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Natural justice in adjudication under the Security of Payment Act

Various iterations of the Building and Construction Security of Payment Act (“the Act”) operate in numerous states and territories providing a fast-paced and streamlined payment process for builders and other industry participants.

Adjudication is a cost efficient and effective mechanism used under the Act to settle disputes about payments. Adjudicators, as the title implies, hear the assertions of each party and ‘adjudicate’ or make a judgment on their assertions regarding a dispute.

Problems can however arise when an adjudicator does not actually ‘adjudicate’ but make a decision based on reasoning that none of the parties were arguing about. Can such adjudication under the Act be binding? As illustrated in the recent Queensland case of Caltex Refineries (Qld) Pty Ltd & Anor v Allstate Access (Australia) Pty Ltd & Ors [2014] QSC 223 (‘Caltex v Allstate’), the decision may not be valid as it denies the parties natural justice.

What happened in Caltex v Allstate?

Caltex hired scaffolding equipment from Allstate in performing its refinery work. Caltex paid for scaffolding on a tonnage basis and used the material for long-term work at two different sites. It was understood by the parties that under the respective contract, Caltex was required to replace any damaged scaffolding at its own cost. After a few years, Allstate found that more than half of the scaffolding was damaged. Allstate issued payment claims that were primarily for the cost of replacing the scaffolding.

The payment claims that Allstate issued were in excess of $3 million for one site and $4 million for the other. Caltex disputed the payments, saying there was a material difference between Caltex having to replace the goods and paying Allstate for the replacement costs. Caltex argued it had to replace the damaged equipment, not pay Allstate for the costs of replacing them.

Allstate was not satisfied with Caltex’s response and Allstate proceeded to adjudication under the Act. At adjudication, Allstate argued that Caltex was responsible for any damaged equipment and Caltex had on a number of other occasions paid off and settled such payment claims. They argued that there was no express term in the contract, but the payment was for a breach of an ‘implied’ term of the contract.

Caltex argued that this was not the case. They argued that there was no term in the contract for Caltex to pay Allstate for damaged equipment. They also argued that Allstate had not pin-pointed to any specific term in the contract.

Adjudicator’s decision

Quite oddly, the adjudicator settled the dispute on the basis that there was an express term in the contract that stated Caltex had to pay for replacement of the damaged scaffolding at its own cost. Neither Allstate nor Caltex argued for this conclusion –which appeared to be based on the adjudicator’s own reading of the contract.

Court’s findings – denial of natural justice

Caltex resorted to Court proceedings to dispute the adjudicator’s decision. Caltex argued a number of points, but two of their arguments were that the adjudicator erred with the contract interpretation and that they were denied natural justice.

The Court essentially agreed with Caltex. Not only was the adjudicator’s reasoning flawed, but Caltex was denied natural justice because it was not provided with an opportunity to argue about the point that adjudicator decided upon. On the same note, the adjudicator’s decision was different from Allstate’s arguments and submissions and it was also wholly inconsistent with any of the parties’ arguments.

In coming to the above conclusion, it was unnecessary for Caltex to prove that it could have persuaded the adjudicator had they been given the opportunity. The relevant fact was that they were deprived of their opportunity to argue on the adjudicator’s reasoning of the decision. As a result, the adjudicator’s decision was deemed to be ineffective.

Conclusion

Caltex v Allstate is a good example that demonstrates the importance of natural justice in adjudication. Each party should be able to argue their case based on documents they provide under the Act and the adjudication should be based on what the parties are disputing about. If the adjudicator wholly decides the case on reasoning that no party raises – then you may question whether you were provided with natural justice in the adjudication process.

If you require legal advice in relation to adjudication or about the Building and Construction Security of Payment Act, then we advise that you seek advice from Chamberlains Law Firm.

Contact:

Stipe Vuleta

E: stipe.vuleta@chamberlains.com.au

P: 02 6215 9100

 

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