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Focus: SOPA adjudications in Western Australia – only the applicant can win!

3 July 2014

In brief: The Supreme Court of Western Australia has held that under that state's security of payment legislation, an adjudicator does not have the power to make a determination that requires an applicant to pay the respondent money by reason of any counterclaim raised in the adjudication. An adjudicator may consider the counterclaim, but only in the context of whether any amount is payable to the applicant. A respondent who seeks to recover money by reason of a counterclaim must initiate a separate adjudication. Partner Michael Hollingdale , Managing Associate Jeremy Quan-Sing and Associate Helen Dolling report.

How does it affect you?

  • If you receive a payment claim that might be adjudicated, and think that you have a counterclaim, consider issuing a separate payment claim of your own.
  • If you are responding to an adjudication application and anticipate that, once the claim and your counterclaim are considered, the net flow of money would be to you, you will need to commence a separate adjudication application to recover money under the counterclaim.
  • If you are a counterclaimant, consider the use of the consolidation provisions under the Construction Contracts Act 2004 (WA) (the CCA) to ensure that claims and counterclaims are adjudicated in the most efficient and cost-effective manner.

Background

Tenix SDR Pty Ltd and Alliance Contracting Pty Ltd entered into a sub-contract under which Alliance was engaged to do construction work for the Karratha waste water treatment plant. When Tenix certified practical completion, it claimed that Alliance was liable for liquidated damages of approximately $900,000. In response, Alliance gave Tenix a formal notice of dispute, alleging that Tenix was in breach of the sub-contract for claiming liquidated damages, and subsequently issued its final payment claim and invoice for approximately $9 million.

Tenix made an adjudication application under the CCA which defined the payment dispute as being the dispute over the liquidated damages it had claimed. Alliance did not commence an adjudication application of its own. Instead, in its response to Tenix's adjudication application, Alliance contended that Tenix owed it money due to its final payment claim.

The adjudicator considered the merits of the competing claims and found that when all claims were considered, Tenix had to pay Alliance money, with the net balance of the claim and counterclaim being approximately $6 million in favour of Alliance. However, the adjudicator also found that he did not have power under the CCA to order that any sum be paid by Tenix to Alliance. Therefore, as nothing was due to be paid to Tenix, the adjudicated amount was nil.

Alliance brought judicial review proceedings, asserting that the adjudicator had power to determine that a sum was payable by Tenix to Alliance and was wrong to conclude otherwise.1

The decision

Justice Beech found that:

  • The adjudicator was correct in determining that a nil sum was payable to Tenix and that the adjudicator did not have jurisdiction to make an order that Tenix pay a sum to Alliance.
  • The power of an adjudicator in relation to payments is confined to the specific payment dispute before the adjudicator (which is defined by the payment claim in dispute). The payment dispute before the adjudicator related to Tenix's claim for liquidated damages only, and did not include Alliance's final payment claim.
  • Although the merits of a respondent's counterclaim may be considered by an adjudicator in relation to whether the respondent has to pay any money to the applicant, the counterclaim is not subsumed into the payment dispute being adjudicated.
  • Despite being factually related, the claim and counterclaim were two separate payment disputes arising from two separate payment claims.
  • Neither party had triggered an adjudication in relation to Tenix's rejection of Alliance's final payment claim. The timeframe within which that could be done had expired.

The effect of the decision

A respondent to an adjudication application will now need to consider whether it has a counterclaim and whether it should trigger a separate adjudication application of its own in response.

Given that a respondent cannot have an adjudication determination in its favour unless it triggers a separate adjudication relating to a counterclaim there is likely to be an increase in the number of adjudication applications made. Parties need to make sure they protect their interests by ensuring the net cash flow between the parties by reason of CCA adjudications reflects the true position when all claims are considered.

With more payment claims being made, and payment disputes arising, contracting parties will need to be more vigilant than ever when monitoring the relevant timeframes within which adjudication applications may be made. We note that the Western Australian Department of Commerce has announced the long awaited review of the CCA and perhaps this is something that will be considered.

Footnotes
  1. Alliance Contracting Pty Ltd v James [2014] WASC 212.

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