 31(2) of the Act) is limited to the payment dispute before him or her as constituted by the application for adjudication, which is usually restricted to whether the recipient of the payment claim is liable to make a payment in respect of that payment claim.

This decision is also important because it confirms a line of Queensland authorities[1] that have held that an adjudication determination that is infected by jurisdictional error cannot be severed.[2]

The facts

The second respondent, Tenix SDR Pty Ltd (Tenix) engaged the applicant, Alliance Contracting Pty Ltd (Alliance), to undertake works for the construction of a wastewater treatment plant in Karratha pursuant to the terms of a subcontract.

The subcontract provided a mechanism for the subcontractor (Alliance) to make a final claim and the main contractor (Tenix) to issue a final certificate. On 13 September 2013, Alliance submitted its final claim pursuant to the subcontract. By that final claim, Alliance claimed the sum of $8,928,986.16 from Tenix. 

Following an assessment of Alliance’s final claim, Tenix issued its final certificate pursuant to the subcontract on 11 October 2013. By that final certificate, Tenix rejected the claims set out in Alliance’s final claim and assessed that there was a sum finally due and owing under the subcontract from Alliance to Tenix in the amount of $3,676,815.70.

Alliance did not make any application for adjudication under the Act in relation to Tenix’s rejection of the  final claim.  Under the Act, any application, by Alliance, for adjudication in respect of that payment dispute had to be commenced by 8 November 2013.

On 25 October 2013, Alliance submitted a notice of dispute under the subcontract by which it notified Tenix that it disputed the claims made by Tenix against Alliance in the final certificate. On 22 November 2013, Tenix made its own application for adjudication under the Act in respect of that dispute of Tenix’s claim as set out in its final certificate. Tenix sought a determination that Alliance pay it $3,342,560.33.[3] The first respondent, Mr Laurie James, was appointed as the adjudicator.

The claims made by Alliance in its adjudication response, essentially, reproduced the claims that it had advanced in its final claim under the subcontract.

The adjudicator published and provided his determination to the parties on 20 December 2013.[4] The adjudicator considered that in order to assess Tenix’s payment claim, it was necessary for him to assess the merits of Alliance’s competing and interdependent claims (the subject of Alliance’s final claim).

The adjudicator largely (but not entirely) found merit in the claims advanced by Alliance in its adjudication response and made a finding that the amount finally due and owing under the subcontract was an amount of $6,242,232.90 from Tenix to Alliance. However, he considered that section 31(2)(b) of the Act confined his power of determination to whether payment should be ordered in respect of Tenix’s claims in its adjudication application, and not the counterclaims advanced by Alliance in its adjudication response. For that reason, the adjudicator determined that no amount was payable from Alliance to Tenix but did not order that any amount was payable by Tenix to Alliance (notwithstanding his view that the final balance between the parties should be $6,242,232.90 in favour of Alliance).

Alliance applied for judicial review of the adjudicator’s decision on the grounds that the adjudicator had failed to exercise his jurisdiction. Alliance submitted that the adjudicator’s failure arose because he had (wrongly) found that he did not have jurisdiction to order any sum to be paid in favour of Alliance. The adjudicator’s finding that his power to make a determination was confined to whether payment should be ordered in respect of Tenix’s claims constituted, Alliance submitted, a jurisdictional error.

Consequently, the proper construction of section 31(2)(b) of the Act was put squarely before the Court.

Alliance’s submissions

In relation to the proper construction of section 31(2)(b) of the Act, Alliance submitted that:

  1. the words ‘any party’ in that section are to be read broadly and generally such that those words encompassed not only the respondent in an adjudication application, but also the applicant; and
  2. if the legislature had intended to restrict an adjudicator’s powers to award a payment in favour of an adjudication applicant, it could (and would) have done so in clear terms.

In relation to what constituted the relevant ‘payment dispute’ (for the purposes of section 31(2)(b) of the Act) in this case, Alliance submitted that:

  1. the relevant payment dispute constituted the dispute over the competing contentions advanced by each party in the final certificate payment claim; and
  2. when Alliance rejected Tenix’s final certificate on the grounds of its competing claims, the payment dispute that arose encompassed both parties’ claims.

Accordingly, Alliance submitted that an adjudicator was empowered to determine that a sum is payable in respect of the counterclaim raised in the respondent’s response to the adjudication application.

The Court’s decision

In relation to the words ‘any party’ in section 31(2)(b) of the Act, Justice Beech said (at [53]):

There is a limit to the work that can be done by the broad words 'any party'. Those words do not mean that the adjudicator has a free-floating power to determine, without reference to the payment dispute, that a sum is payable by an applicant to a respondent. An adjudication under pt 3 of the Act is confined to a payment dispute. Section 25 provides for parties to construction contracts to apply to have a payment dispute under the contract adjudicated. See also s 26, s 30 and s 31. Section 31(2) of the Act must, of course, be read as a whole, and construed in the context of the Act as a whole. The words 'determine ... whether any party to the payment dispute is liable to make a payment' mean to determine whether any party to the payment dispute is liable to make a payment in respect of the payment dispute. As Pritchard J has observed [in Cape Range Electrical Contractors Pty Ltd v Austral Construction Pty Ltd [2012] WASC 304 at 55], the area of enquiry for the adjudicator is confined to the payment dispute. The power of the adjudicator in relation to payments is likewise confined.

His Honour considered that the characterisation, and proper identification, of the payment claim, the payment dispute and the scope of the adjudicator’s powers were of importance.  His Honour rejected Alliance’s characterisation of the payment dispute and said (at [62]) that, in this case, the payment dispute “was constituted by Alliance’s rejection or disputation of Tenix’s payment claim. On that view, the payment dispute relates to whether, as Tenix claimed by its final certificate, Alliance was liable to pay the sum claimed by Tenix in its final certificate ...”.

In relation to the power conferred upon an adjudicator under section 31(2)(b) of the Act, His Honour was of the view that the determination by an adjudicator of whether any party to a payment dispute is liable to make a payment involves, and is limited to, determining whether the recipient of the payment claim is liable to make a payment in respect of that payment claim.

His Honour considered that where a respondent to a payment claim asserts a counterclaim that contends that the party making the payment claim is, in fact, liable to the respondent, such a counterclaim is not, itself, subsumed into the payment dispute that arises from the respondent’s rejection of that payment claim (even if the payment claim and the counterclaim are factually overlapping or intertwined).  Instead, the respondent’s counterclaim is itself a separate payment claim, the rejection of which will give rise to and constitute a further payment dispute.

Section 26(1) of the Act provides that a party can apply to have a payment dispute adjudicated provided that it prepares and serves an adjudication application within 28 days after that dispute arises. In oral submissions, Alliance had conceded that one consequence of its construction of section 31(2)(b) of the Act was that it would allow a respondent, whose right to have a payment claim determined had previously expired, to revive that right (to have that payment claim adjudicated) by virtue of the respondent including that payment claim as a counterclaim in a subsequent adjudication. His Honour was of the view that this consequence militated against Alliance’s construction of the Act. His Honour considered (at [71]) that the payment claim by each party gives rise to a separate payment dispute once each payment claim is disputed.

His Honour ultimately considered (at [75]) that, on a proper construction of section 31(2)(b) of the Act:

  1. an adjudicator’s power to determine that a party is liable to make a payment arises only in respect of the payment claim, the disputing or rejecting of which gives rise to and constitutes the payment dispute the subject of the adjudication application; and
  2. the adjudicator’s function is to determine the merits of the payment claim, the disputing of which constitutes the payment dispute, and to determine whether any party to that payment dispute is liable to make a payment in respect of that payment claim.

For these reasons, His Honour was of the opinion (at [92]) that the adjudicator was correct in concluding that his power to make a determination was confined to whether payment should be ordered in respect of Tenix’s claims.

Why is this decision important?

This decision has consequences for the administration of construction contracts and the preparation of applications for adjudication in Western Australia. Following this decision, parties must be careful, when responding to any claims for payment made by another party to their construction contract, to identify the substance of those claims and keep track of each occasion that those claims are disputed.

The respondent to an application should carefully consider:

  1. the substance of the relevant ‘payment claim’ and ‘payment dispute’ and whether any claims or counterclaims that are sought to be raised are, in fact, responses to the initiating payment claim and not to a separate (although related) payment claim; and
  2. whether the adjudicator has the power to provide relief on any counterclaim. 

The power of the adjudicator is ultimately framed by the payment dispute before him or her.  It is generally for the applicant to frame the payment dispute. Accordingly, adjudication applicants should carefully consider how to frame the payment dispute, for fear that careless drafting could open up the adjudicator’s jurisdiction to determine that the applicant must make a payment to the respondent.


 [1] See for example BM Alliance Coal Operations Pty Ltd v BGC Contracting Pty Ltd [2013] QCA 394.

 [2] The issues of jurisdictional error and severance of an adjudication determination are beyond the scope of this article.

 [3] Tenix had, following the issue of the final certificate and during the course of preparing the adjudication application, reviewed its assessment of the amount finally due and owing under the subcontract such that the net amount due from Alliance was slightly reduced.

 [4] An amended determination was made on 16 January 2014 by which the adjudicator set out reasons why he had not made the determination in favour of Alliance.


The content of this publication is for reference purposes only. It is current at the date of publication. This content does not constitute legal advice and should not be relied upon as such. Legal advice about your specific circumstances should always be obtained before taking any action based on this publication.


Contacts

Chris Ryder

Partner. Perth
+61 8 9460 1606

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