The Western Australian Supreme Court has provided additional guidance on the types of errors that can lead to an adjudicator's determination being quashed by the court. The Delmere Holdings Pty Ltd v Green decision is of interest to anyone who deals with security of payment adjudications under the Construction Contracts Act 2004 (WA). Partner-elect Jeremy Quan-Sing and Law Graduate James Illich report.
How does it affect you?
- Where the variation mechanism under a construction contract provides for a contractor to first provide an initial estimate of the cost of performing a variation, and subsequently to make a claim for payment for that variation, a rejection of the initial variation estimate will not trigger a 'payment dispute' for the purposes of the Construction Contracts Act 2004 (WA) (the CCA).
- Determinations may be open to being quashed on the basis of jurisdictional error where an adjudicator attempts to apply legal concepts in a manner that cannot be reconciled with the current state of the law.
- A quantum meruit claim is not a claim arising under a construction contract, and therefore cannot be adjudicated under the CCA.
- An adjudicator cannot refuse to consider a document solely on the basis that it has only been provided by one party to the adjudication (and not the other party).
In December 2013, Delmere and Alliance entered into a construction contract under which Alliance agreed to carry out piping works in the Pilbara region of Western Australia.
The variation mechanism under the contract prescribed as follows:
- The contractor was required to provide an estimate of the cost of performing a variation within 10 days of a direction to vary (clause 34(d)).
- The contractor was then required to submit more detailed information relating to the cost of the variation within 30 days of the direction to vary (clause 34(e)).
- The engineer was required to assess the variation claim 'as soon as practicable after the claim is made' (clause 34(g)).
- Entitlement to payment for variations was dealt with under clause 39, which was the general provision for progress payment claims.
Alliance submitted a 'variation claim' (VC17) stating on its face that it was submitted in accordance with clause 34(d), being the provision of the contract requiring the initial estimate of likely cost of variation. VC17 set out the estimated costs of performing the variation. Delmere responded negatively to the estimate. Alliance relied on this 'rejection' as the basis of an adjudication application made on 7 November 2014.
On 10 November 2014, three days after making its adjudication application, Alliance submitted an invoice to Delmere for the variation costs (Invoice 24). Alliance did not provide a copy of Invoice 24 to the adjudicator. Delmere included Invoice 24 as part of its adjudication response.
The adjudicator found that the rejection of the initial variation estimate was sufficient to trigger a payment dispute for the purposes of the CCA. He refused to consider Invoice 24 in his determination on the basis that only Delmere had submitted it, and not Alliance. The adjudicator was not legally qualified and his reasoning sought to apply concepts of unjust enrichment and equity in a manner that was not reconcilable with the state of the common law.
The adjudicator subsequently made a determination in favour of Alliance, and Delmere was required to pay $873,011.87. Delmere applied to the Supreme Court to quash the determination.
Was VC17 a 'payment claim'?
The central issue in the proceeding was the adjudicator's finding that VC17 was a 'payment claim' sufficient to trigger a payment dispute. Delmere argued that, at the time of Alliance's adjudication application, Alliance had not made a payment claim for the purpose of the CCA. Delmere submitted that VC17 was merely an estimate of the costs of a variation for the purposes of clause 34, and that the true payment claim was Invoice 24. If so, there had been no 'payment dispute' at the time Alliance applied for an adjudication, and the adjudicator therefore did not have jurisdiction. Alliance maintained that VC17 was a payment claim.
Justice Kenneth Martin examined the terms of the contract and found that VC17 was expressed to be submitted pursuant to clause 34(d), and that this provision did not deal with a claim for payment of money. It merely provided for the subcontractor to submit an estimate of the costs of performing a variation. As such, VC17 was not a payment claim for the purpose of the CCA, and therefore there was no payment dispute at the time Alliance had applied for an adjudication. The determination was quashed on this basis.
Could the adjudicator only consider a document that was provided by both parties?
Alliance issued Invoice 24 to Delmere after making its adjudication application. However, it did not provide a copy to the adjudicator. Delmere included the invoice in its adjudication response, arguing that it was critical to the issue of determining whether there was a payment dispute. Delmere asserted that Invoice 24 was the 'payment claim' for the purposes of the CCA, and made it clear that the variation estimate had not been a claim.
The adjudicator had refused to consider Invoice 24 because only Delmere had submitted it as part of the adjudication process.
Justice Martin held that the adjudicator's failure to appreciate the significance attached to Invoice 24 (as the real payment claim), as well as his refusal to even consider it in the circumstances, was a clear demonstration of fundamental jurisdictional error. It was also sufficient to quash the determination.
Did a quantum meruit claim arise under the contract as required by the CCA?
The adjudicator had, in his reasoning, talked about Alliance's claims in terms of those claims being akin to claims for quantum meruit.
While his Honour rejected any notion of Alliance's claim being a quantum meruit claim, he interestingly also stated that a quantum meruit claim could only arise outside of the contract. As such it would not be a claim 'under' a construction contract as required under part 3 of the CCA, and could not be the subject of an adjudication. His Honour made similar comments that claims for unjust enrichment would not be claims made 'under' a construction contract.
Incorrect application of Australian Law
His Honour stated that the adjudicator's comments in relation to unjust enrichment and rights in equity were 'incoherent ' and 'simply not possible…to reconcile with the current state of Australian law'. He stated that this alone was sufficient for a finding that there had been a jurisdictional error sufficient to quash the determination itself. This builds upon his Honour's comments in Red Ink Homes Pty Ltd v Court  WASC 52 to the effect that, despite adjudication determinations not being open to challenge for error of law, there is a threshold at which a decision will be so 'arbitrary or irrational' that it will constitute a jurisdictional error.
This case is a useful reminder that, for parties responding to an adjudication application:
- close attention should be paid to the express terms of a contract to determine if, and when, a 'payment dispute' for the purposes of the CCA can be said to arise;
- adjudication determinations that contain reasoning which is completely 'arbitrary or irrational' might be open to judicial review.