GRC GROUP PTY LTD and KESTELL
[2015] WASAT 11
•6 FEBRUARY 2015
JURISDICTION : STATE ADMINISTRATIVE TRIBUNAL
ACT: CONSTRUCTION CONTRACTS ACT 2004 (WA)
CITATION: GRC GROUP PTY LTD and KESTELL [2015] WASAT 11
MEMBER: MR M SPILLANE (SENIOR MEMBER)
HEARD: 3 SEPTEMBER 2014
DELIVERED : 6 FEBRUARY 2015
FILE NO/S: CC 762 of 2014
BETWEEN: GRC GROUP PTY LTD (ACN 120 668 000)
Applicant
AND
NAOMI ANITA KESTELL
Respondent
Catchwords:
Application for review of decision by adjudicator declining jurisdiction Whether payment claim needs to be bona fide to be a valid payment claim Implying words into a statute
Legislation:
Construction Contracts (Security of Payments) Act 2004 (NT)
Construction Contracts Act 2004 (WA), s 3, s 6, s 16, s 26, s 26(2)(b)(ii), s 31(2), s 32(2)(a), s 46(2), Sch 1 Div 4 cl 5
State Administrative Tribunal Act 2004 (WA), s 29(3)(c)(ii)
Result:
Application successful
Decision under review set aside
Adjudicator to make determination under s 31(2)(b) of Construction Contracts Act 2004 (WA)
Summary of Tribunal's decision:
The applicant sought a review of a decision of an adjudicator under the Construction Contracts Act 2004 (WA) to dismiss its application for adjudication of a payment dispute without making a determination of its merits.
The issue that arose on review was whether payment claims that are not bona fide fail a threshold jurisdictional test or simply affect the merits of the claim.
The applicant contended that such a test was not laid down in either the contract or the Act and it was not open to the adjudicator to apply such a test as a requirement of a valid payment claim.
The respondent on the other hand argued that such a requirement was necessary to have a valid payment claim and that the adjudicator was correct in dismissing the matter without making a determination on the merits for that reason.
The Tribunal, having carefully considered the adjudicator's decision and the relevant case law, found that the issue of whether a payment claim is bona fide is not a requirement for a valid payment claim under either the contract or the Act, and such an additional test of criteria should not be imposed as a threshold jurisdictional issue to be decided at the time of considering whether to dismiss an application pursuant to s 32(2)(a) of the Act without making a determination on its merits.
The Tribunal accordingly set aside the decision of the adjudicator and referred the matter back to the adjudicator for determination pursuant to s 31(2)(b) of the Act.
Category: B
Representation:
Counsel:
Applicant: Mr HM Healy
Respondent: Mr BH Taylor
Solicitors:
Applicant: Hotchkin Hanly
Respondent: Rockwell Olivier
Case(s) referred to in decision(s):
470 St Kilda Road Pty Ltd v Reed Constructions Australia Pty Ltd and Phillip Martin [2012] VSC 235
Beba Enterprises Pty Ltd v Elle Pty Ltd [2014] WASC 141
Cape Range Electrical Contractors Pty Ltd v Austral Construction Pty Ltd [2012] WASC 304
Hall Contracting Pty Ltd v MacMahon Contractors Pty Ltd [2014] NTSC 20
Leighton Contractors Pty Ltd v Campbelltown Catholic Club Ltd [2003] NSWSC 1103
Nepean Engineering Pty Ltd v Total Process Services Pty Ltd (In Liquidation) (2005) 64 NSWLR 462
Trans Australian Constructions Pty Ltd v Nilsen (SA) Pty Ltd & Another (2008) 23 NTLRJ
REASONS FOR DECISION OF THE TRIBUNAL:
Introduction
On 10 July 2012, GRC Group Pty Ltd (trading as Gage Road Constructions) (applicant) and Ms Naomi Anita Kestell (respondent) entered into a Housing Industry Association cost plus contract under which the applicant was to construct a three storey dwelling for the respondent at No 28 Allsop Parade, Cottesloe (contract).
On 14 March 2014, the applicant made a payment claim in the amount of $180,562.52 (including GST) (payment claim 18) for building work done by the applicant pursuant to the contract between 1 February and 13 March 2014.
On 17 March 2014, the respondent confirmed by email to the applicant that payment claim 18 was disputed.
On 11 April 2014, the applicant brought an application for adjudication pursuant to s 26 of the Construction Contracts Act 2004 (WA) (Act) with respect to the payment dispute that had arisen in relation to payment claim 18 (application).
By letter dated 15 April 2014, Mr Glynn Logue confirmed his appointment as the adjudicator to determine the payment dispute.
On 28 April 2014, the respondent served its response to the application (response). The primary submission of the response was that the applicant had fraudulently inflated the labour costs in payment claim 18 and that it was not a bona fide payment claim for the purposes of the Act, and, accordingly, should be dismissed without consideration of its merits.
On 30 April 2014, the applicant wrote to the adjudicator regarding the allegations of fraud in the response and stated:
…
The Adjudication Response raises serious allegations of fraud pursuant to which the Respondent submits that the Adjudication Application should be dismissed, or alternatively, should be subject to substantial set-off …
The allegations of fraud are denied by the Applicant.
These allegations have not previously been made by the respondent … Therefore, the Applicant could not have anticipated that such allegations would be made in the Adjudication Response.
The Applicant has witnesses that are prepared to swear statutory declarations denying the allegations of fraud now made by the Respondent. Accordingly, if you intend to place any reliance on these allegations in making your determination, the Applicant respectfully requests that it be given the opportunity to tender evidence disputing the allegations.
On 1 May 2014, the respondent sent a letter to the adjudicator replying to the applicant's letter to the adjudicator of 30 April 2014 stating:
…
As stated in our client's adjudication response, the issues of GRC deliberately (amongst other things) applying inflated hourly rates and inflated hours worked have been active issues between Kestell and GRC since at least November 2013. Whilst the word 'fraudulent' may not have been used before the adjudication response was served, the substance of the issues remain[s] the same, that being, a deliberate effort on the part of GRC to overcharge Kestell.
In the circumstances, GRC ought not be afforded any opportunity to respond to the matters raised in our client's response.
The adjudicator does not appear to have responded to the applicant's letter dated 30 April 2014 requesting that it be allowed to respond to the allegations of fraud levelled against it in the response, but on 5 May 2014, the adjudicator wrote a letter to the parties requesting the applicant to identify the items in its payment claim that made up the invoice amount of $164,147.75 and show how that invoice amount was calculated.
The adjudicator noted that he was 'having some difficulty reconciling the amount of $164,147.75'.
On 5 May 2014, the applicant sent a letter to the adjudicator responding to the adjudicator's request.
On 6 May 2014, the adjudicator sent a further letter to the parties requesting further submissions on:
1)the calculation of the hourly rate costs of the supervisor employed by the applicant; and
2)the payroll records of labourers employed by the applicant for the relevant period.
On 7 May 2014, the applicant sent two letters dated 6 May 2014 to the adjudicator which responded to the request for further submissions by the adjudicator in his letter dated 6 May 2014.
On 7 May 2014, the respondent also sent a letter to the adjudicator responding to the adjudicator's request for further submissions in the adjudicator's letter dated 6 May 2014.
On 12 May 2014, the adjudicator issued his determination in respect of the application and stated, at [41] to [43]:
Jurisdiction
[41]I have previously found that grounds for dismissal (i) and (iii) do not exist (see paragraphs [13] and [7]). I am satisfied that the complexity of the matter will not make it impossible for me to make a fair determination of the application on its merits. Accordingly, I find that ground for dismissal (iv) also does not exist.
[42]With the payment dispute having arisen on 17 March 2014, the applicant was required to prepare and serve its written application on the respondent and on the prescribed appointer by 15 April 2014 cf. The MCIC Nominees Trust t/as Capital Projects & Developments v Red Ink Homes Pty Ltd [2013] WASAT 177. The applicant did that by serving its written application on the respondent and on the prescribed appointer on 11 April 2014 and, on the face of it, I find that ground for dismissal (ii) does not exist. However, for the reasons set out in paragraphs [18] ‑ [38] above, I find that the Payment Claim is not a bona fide claim for the purposes of the Act and, from that, has not been prepared and served in accordance with s 26.
Determination
[43]Because of the foregoing, I dismiss the application without making a determination of its merits.
On 6 June 2014, the applicant made an application to this Tribunal for a review of that determination (review application).
To best explain the parties' arguments and put the matter in context, the Tribunal will set out the respondent's submissions first, which not only support the adjudicator's findings but were adopted and relied upon by the adjudicator in making his determination.
Issue
At paragraph 26 of its submissions to this Tribunal dated 29 August 2014, the respondent set out what the Tribunal believes to be the central issue in this matter, namely:
The question that arises in this Review Application is whether claims that are not bona fide and are fraudulent, fail a threshold jurisdictional issue or simply affect the merits of the claims.
Respondent's submissions
In its response to the applicant's adjudication application dated 28 April 2014, the respondent, at paragraph 1.3 of its Executive Summary, stated:
The payment claim is not a valid payment claim pursuant to the Construction Contracts Act 2004 (Act) because it is not a bona fide claim, and is a claim tainted by fraud. Accordingly, the adjudication application must be dismissed without any determination as to its merits (discussed further at section 2 below).
At section 2 of the same response under the heading 'Progress Claim 18 is not a valid payment claim', the respondent stated:
2.1Section 3 of the Act relevantly defines a payment claim to be a claim made under a construction contract by the contractor to the principal for payment of an amount in relation to the performance by the contractor of its obligations under the contract.
2.2The Construction Contracts (Security for Payments Act 2004 (NT) (NT Act) contains an identical definition of payment claim at section 4.
2.3Trans Australian Constructions Pty Ltd v Nilsen (SA) Pty Ltd and Another (2008) 23 NTLRJ 123 (see Tab 2) was a case heard in the Supreme Court of the Northern Territory in which the interpretation of 'payment claim' under the NT Act was considered.
2.4At [67] Southwood J held that 'the essential requirements of a valid payment claim are … the payment claim must be a bona fide claim and not a fraudulent claim'.
2.5At [71] Southwood J goes on to say that 'the rendering of a payment claim that contains requirements specified at [67] above is an essential requirement of the adjudicator's determination. However, an adjudicator is bound to consider if there is a valid payment claim before the adjudicator that contains the requirements referred to at [67] above'.
2.6For the reasons discussed at sections 4 to 10 below, it is Kestell's contention that progress claim 18 is not a bona fide claim but rather a claim tainted by fraud and therefore not a valid payment claim under the Act.
2.7Further, a payment claim must be a claim for payment of an amount in relation to the performance by the contractor of its obligations under the contract. It is Kestell's contention that progress claim 18 contains claims for labour hours not actually performed or worked by GRC. This is discussed in section 5 below. Accordingly, progress claim 18 is not a valid claim under the Act.
2.8Given that progress claim 18 is not a valid payment claim under the Act for the reasons identified at paragraphs 2.6 and 2.7 immediately above:
(a)no payment dispute pursuant to section 6 of the Act has arisen;
(b)there are no grounds for GRC to make an adjudication application under sections 25 and 26 of the Act and the application has therefore not been prepared and served in accordance with section 26; and
(c)the application must be dismissed without making a determination of its merits in accordance with section 31(2)(ii) of the Act.
In its written submissions before this Tribunal dated 29 August 2014, the respondent, in further support of that proposition, stated, at paragraphs 41 to 48:
41.In Semmens v Ocram Constructions Pty Ltd [2012] WADC 54, the District Court of Western Australia dealt with the same Housing Industry Association form costs plus contract as the Contract. In that case, Staude DCJ, at … [144], stated that the Housing Industry Association form costs plus contract creates no obligation on the part of the owner to pay other than the progress claims made in accordance with clause 10 [emphasis added].
42.Further, and importantly, at … [169] Staude J stated as follows:
'While there is authority for the proposition that strict compliance with a contractual obligation to pay progress claims is necessary to ensure the legal stability of a building contract … the necessary corollary obligation is just as important; that progress claims be made in accordance with the terms of the contract and, one might add, as a necessary implication, with reasonable care and in good faith.' [emphasis added]
43.In Triple C Holdings Pty Ltd and Anor v Hogan and Anor [1983] 1 NSWLR 252 Sheppard J held at … [255] that in a simple building agreement to pay a percentage upon the cost of labour and materials, 'cost' means the actual cost honestly and properly expended in carrying out the works [emphasis added].
44.Further, it has been held that as a matter of general principle and ordinary commercial common sense (and in the absence of a clear expression to the contrary), a provision that entitles the contractor to be reimbursed for costs incurred will be subject to an implied term that the costs will be reasonable and properly incurred[:] [see] Onesteel Manufacturing Pty Ltd v United KG Pty Ltd (2006) 22 BCL 449 (Onesteel) at … [36].
45. In that case, Debelle J stated … as follows … at … [36]:
'[I]n the absence of such a provision, the building owner has an entirely open‑ended obligation or, looking at the other side of the coin, the contractor has been handed a blank cheque. Such a contract would put a premium on inefficiency and extravagance. There would be no proper accountability for incompetence or unnecessary work. … In addition, the power of a contractor in a building contract to incur costs is a power the exercise of which will significantly affect the interests of the building owner … for that reason also, it is a power which should be exercised so that the costs are reasonably incurred.'
46.The expression 'properly incurred' signifies that the costs have been incurred in accordance with the Contract[:] [see] […] [48] of Onesteel.
47.The cases referred to above provide support to the proposition that a progress claim made by the applicant is not a progress claim under the Contract if it includes claims for:
47.1costs that are not the actual costs honestly and properly incurred by the applicant in carrying out the Works; or
47.2costs that are not Costs under the Contract (ie. Costs that are excluded by virtue of clause 7 of the Contract).
N48. It is the respondent's position that in order for a progress claim to be a progress claim under the Contract, the progress claim must be a bona fide claim and not a fraudulent claim.
The respondent also made oral submissions in respect of the same issues and stated:
And the particular requirements on the adjudicator. Of course they're under [s] 31(2)[(a)], we say dismiss the application in certain circumstances. I mean, the matter is before the adjudicator so he has ‑ he has either the choice ‑ he has to decide the jurisdictional questions under [s 31]2[(a)] and he has clearly formed a view in relation to those the he can (1) make a decision on the evidence and (2) his decision is that there was two elements, (1) an inflation of costs, which is the point that you raised, and then secondly, that it was done knowingly. So that's the decision he felt on the material before him he could make. (T:8; 03.09.14)
Applicant's submissions
In its submissions to the Tribunal dated 30 July 2014, the applicant, in addressing the comments of Southwood J in Trans Australian Constructions Pty Ltd v Nilsen (SA) Pty Ltd & Another (2008) 23 NTLRJ (Trans Australian Constructions) at 123, on which the adjudicator had relied in making his findings, stated at [18] to [24]:
[18]Since the decision in Trans Australian the issue of whether a payment claim must be bona fide and made in good faith to be valid under security of payment legislation has been considered in other jurisdictions. The leading authority on the issue is the decision of Vickery J in 470 St Kilda Road Pty Ltd v Reed Constructions Australia Pty Ltd and Phillip Martin [2012] VSC 235. At [43] to [44] Vickery J following an extensive analysis of the authorities found that:
'In my opinion there is no warrant for implying into the Act an obligation of good faith on the part of the Claimant in preparing and submitting a payment claim. Following the service of a payment claim the Act provides mechanisms for the claim to be reviewed by the Respondent and, if necessary, part rejected or wholly rejected by the serving of a payment schedule. It is at this point that a spurious claim lacking any proper foundation can be addressed. The Act also provides for a process of Adjudication. Upon appointment, the Adjudicator is in a position to address and determine the merits of the parties' dispute as articulated in the payment claim and payment schedules.
No enquiry into the bona fides of a claimant is necessary for the effective functioning of these processes. Nor is any such enquiry desirable, given the important objective of providing expedition in the determination of the interim rights of the parties in relation to the recovery of progress claims under a construction contract. It would fly in the face of this purpose of the Act, and the robust determination of disputes under the statutory adjudication process to import an element of good faith as an issue to be considered and determined for a valid payment claim. In addition to the s 14 requirements.' (emphasis added)
[19]Paramount to Vickery J's reasoning was the issue of whether words should be implied into the text of legislation. In answering this question in the negative, having regard to the authorities, he observed at [42] that when implying words into statutory text '[t]he fundamental duty of the Court is to apply the law as enacted by the parliament'.
[20]The Act does not contain the words 'bona fide' or 'good faith' when describing what constitutes a valid payment claim. The requirements for a valid payment claim where a construction contract does not have provisions regarding making a payment claim are listed in Schedule 1 Division 4 clause 5(2). In Schedule 1 Division 4 clause 5(2) it is not a requirement for a payment claim to be bona fide.
[21]The Contract does not require a payment claim to be bona fide either, and where a contract contains terms regarding the making of payment claims those terms must take precedence over any implied term in the Act (if (which is denied) any relevant term could be implied in the Act).
[22]As established by the 470 St Kilda Road decision, an analysis of the bona fides of a payment claim is not a threshold jurisdictional issue[;] rather[,] it is an issue which relates to the merits of the payment claim.
[23]The policy reasons for not importing a threshold bona fides requirement for payment claims into the Act are obvious. If such a term was to be implied it would be a simple matter for respondents to allege for myriad reasons that payment claims are not bona fide, thereby opening the floodgates to dismissals by adjudicators of adjudication applications pursuant to s 31(2) of the Act.
[24]Further Trans Australian is not good authority because:
(a)the specific paragraphs in the decision which have been relied on by the Respondent and adopted and recited as authority by the Adjudicator are obiter dictum and not binding;
(b)the decision has not been adopted or cited as authority in any other jurisdictions in Australia.
In oral submissions regarding the same issue, counsel for the applicant, in answer to a question from the Tribunal regarding the differences between the Western Australian legislation and the East Coast legislation, stated:
Yes. I appreciate that, senior member, but we would say that that decision, it's dealing with such a fundamental requirement of this type of legislation and it's actually no different to ‑ in applying those same principles to the WA legislation. What's being talked about in that extract there and I really can't put it any higher than what has been extracted at paragraph 18[.]
…
I submit that Vickery J there really does put it in a nutshell and what he is talking about is a payment claim and in our submission we say there's no difference in a payment claim under any of the legislations for security of payment. When you ‑ and I can take you through that Victorian legislation if you would like, sir.
…
But what I am saying is, is that when you do work it through and you work out what a payment claim is under that legislation, it's a payment claim made under a construction contract for construction works. So it's fundamentally the same type of claim that is a payment claim under the West Australian legislation. So when we bear that in mind and we look at some of the quoted section there and he's saying:
'In my opinion there's no warrant for implying into the Act an obligation of good faith on the part of the claimant in preparing and submitting a payment claim'. (T:22; 03.09.14)
Consideration
The adjudicator issued a written decision dated 9 May 2014 headed 'Adjudicator's Determination Pursuant to the Construction Contracts Act 2004'. The following paragraphs are relevant to understand the submissions made:
Documents Forming Basis for Determination
[14]The parties served the following documents on each other and on me for the purpose of having their payment dispute determined ‑
(a)The applicant's written application for adjudication dated 11 April 2014, with the information, documentation and submissions on which it relies in the adjudication in Attachments 1 ‑ 10.
(b)The respondent's written response to the application dated April 2014, with the information, documentation and submissions on which it relies in the adjudication in Attachments 1 ‑ 39 and in the accompanying Statutory Declaration of Mr Timothy Arthur Kestell.
(c)The applicant's further documentation dated 5 and 6 May 2014 and the parties' further submissions dated 6 May 2014.
…
[22]The respondent contends that the Payment Claim is not a valid payment claim for the purposes of the Act because it is not a bona fide claim. In so contending, the respondent cites Trans Australian Constructions Pty Ltd v Nilsen (SA) Pty Ltd and Another [2008] NTSC 42. At [67], Southwood J opined that the essential requirements of a valid payment claim were as follows ‑
1.The payment claim must be made pursuant to a construction contract and not some other contract.
2.The payment claim must be in writing.
3.The payment claim must be a bona fide claim and not a fraudulent claim.
4.The payment claim must state the amount claimed.
5.The payment claim must identify and describe the obligation the contractor claims to have performed and to which the amount claimed relates in sufficient detail for the principal to consider if the payment claim should be paid, part paid or disputed.
[23]At [71], Southwood J went onto [sic] say ‑
The rendering of a payment claim that contains the requirements specified at [67] above is an essential requirement of the adjudication process described in the Act. It is not merely a matter for the adjudicator's determination. However, an adjudicator is bound to consider if there is a valid payment claim before the adjudicator that contains the requirements referred to [at] [67] above.
[24]Payment claim is defined in the Construction Contracts (Security for Payments) Act 2004 (NT) in the very same manner it is defined in the Act. Accordingly, I consider that Trans Australian Constructions has application to this matter.
[25]The LexisNexis Concise Australian Legal Dictionary defines bona fide(s) in the following terms ‑
Bona fide ‑ in good faith; with sincerity. 1. In law, to do something in good faith or with an honest intention. 2. In common usage, genuine, sincere, not a fake.
Bona fides ‑ good faith; honest intention; absence of intent to defraud; absence of deliberate wrongdoing.
[26]In contending that the Payment Claim is not a bona fide claim, the respondent alleges that the applicant ‑
(a)fraudulently inflated the actual Costs claimed pursuant to Clause 6; and
(b)claimed costs that are excluded by Clause 7.
The adjudicator then goes through the actual costs charged and various email correspondence in some detail in [27] to [32] of his determination, and states at [33]:
[33]From all of the above, I accept that the applicant inflated the actual Costs claimed pursuant to Clause 6.
Following another reference to email correspondence, states at [35]:
[35]From that, I accept that the applicant knowingly included costs that were excluded by Clause[s] 7(a)(ii) and (iii).
At [40] of his decision, the adjudicator set out the requirements of s 31(2) of the Act, and then under the headings 'Jurisdiction' and 'Decision' at [41] to [43], made the critical findings set out earlier.
However, there appears to be some confusion in the adjudicator's findings at [41] and [42].
Section 31(2) of the Act states:
An appointed adjudicator must, within the prescribed time …
(a)dismiss the application without making a determination of its merits if -
(i)the contract concerned is not a construction contract;
(ii)the application has not been prepared and served in accordance with section 26;
(iii)an arbitrator or other person or a court or other body dealing with a matter arising under a construction contract makes an order, judgment or other finding about the dispute that is the subject of the application; or
(iv)[is] satisfied that it is not possible to fairly make a determination because of the complexity of the matter or the prescribed time or any extension of it is not sufficient for any other reason;
(b)otherwise, determine on the balance of probabilities whether any party to the payment dispute is liable to make a payment[.]
Therefore, the adjudicator 'must' dismiss the application without making a decision on its merits if any of the four circumstances set out at s 31(2)(a)(i) to (iv) exist, but if they do not, he must proceed to determine the matter on its merits.
This was confirmed by Pritchard J in Cape Range Electrical Contractors Pty Ltd v Austral Construction Pty Ltd [2012] WASC 304 (Cape Range Electrical Contractors) at [70] where she stated:
… the language used in s 31 itself indicates that the exercise of the power in s 31(2)(b) is a corollary of the power in s 31(2)(a). That much is clear from the use of the word 'otherwise' in s 31(2)(b), and from the reference in s 31(3) to an adjudication application being 'dismissed or determined under subsection (2)'. Further, under s 31(2)(a) an adjudicator is required to dismiss an adjudication application without making a determination of its merits if any of s 31(2)(a)(i) ‑ (iv) apply. An adjudication application will therefore arise for determination on the merits (under s 31(2)(b)) only if it has not been dismissed (without any determination being made as to its merits) under s 31(2)(a) of the CC Act. Moreover, as the opening words of s 31(2) of the CC Act make clear, if an adjudicator does not dismiss an application for adjudication under s 31(2)(a), he or she must proceed to determine the application on its merits by determining whether a party to the payment dispute is liable to make a payment. Consequently, an adjudication application could only ever arise for determination under s 31(2)(b) if the matters set out in s 31(2)(a)(i) ‑ (iv) do not apply.
The confusion the Tribunal refers to in the present case arises from an examination of the adjudicator's findings at [41] and [42] in respect of the matters set out in s 31(2)(a)(i) to (iv) of the Act. As, although the adjudicator appears to have made a finding that none of the four matters applied, at [43] he still dismissed the matter without making a determination on its merits.
In [41], the adjudicator refers to s 31(a)(i), (iii) and (iv) and states:
I have previously found that grounds for dismissal (i) and (iii) do not exist (see paragraph[s] [13] and [7]). (Tribunal's emphasis)
He then goes on in the same paragraph to state:
I am satisfied that the complexity of the matter will not make it impossible for me to make a fair determination of the application on its merits. Accordingly I find that ground for dismissal (iv) also does not exist. (Tribunal's emphasis)
Then, in [42], he deals with s 31(2)(a)(ii) in respect of the preparation and service of the application, and states:
With the payment dispute having arisen on 17 March 2014, the applicant was required to prepare and serve its written application on the respondent and on the prescribed appointer by 15 April 2014 cf. The MCIC Nominees Trust t/as Capital Projects & Developments v Red Ink Homes Pty Ltd [2013] WASAT 177. The applicant did that by serving its written application on the respondent and on the prescribed appointer on 11 April 2014 and, on the face of it, I find that ground for dismissal (ii) does not exist. … (Tribunal's emphasis)
In the circumstances, having made those four findings, one would expect the adjudicator would then proceed as he is required to by s 31(2)(b) of the Act to determine the matter on its merits.
However, he does not do this, but adds the following sentence at the end of [42], stating:
However, for the reasons set out in paragraphs [18] ‑ [38] above, I find that the Payment Claim is not a bona fide claim for the purposes of the Act and, from that, has not been prepared and served in accordance with s 26.
And at [43] under the heading 'Determination', states:
Because of the foregoing, I dismiss the application without making a determination of its merits.
That leads squarely to the issue before this Tribunal, as the adjudicator, having made clear findings in respect of the four matters set out in s 31(2)(a)(i) to (iv) of the Act, does not proceed to determine the matter on its merits, but dismisses the matter, without doing so, on the basis that he finds the payment claim is not a bona fide payment claim relying on the comments of Southwood J in Trans Australian Constructions: see [22] to [24] of the adjudicator's decision.
In Trans Australian Constructions, Southwood J introduces the concept of a payment claim having to be bona fide in a list of five requirements at [67] of his decision.
At [64], Southwood J states:
[64]In my opinion it was not the intention of the legislature that any failure to comply with the requirements of a construction contract about the making of payment claims should result in the invalidity of an adjudicator's determination under the Act. Such a construction would defeat the object of the Act. The object of the Act is to promote security of payments under construction contracts. The object of the Act is to be achieved by facilitating timely payments between the parties to construction contracts; providing for the rapid resolution of payment disputes arising under construction contracts; and providing mechanisms for the rapid recovery of payments under construction contracts. It also is to be noted that a payment made in accordance with an adjudicator's determination is a payment on account. It is a payment made without prejudice to the parties' ultimate contractual rights.
At [66] to [71], Southwood J states:
[66]It was the intention of the legislature that a valid payment claim must be of adequate particularity to enable a principal or head contractor to know the ambit of any potential application for a determination by an adjudicator under the Act if the claim is unpaid or disputed. To do so, a payment claim, must contain sufficient detail to put the principal or head contractor on notice of the precise amount claimed and it must sufficiently identify the obligations said to have been performed under the contract to which the amount claimed relates. If a payment claim does not contain such detail the principal or head contractor cannot determine if the progress claim should be paid, part paid or disputed. It was the intention of the legislature that a principal or head contractor must be given a fair opportunity to determine whether to pay, part pay or dispute a payment claim.
[67]In my opinion the essential requirements of a valid payment claim are as follows:
1.The payment claim must be made pursuant to a construction contract and not some other contract;
2.The payment claim must be in writing;
3.The payment claim must be a bona fide claim and not a fraudulent claim;
4.The payment claim must state the amount claimed;
5.The payment claim must identify and describe the obligations the contractor claims to have performed and to which the amount claimed relates in sufficient detail for the principal to consider if the payment claim should be paid, part paid or disputed.
[68]The above requirements of a valid payment claim are consistent with the definition of payment claim in the Act. They are also consistent with the basic requirements of procedural fairness. Section 28(2) of the Act and r 6 of the Construction Contracts (Security of Payments) Regulations (NT) contain little particularity about the necessary details of an application for adjudication. However, s 28(2)(b)(ii) does require the relevant payment claim to be attached to the application for adjudication.
[69]Section 4 of the Act defines payment claim, so far as is relevant, as follows:
payment claim means a claim made under a construction contract by the contractor to the principal for payment of an amount in relation to the performance by the contractor of its obligations under the contract; or …
[70]The two key elements of the definition of 'payment claim' are that a payment claim is a claim made under a construction contract and not some other kind of contract; and a payment claim is a claim made by the contractor to the principal for payment of an amount in relation to the performance by the contractor of its obligations under the contract.
[71]The rendering of a payment claim that contains the requirements specified in par [67] above is an essential requirement of the adjudication process described in the Act. It is not merely a matter for the adjudicator's determination. However, an adjudicator is bound to consider if there is a valid payment claim before the adjudicator that contains the requirements referred to at [67] above.
As can be seen, apart from listing the requirement that a payment claim, to be a valid payment claim must be bona fide and not fraudulent, at point 3 in [67] of Trans Australian Constructions, there is not a great deal of analysis or rationale as to why.
The adjudicator and this Tribunal on review are principally guided by the contract between the parties and the Act under which we operate, namely, the Construction Contracts Act 2004 (WA).
As outlined earlier, the contract the parties entered into was a standard Housing Industry Association Ltd cost plus contract which dealt with the issue of progress payments at clause 10 of the contract, and stated:
PROGRESS PAYMENTS
(a)The Builder shall be entitled to make claims for progress payments for the Works by notice in writing to the Owner ([hereinafter] referred to as 'Progress Claims') at intervals of either:
(i)the number of days specified in Item 7 of the Schedule commencing from the date of commencement of the Works; or
(ii)the value of the Progress Claim exceeding the amount specified in Item 7 of the Schedule.
(b)Such Progress Claims are subject to the following conditions:
(i)the Progress Claim shall identify all Costs incurred by the Builder up to and including the date of that progress claim together with the Builder's fee as specified in Item 5 of the Schedule;
(ii)payments shall be payable by the Owner within FIVE (5) days of receipt of any Progress Claim;
(iii)if the Owner shall not within FIVE (5) days of receipt of any Progress Claim notify the Builder of their disagreement with any of the items therein specifying full details of the Owner's disagreement the Owner shall be deemed to have accepted and approved of that Progress Claim as true and correct;
(iv)if any dispute arises as to any item in a Progress Claim the Owner shall pay to the Builder the undisputed portion of that Progress Claim within the period specified in sub-clause 10(b) and the balance shall if not agreed and paid by the date of the next Progress Claim be resolved in accordance with Clause 18; and
(v)if any dispute arises as to any item in a Progress Claim which dispute remains unresolved at the date of the next Progress Claim the Builder may suspend the Works until the dispute is resolved or for any shorter period he may decide without prejudice to either party's rights in accordance with this Contract.
Section 3 of the Act defines a payment claim as being:
payment claim means a claim ‑
(a)by the contractor to the principal for payment of an amount in relation to the performance by the contractor of its obligations under this contract; or
(b)by the principal to the contractor for payment of an amount in relation to the performance or non‑performance by the contractor of its obligations under this contract[.]
Further, s 16 of the Act under the heading 'Making claims for payment' states:
The provisions in Schedule 1 Division 4 are implied in a construction contract that does not have a written provision about how a party is to make a claim to another party for payment.
Clause 5 of Div 4 of Sch 1, under the heading 'Making claims for payment' at (1), repeats the definition of 'payment claim' in s 3 of the Act set out above, and then states at (2) to (4):
(2)A payment claim must ‑
(a)be in writing;
(b)be addressed to the party to which the claim is made;
(c)state the name of the claimant;
(d)state the date of the claim;
(e)state the amount claimed;
(f)in the case of a claim by the contractor ‑ itemise and describe the obligations that the contractor has performed and to which the claim relates in sufficient detail for the principal to assess the claim;
(g)in the case of a claim by the principal ‑ describe the basis for the claim in sufficient detail for the contractor to assess the claim;
(h)be signed by the claimant; and
(i)be given to the party to which the claim is made.
(3)In the case of a claim by the contractor, the amount claimed in a payment claim ‑
(a)must be calculated in accordance with this contract; or
(b)if this contract does not provide a means of calculating the amount, must be ‑
(i)if this contract says that the principal is to pay the contractor one amount (the contract sum) for the performance by the contractor of all of its obligations under this contract (the total obligations) ‑ the proportion of the contract sum that is equal to the proportion that the obligations performed and detailed in the claim are of the total obligations;
(ii)if this contract says that the principal is to pay the contractor in accordance with rates specified in this contract ‑ the value of the obligations performed and detailed in the claim calculated by reference to those rates; or
(iii)in any other case ‑ a reasonable amount for the obligations performed and detailed in the claim.
(4)Paragraph (b) of subclause (3) does not prevent the amount claimed in a progress claim from being an aggregate of amounts calculated under one or more of subparagraphs (i), (ii) and (iii) of that paragraph.
As can be seen, therefore, the details of what a payment claim must contain to be valid are set out in the contract, and if the contract did not contain a written provision about how a party is to make a payment claim, s 16 confirms that the specific provisions of Div 4 of Sch 1 are implied into the contract.
To be 'bona fide' does not appear to be a test of criteria that a payment claim needs to pass to be valid under either the contract or the Act or to be accepted by the adjudicator pursuant to s 31(2)(a).
However the adjudicator in making the critical finding at [42] stated:
However, for the reasons set out in [18] to [38] above, I find that the payment claim is not a bona fide payment claim for the purpose of the Act and, from that, has not been prepared and served in accordance with s 26.
The reasons referred to set out at [18] to [21] came under the heading 'Payment Claim' and the adjudicator initially dealt with the contents of the actual payment claim at [18] to [21].
At [22] and [23] he set out the comments of Southwood J and, at [24], commented on the similarities in the definition of 'payment claim' in both the Western Australian and Northern Territory Acts and at [25] he dealt with the definition of 'bona fide' as set out in the LexusNexus Concise Australian Legal Dictionary.
At [26] to [35], he dealt with the allegations made by the respondent and various emails and charge out rates detailed in the correspondence before making various calculations as to the costs claimed, dealing with such items as payroll tax, provision of motor vehicle, mobile phone, personal computer, workers' compensation, protective clothing and safety equipment ([30]) before going on to make a finding that the applicant had inflated the costs ([33]) and knowingly included costs that were excluded by the contract ([35]).
It could be argued that by undertaking such a forensic examination, the adjudicator had in fact gone some way to determining the matter on its merits, which is not permitted, as confirmed by Pritchard J at [70] of Cape Range Electrical Contractors.
The finding by the adjudicator that 'the "Payment Claim" was not a bona fide claim for the purposes of the Act and, from that, had not been prepared and served in accordance with s 26' appears to refer to s 31(2)(a)(ii), which refers to 'the Application' not being prepared and served in accordance with s 26 not the 'Payment Claim'.
Section 26 states:
Applying for adjudication
(1)To apply to have a payment dispute adjudicated, a party to the contract, within 28 days after the dispute arises or, if applicable, within the period provided for by section 37(2)(b), must ‑
(a)prepare a written application for adjudication;
(b)serve it on each other party to the contract;
(c)serve it ‑
(i)if the parties to the contract have appointed a registered adjudicator and that adjudicator consents, on the adjudicator;
(ii)if the parties to the contract have appointed a prescribed appointor, on that appointor;
(iii)otherwise, on a prescribed appointor chosen by the party;
and
(d)provide any deposit or security for the costs of the adjudication that the adjudicator or the prescribed appointor requires under section 44(8) or (9).
(2)The application ‑
(a)must be prepared in accordance with, and contain the information prescribed by, the regulations;
(b)must set out the details of, or have attached to it ‑
(i)the construction contract involved or relevant extracts of it; and
(ii)any payment claim that has given rise to the payment dispute;
and
(c)must set out or have attached to it all the information, documentation and submissions on which the party making it relies in the adjudication.
(3)A prescribed appointor that is served with an application for adjudication made under subsection (1) must comply with section 28.
'Payment claim' is only referred to at s 26(2)(b)(ii) which stipulates that an applicant must set out the details or have attached to it 'any payment claim that has given rise to a payment dispute'.
In the Western Australian legislation, it is not the existence of a payment claim but the existence of a 'payment dispute' which can give rise to an adjudication under the Act.
'Payment dispute' is defined at s 6 of the Act as:
Payment dispute
For the purposes of this Act, a payment dispute arises if ‑
(a)by the time when the amount claimed in a payment claim is due to be paid under the contract, the amount has not been paid in full, or the claim has been rejected or wholly or partly disputed;
(b)by the time when any money retained by a party under the contract is due to be paid under the contract, the money has not been paid; or
(c)by the time when any security held by a party under the contract is due to be returned under the contract, the security has not been returned.
Therefore, a payment dispute arises if 'by the time when the amount claimed in a payment claim is due to be paid under the contract, the amount has not been paid in full, or the claim has been rejected or wholly or partly disputed'.
In the present case, it is important to note that it has not been argued that the fact that a payment claim is not bona fide or is fraudulent cannot be considered by the adjudicator or is irrelevant. It is simply at what point may that, or should that, be considered.
The issue before the Tribunal is whether it can or should be considered at the time the adjudicator is determining whether to dismiss the matter without making a determination on its merits under s 31(2)(a) of the Act.
Whether it should it be considered at the time of determination of the merits which are dealt with on the balance of probabilities is an entirely different question.
Bayley, in his text Construction Law Volume 1 under the heading 'Fraudulent payment claims' at 6.66 and 6.67, states:
A fraudulent payment claim is one where the maker of the claim knows that it is not entitled to the amount claimed. It is impermissible for a contractor to make a fraudulent payment claim. One reason for this is that it is an implied term of a contract that a contractor is to act honestly in making progress claims.A fraudulent payment claim will therefore have no contractual effect. A contractor who makes a fraudulent payment claim may be subject to criminal sanctions.A person who makes a fraudulent payment claim, or participates in a fraud on a payer, will be liable to repay the full amount that was defrauded, even if there were other co‑fraudsters who benefited from the payments made as a consequence of the fraud.
A fraudulent payment claim may be distinguished from a payment claim which is for an amount that is in excess of the payee's true entitlement, yet the payee genuinely believes it is entitled to payment of the amount claimed. In such cases, the payment claim will not be fraudulent. Where, furthermore, a person has performed work at the request and for the benefit of another, and the person who performed the work has submitted a payment claim that contains fraudulent misrepresentations, the person making the fraudulent payment claim may still be able to recover a reasonable remuneration for the work actually performed. (Footnotes omitted)
Further, s 6 of the Act makes it clear that a payment claim may be rejected or wholly or partly disputed and does not limit the grounds on which that can be done.
In the present case the applicant raised the issue of 'Supplier Costs' in the sum of $64,527.13 which were part of the total 'Payment Claim' and submitted that even if the 'Labour Cost' component were found to be fraudulently claimed (which was denied) the 'Supplier Costs' were valid and properly charged.
In contrast to the comments of Southwood J in Trans Australian Constructions at [64] to [71], on which the adjudicator appears to have relied to find, that the 'Payment Claim' was not a bona fide payment claim for the purposes of the Act, Vickery J, in 470 St Kilda Road Pty Ltd v Reed Constructions Australia Pty Ltd and Phillip Martin [2012] VSC 235 (470 St Kilda Road), a decision referred to by the applicant in its submissions, deals in some detail with a line of authorities on the subject in both New South Wales and Queensland under the heading 'Implying words into Statutory Text' at [41] and [42] and concludes by stating at [43] and [44] by stating:
In my opinion there is no warrant for implying into the Act an obligation of good faith on the part of a claimant in preparing and submitting a payment claim. Following the service of a payment claim the Act provides mechanisms for the claim to be reviewed by the respondent and, if necessary, part rejected or wholly rejected by the serving of a payment schedule. It is at this point that a spurious claim lacking any proper foundation can be addressed. The Act also provides for a process of adjudication. Upon appointment, the adjudicator is in a position to addresses [sic] and determine the merits of the parties' dispute as articulated in the payment claim and payment schedule.
No enquiry into the bona fides of a claimant is necessary for the effective functioning of these processes. Nor is any such enquiry desirable, given the important objective of providing expedition in the determination of the interim rights of the parties in relation to the recovery of progress claims under a construction contract. It would fly in the face of this purpose of the Act, and the robust determination of disputes under the statutory adjudication process, to import an element of good faith as an issue to be considered and determined for a valid payment claim, in addition to the s 14 requirements.
In addition to Vickery J's comment outlined above that:
… there is no warrant for implying into the Act an obligation of good faith on the part of a claimant in preparing and submitting a payment claim.
the Tribunal also notes the comments of Allanson J in Beba Enterprises Pty Ltd v Elle Pty Ltd [2014] WASC 141 at [24] to [27] as to reading words into a statute when he stated:
Since the hearing of this appeal, the High Court has again considered when a court may be justified in reading a statutory provision as if it contained additional words: see Taylor v The Owners ‑ Strata Plan No 11564 [2014] HCA 9. While two members of the court dissented in the result, there was no difference on the principle that the fundamental task of the court is and remains the construction of the words the legislature has enacted: see French CJ, Crennan and Bell JJ [39], Gageler and Keane JJ [65].
The majority said, at [38]:
The question whether the court is justified in reading a statutory provision as if it contained additional words or omitted words involves a judgment of matters of degree. That judgment is readily answered in favour of addition or omission in the case of simple, grammatical, drafting errors which if uncorrected would defeat the object of the provision. It is answered against a construction that fills 'gaps disclosed in legislation' or makes an insertion which is 'too big, or too much at variance with the language in fact used by the legislature'.
The dissenting judges, Gageler and Keane JJ, said at [65]:
The constructional task remains throughout to expound the meaning of the statutory text, not to divine unexpressed legislative intention or to remedy perceived legislative inattention. Construction is not speculation, and it is not repair.
The extent to which the Tribunal would have altered the Act is too great and too much at variance with the language in fact used by the legislature to permit that construction to stand. It is not a construction of the text, but the formulation of a new category of exception. …
This is what appears to have happened in the present matter as, at the end of [42] of his determination, the adjudicator, having made findings that none of the criteria set out in s 31(2)(a) of the Act existed, went on to introduce what, in effect, is an additional test or criteria from those set out in either the contract or the Act when he found that:
… the payment claim is not a bona fide payment claim for the purpose of the Act and, from that, has not been prepared and served in accordance with s 26.
The Tribunal is in no doubt that whether a payment claim is bona fide, or indeed fraudulent, may be a significant matter for the adjudicator on a determination of the merits; however, the question is, should it be done at the stage of considering the criteria set out in s 31(2)(a) of the Act.
At [46] and [47] of 470 St Kilda Road, Vickery J concludes his discussion by stating:
In the light of the authorities I have cited in these reasons, which were not referred to the Court in Metacorp, on reflection and with the benefit of full argument on the matter, I am persuaded that I was wrong insofar as it is said in that case that a payment claim, whether served prematurely before the due reference date or served on and from each reference date, must be made bona fide in order to be valid, and I decline to follow myself.
There is no implied precondition to the making of a valid payment claim under s 14 of the Act that the claimant has made the claim with a bona fide belief in its entitlement to the moneys claimed or that otherwise the claim is made in good faith.
The Tribunal, although not bound to follow Southwood J, should give his decision significant weight. Vickery J in dealing with the observations of Ipp JA in Leighton Contractors Pty Ltd v Campbelltown Catholic Club Ltd [2003] NSWSC 1103 and Santow JA in Nepean Engineering Pty Ltd v Total Process Services Pty Ltd (In Liquidation) (2005) 64 NSWLR 462: at [33] of 470 St Kilda Road stated:
However, the observations of Ipp and Santow JJA are a long way from authoritatively ruling, following reasoned analysis, that 'good faith' was an essential requirement for a valid payment claim under the statute.
This Tribunal is of a similar view in respect of the comments of Southwood J in Trans Australian Constructions. While recognising that the Northern Territory legislation is more closely aligned to the Western Australian jurisdiction than that of the Eastern States, when one looks at the rationale behind the Act in providing for rapid resolution of payment disputes arising under construction contracts and the wording of the Act itself, there is an inherent logic in the reasoning of Vickery J in 470 St Kilda Road.
The Tribunal prefers and adopts the reasoning and analysis of Vickery J and finds that the issue of whether a payment claim is bona fide is not a requirement of a valid payment claim under either the contract or the Act. Such an additional test of criteria should not be imposed as a threshold jurisdictional issue to be decided at the time of considering whether to dismiss an application pursuant to s 31(2)(a) without making a determination on its merits.
For those reasons, the Tribunal will set aside the decision of the adjudicator.
There were a number of other issues raised by the parties which in the circumstances do not now need to be determined. However, as the matter will be referred back to the adjudicator to decide on its merits, the Tribunal will comment on one issue that was raised to assist the adjudicator in dealing with the matter.
That was the issue of procedural fairness raised by the applicant in respect of being denied the opportunity by the adjudicator to respond to the assertion in the response that the payment claim was fraudulent which, the applicant claimed, was a matter they could not have anticipated, and in a letter to the adjudicator dated 30 April 2014 had requested the opportunity to respond.
As stated earlier although the adjudicator did seek further information from the parties, he does not seem to have responded to the applicant's request of 30 April 2014.
As against this, the respondent in its letter to the adjudicator of 1 May 2014 stated:
Whilst the word 'fraudulent' may not have been used before the adjudication response was served the substance of the issue remains the same, that being a deliberate effort on the part of GRC to overcharge Kestell.
In the circumstances, GRC ought not to afforded any opportunity to respond to the matters raised in our client's response.
The respondent had also provided evidence by way of statutory declaration in its response to the adjudicator.
As to the veracity of statutory declarations furnished to an adjudicator, which may be an issue the adjudicator is faced with in this matter the Tribunal notes the comments of Vickery J, in 470 St Kilda Road, under the heading 'Finding as to the Veracity of the Statutory Declaration' when at [81] he stated:
The Adjudicator did not have the advantage of having Mr Robinson crossexamined or directly challenged on his Statutory Declaration. Such a forensic tool, which is a traditional means of determining controversial issues of fact by courts, is not appropriate for adjudications conducted under the Act. Adjudications are illequipped to deal with controversial issues of fact in this way, particularly within the tight time frames permitted for the delivery of Adjudication Determinations. The interim determination which results from an adjudication determination can always be tested, and indeed reversed or modified in the appropriate case, following a later court hearing in the matter. This is clearly the appropriate forum to determine contractual entitlements founded upon
In respect of procedural fairness Le Miere J in Zurich Bay Holdings Pty Ltd v Brookfield Multiplex Engineering and Infrastructure Pty Ltd [2014] WASC 40 (Zurich Bay Holdings), in dealing with an application for prerogative relief in respect of an adjudication under the same Act found that the adjudicator in that case had failed to afford procedural fairness and stated at [10]:
… Generally speaking, the parties must anticipate possible findings and make submissions at the trial of the potential findings on the issues litigated. Nevertheless, procedural fairness may require the judge to hear the parties further if certain matters emerge in the judge's consideration of the case after trial which the judge regards as potentially dispositive but in relation to which, in all the circumstances, it is to be inferred that the parties did not have a proper opportunity to address at trial[.]
In the Northern Territory case of Hall Contracting Pty Ltd v MacMahon Contractors Pty Ltd [2014] NTSC 20 in another matter regarding prerogative relief in a construction contract Barr J, in following Le Miere in Zurich Bay Holdings and also finding that there was denial of procedural fairness in that case due to a failure to allow a party to make submissions on a matter which was highly significant in the adjudicator's determination, stated at [35]:
Once it is accepted that the rules of procedural fairness apply to an adjudication under the Act, such that a purported determination would be void if there were a substantial denial of natural justice, the difficulty in each case is assessing what constitutes a substantial denial of natural justice to an affected party. (Author's emphasis)
In the present case the adjudicator will have to satisfy himself whether in all the circumstances any further information or evidence is necessary to fairly decide the matter keeping in mind his powers under s 32(2) of the Act, as against the fact that applicants generally must anticipate arguments the respondent may raise and possible findings by the adjudicator.
Conclusion
For the reasons given, the Tribunal finds that payment claims that are not bona fide and may be fraudulent do not fail a threshold jurisdictional test, but it may affect the merits of the claim.
In the circumstances, the adjudicator's decision of 9 May 2014 will be set aside pursuant to s 29(3)(c)(ii) of the State Administrative Tribunal Act 2004 (WA) and s 46(2) of the Act, and the matter will be sent back to the adjudicator to make a determination under s 31(2)(b) of the Act within 14 days from the date of this decision or any extension of that time consented to by the parties.
Orders
1.The decision of the adjudicator dated 9 May 2014 is set aside.
2.The matter is referred back to the adjudicator to make a determination pursuant to s 31(2)(b) of the Construction Contracts Act 2005 (WA) within 14 days of the date of this decision or any extension of that time consented to by the parties.
I certify that this and the preceding [83] paragraphs comprise the reasons for decision of the State Administrative Tribunal.
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MR M SPILLANE, SENIOR MEMBER
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