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Suspension of relief: take out notices, jurisdictional error and Security of Payment Act

In Parrwood Pty Ltd v Trinity Constructions (Aust) Pty Ltd, the Court confirmed that, for the purposes of the Building and Construction Industry Security of Payment Act 1999 (NSW) (SOPA), taking the work out of the hands of a contractor will not remove reference dates accrued before the take out notice is served, even if they are not actually used until after the take out notice is issued.

Although the facts were unusual and complicated, in the unique world of the SOPA they are not unheard of. This note is useful for parties considering whether:

  1. to issue a take out notice instead of a termination notice (particularly for NSW construction contracts entered into before 21 October 2019); or
  2. to withdraw an adjudication application in the event of jurisdictional error by an adjudicator on the first determination, to re-lodge before a new adjudicator.

The facts

The contractor was working under the principal in a residential building project. The contractor accrued reference dates on the 25th day of each month. The contract contained an AS standard clause where the contractor fails to show reasonable cause for its default:

“the Principal may by written notice to the Contractor:

(a) take out of the Contractor’s hands the whole or part of the work remaining to be completed and suspend payment until it becomes due and payable pursuant to subclause 39.6; or

(b) terminate the Contract.”

The parties fell into dispute and the principal asked the contractor to show cause.

Then:

  • on 25 August 2019, the monthly reference date for a SOPA claim came about;
  • on 3 September 2019, the principal issued a notice that took out of the contractor’s hands all of the work remaining to be completed, instead of terminating the contract; and
  • on 6 September 2019, the contractor issued a payment claim in the amount of $2,023,645.76. This payment claim was said to use the 25 August 2019 reference date.

In response, the principal scheduled “$Nil”.

The contractor applied for adjudication under the SOPA. The adjudicator declined to determine an amount that the contractor was owed (if any), finding the payment claim was invalid.

After it received the first adjudicator’s decision, the contractor “withdrew” its application, and made a second adjudication application. The contractor argued that the first adjudicator had failed to exercise his statutory function in declining to determine the amount owing. The second adjudicator considered the application and awarded over $400,000 to the contractor. The principal applied to the Supreme Court to set aside the second adjudication determination.

There were two broad issues that the Court was required to consider.

Suspension and payment claims

The first issue was what effect the take out notice had on the ability to issue payment claims.

The Court found that even though the payment claim was served after a take out notice, it was saved by the fact that it was served for a reference date occurring before the take out notice was made.

The outcome would have been different if the take out notice was served before the reference date. In this case, the contractor’s rights are suspended by the take out notice, and it cannot make a payment claim under the fast-track SOPA. It can, however, still make a claim under general law.

A take out notice cannot extinguish a right to make a payment claim that already exists.

Second Adjudication

Jurisdictional error

The second issue concerned the unusual circumstances in which a claimant may effectively redo its application.

The Court found that the first adjudicator had not made a ruling that, for example, the contractor was entitled to “$Nil”. Rather, the adjudicator had decided that, no matter what he thought about the facts, he could not determine any adjudicated amount (“I must decline therefore from determining …”).

The first adjudicator had failed to determine the amount of the progress payment (if any) to be paid, as required under section 22(1) of the SOPA. Therefore, the first purported determination was void.

Making a second application

Section 26(3) of the SOPA allows for a claimant to withdraw an application and make a new adjudication application, if the adjudicator accepts the application but then “fails to determine the application within the time allowed”. The claimant must withdraw and make the new application within five business days after it is entitled to withdraw the previous adjudication application.

This may occur where the adjudicator has made a jurisdictional error in failing to determine the application.

If the original decision is decided by a court to be valid (because there was no jurisdictional error), then the second application is wasted. However, if the original decision is declared void, then the second application may still be valid.

Conclusion

It pays to be aware of when reference dates arise, and when take out notices can and should be served. Principals concerned to issue effective take out notices should be mindful of existing reference dates which have or may accrue before that notice.

Claimants should be keenly aware of the existence of any jurisdictional error on the part of adjudicators. Such error may allow them to re-lodge an adjudication application.

 

 

Is the arbitration agreement “not applicable”?

In Gemcan Constructions Pty Ltd v Westbourne Grammar School [2020] VSC 429, Lyons J of the Victorian Supreme Court (VSC) was required to consider whether the terms of the contract contained a valid arbitration agreement within the meaning of s 7 of the Commercial Arbitration Act 2011 (Vic) (CAA). His Honour found that inserting the words “Not Applicable” or “N/A” into corresponding items of Annexure Part A in an otherwise unamended Australian Standard (AS) contract may not evince the necessary intention that relevant clauses do not otherwise apply.

The case not only provides insight into when the court will find that a binding arbitration agreement exists, but also suggests that caution is required at the time of drafting an AS contract.

The case is relevant Australia-wide concerning the application of the CAA because uniform legislation has been enacted in all Australian states and territories.

Facts

On or about 25 July 2016, Gemcan Constructions Pty Ltd (Gemcan) entered into a contract for works to take place at Westbourne Grammar School’s (WGS) Williamstown Campus in Victoria. The contract was a standard form AS 4000-1997 which included the usual:

  • AS 4000 -1997 General Conditions of Contract;
  • particulars at Annexure Part A; and
  • deletions, amendments and additions at Annexure Part B.

A dispute arose between the parties via the exchange of a payment claim and payment certificate issued under their contract. The value of the dispute was circa $1.4 million and included contract works claims, variations, other heads of additional cost, extensions of time, liquidated damages, interest and retention.

Clause 42 of the contract was the dispute resolution clause. Clause 42.2 provided that (inter alia):

If the dispute has not been resolved within 28 days of service of the notice of dispute, that dispute shall be and is hereby referred to arbitration.

Clause 42.3 then went on to provide:

If within a further 14 days the parties have not agreed upon an arbitrator, the arbitrator shall be nominated by the person in Item 32(a). The arbitration shall be conducted in accordance with the rules in Item 32(b).

However, Items 32(a) and 32(b) respectively in Annexure Part A were completed with the words “Not Applicable”.

As the dispute had not been resolved in the time specified in clause 42.2, Gemcan sought to refer the dispute to arbitration and put WGS on notice of its preferred arbitrator.

WGS responded disputing that there was an arbitration agreement in existence because by the parties completing Annexure Part A items with “Not Applicable”, the parties had evinced an intention that its disputes would not be referred to arbitration. If there was no valid arbitration agreement within the meaning of the CAAs, the CAA would not apply and WGS could not be forced to arbitrate.

WGS also disputed Gemcan’s choice of arbitrator, chiefly because he was around twice as expensive as WGS’s selection – a more junior barrister. Gemcan’s view was that its arbitrator was much more experienced in arbitrations generally and had greater legal expertise, as he was senior counsel.

Decision

Lyons J determined:

  • clause 42.2 of the contract constituted a valid agreement to refer the dispute to arbitration, so that the CAA applied; and
  • Gemcan’s arbitrator should be appointed pursuant to s 11 of the CAA.

Whether or not there has been a valid arbitration agreement is a precondition to the application of the CAA. Section 7 of the CAA provides the requirements for a valid arbitration agreement.

Lyons J held that an agreement to arbitrate was evident on the terms of the contract because:

  1. clause 42.2 is ‘clear and unambiguous in its terms’.[1] The last sentence of the standard-form clause evince a clear and objective intention that disputes arising under the clause are to be referred to arbitration if they are not resolved within 28 days of the notice of dispute issuing;
  2. the use of the words “Not Applicable” in Items 32(a) and (b) of Annexure Part A do not evince an intention to negate the referral to arbitration because they only refer back to clause 42.3, not clause 42.2. Clause 42.3 only provides for the procedural aspects of the arbitration, not the agreement to arbitrate itself. In the absence of an agreement regarding procedural aspects (including the arbitrator to be appointed and applicable rules, ss 11(3) and 19(2) of the CAA steps in to provide a mechanism for decisions to be made on those issues). Those procedural mechanisms ‘are not essential characteristics of an enforceable arbitration agreement[2];
  3. the parties could have used Annexure B to make necessary amendments to delete the offending words from clause 42.2, but they did not do so.

Further, Lyons J accepted Gemcan’s proposed arbitrator on the basis that the arbitration was:

  1. likely to be both factually and legally complex;
  2. significant in quantum (and thus the importance to the parties);
  3. likely to require clear and precise written reasons.

The arbitrator proposed by Gemcan was more expensive, however he had more experience in contested and complex arbitration decisions such that the choice was ‘likely to result in the arbitration being conducted in the most efficient way’.[3]

Take Home Tip

If you do not want your standard-form contract to refer you to arbitration, you must do more than insert “Not Applicable” into relevant Items in Annexure Part A. You must ensure that the General Conditions of Contract are correctly amended so that you are not forced into arbitration.