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Errors in Security of Payment: does one bad apple spoil the barrel?

The Security of Payment regime is infamously inflexible and technical, demanding that parties and their lawyers adhere rigidly to the rules and procedure set out by the Security of Payment Act (SOP Act). The neglect of seemingly small details has led to entire adjudications being voided for lack of jurisdiction or for denial of procedural fairness.

In Rhomberg Rail Australia Pty Ltd v Concrete Evidence Pty Limited [2019] NSWSC 755, the Supreme Court of NSW was asked at what point will clerical errors lead to a judgment being quashed for want of natural justice and procedural fairness.

This case lends itself to the position that a respondent cannot challenge an adjudicator’s determination for denial of natural justice unless the circumstance in question is substantial enough to effect to the outcome of the determination.

In exercising their discretion as to whether natural justice has been denied, the Court will apply an assessment of reasonableness. In deciding on any relief, the Court may also determine that part of the determination that is affected by error can be severed from the part that is not.

Facts

Rhomberg Rail Australia (Rhomberg) engaged Concrete Evidence (Concrete) under a subcontract to lay reinforced concrete for the track slab in connection with a light rail project in Newcastle. The Contract Sum for the works was $3,146,278.36 (excluding GST). During the term, Concrete lodged and adjudication application for $1,061,800.61 (the balance owing under the subcontract and in respect of 119 variations), in which Concrete referred to a register of variations as being enclosed under Tab 7 of the application.

By way of clerical error, Tab 7 was incomplete, such that every other page was missing, resulting in reference to some variations being omitted. However, Tab 8 housed supporting documents in respect of all variations in the register under Tab 7, including for those variations omitted by clerical error under Tab 7. The submissions in Concrete’s application referred to some variations omitted in Tab 7. Both Rhomberg and the Adjudicator received copies of the application with the same clerical error.

Rhomberg served its adjudication response and stated in its submissions that “given the Claimant’s withdrawal of all variations which do not appear in Tab 7, the Respondent has not addressed those variations in this Adjudication Response.”

The Adjudicator, in providing his determination, said “the Respondent considers that the variations not shown in tab 7 have been withdrawn by the Claimant. I do not agree. The adjudication application is to be read as a whole including the amounts included in the payment claim, those disputed in the payment schedule and the submissions made.”

Rhomberg disputed the determination on the grounds that the Adjudicator denied it procedural fairness because the Adjudicator dealt with variations without giving Rhomberg an opportunity to make submissions in relation to them.

Judgment

Ball J found that there was no substantive denial of procedural fairness in respect of the omitted variations.

His Honour determined that in order to ascertain whether Rhomberg had been denied procedural fairness, the assessment would fall to whether Rhomberg ought reasonably to have concluded that Tab 7 was incomplete and that the adjudicator might deal with all the claims set out in Tab 8.

At [20], Ball J stated:

“In my opinion, a person acting reasonably would at least have appreciated that there was an inconsistency between Tab 7 and Tab 8 and therefore appreciated that there was at least a risk that the Adjudicator would proceed with his adjudication by reference to Tab 8 rather than Tab 7. That conclusion is reinforced by the fact that some of [Concrete’s] submissions specifically included references to variations that were not referred to in the Tab 7 schedule. It follows that [Rhomberg] ought reasonably to have appreciated that the Adjudicator might deal with all the Tab 8 variations. That is what the Adjudicator did. Consequently, [Rhomberg] was not denied procedural fairness.” (emphasis added)

Further, His Honour reasoned that the evidence to which Rhomberg argued it had no knowledge of, were the very variations that had been the subject of previous claims and correspondence between the parties, which “must be understood as referring back to what had previously been said in relation to those variations.”

To the question of whether Concrete was entitled to recover in respect of those variations omitted under Tab 7, Ball J at [25] said, reserving Rhomberg’s rights on appeal:

[T]he adjudication determination should be set aside only to the extent that the Adjudicator determined that [Concrete] was entitled to recover in respect of variations on which [Rhomberg] was not invited to make submissions on and on which it could have made submissions consistently with s 20(2B) of the SOP Act.” (emphasis added)

His Honour found for Concrete, agreeing with their submissions, that Rhomberg was not denied procedural fairness because:

  1. it was evidenced that the Adjudicator might proceed to deal with the claims referred to in Tab 8;
  2. any denial of procedural fairness was not substantial as there were no further submissions of substance that Rhomberg could have made; and
  3. if there was a denial of procedural fairness, it did not affect the whole determination and Concrete should be entitled to recover the unaffected portion of its claim.

Commentary

The New South Wales Courts seem to be moving towards a more practicable position in their application of the SOP Act and in exercising their discretion on denial of natural justice considerations. Though other jurisdictions maintain a far stricter interpretation of the requirements of the SOP Act (see Niclin Constructions Pty Ltd v SHA Premier Constructions Pty Ltd & Anor [2019] QSC 91; Conveyor & General Engineering Pty Ltd v Basetec Services Pty Ltd and Anor [2014] QSC 30), the approach in New South Wales appears to prioritise the merits of a matter over strict statutory compliance.

There are two key takeaways from this decision:

  1. a denial of natural justice, of which a denial of procedural fairness is a species, may give rise to jurisdictional error on the part of an adjudicator to determine a payment claim under the SOP Act, in circumstances where a party could not reasonably have anticipated that either the adjudicator or the other party would rely upon the issue or principle concerned; and
  2. the generally accepted position in Fulton Hogan Construction Pty Ltd v Cockram Construction Ltd [2018] NSWSC 264, that the effect of a jurisdictional error will render a determination void, on the basis that a determination is a single determination of a single payment claim, is no longer the favored position in New South Wales. Following the position in the Court of Appeal in YTO Construction Pty Ltd v Innovative Civil Pty Ltd [2019] NSWCA 110, Ball J found that part of a determination affected by error can be severed from that part that is not so affected.

It would be an interesting exercise to consider what the Court’s position would have been had the clerical error only affected Rhomberg’s copy of the adjudication application and not the adjudicator’s (see section 17(5) SOP Act), and whether such a difference would amount to a denial of natural justice and lend itself to the same conclusions.

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