Suprima Bakeries Pty Ltd v Australian Weighing Equipment Pty Ltd

[2016] NSWSC 998

Supreme Court

New South Wales

Medium Neutral Citation:	Suprima Bakeries Pty Ltd v Australian Weighing Equipment Pty Ltd [2016] NSWSC 998
Hearing dates:	11 July 2016
Date of orders:	21 July 2016
Decision date:	21 July 2016
Jurisdiction:	Equity - Technology and Construction List
Before:	McDougall J
Decision:	Restrain first defendant from enforcing adjudication determination. Declare determination void.
Catchwords:	BUILDING AND CONSTRUCTION – Building and Construction Industry Security of Payment Act 1999 – adjudication determination – whether contracts were construction contracts within the meaning of the Act – whether Adjudicator denied natural justice to plaintiff – failure to deal with claim of defective work
Legislation Cited:	Building and Construction Industry Security of Payment Act 1999 (NSW) Building and Construction Industry Security of Payment Act 2002 (Vic)
Cases Cited:	Class Electrical Services v Go Electrical [2013] NSWSC 363 Clyde Bergemann v Varley Power [2011] NSWSC 1039 Musico v Davenport [2003] NSWSC 977 SSC Plenty Road Pty Ltd v Construction Engineering (Aust) Pty Ltd [2015] VSC 631
Category:	Principal judgment
Parties:	Suprima Bakeries Pty Ltd (Plaintiff) Australian Weighing Equipment Pty Ltd (First Defendant) Kenneth Spain (Second Defendant)
Representation:	Counsel: D S Weinberger (Plaintiff) V Culkoff (First Defendant) Second defendant submitted save as to costs.   Solicitors: Chedid Storey Legal (Plaintiff) McInnes Wilson Lawyers (First Defendant) Submitting appearance (Second Defendant)
File Number(s):	2015/364338

Judgment

1. HIS HONOUR:   The Plaintiff (Suprima) manufactures frozen dough in premises at Minto. In 2013 and 2014, as part of a substantial upgrade to its Minto premises, Suprima agreed with the first defendant (AWE) for the latter to supply plant and equipment to be used in the manufacture of frozen dough. There is a dispute as to whether the parties’ agreement was embodied in one, or more than one, contract.

2. Suprima says that the plant and equipment supplied and installed by AWE is essentially useless. AWE disputes this.

3. AWE took the view that the contract (on its view, there was only contract) between it and Suprima was a construction contract for the purposes of the Building and Construction Industry Security of Payment Act1999 (NSW) (the Act). It served a payment claim on Suprima. Suprima served a payment schedule asserting, among other things, that there was no construction contract, and that the plant and equipment supplied by AWE was worthless.

4. The dispute was referred to the second defendant (the Adjudicator) for adjudication. He concluded that there was a construction contract. He determined that AWE was entitled to be paid $535,000.00 of the claimed amount of $662,000.00 (each rounded up to the nearest $1000.00).

The real issues for decision

5. Suprima challenges the Adjudicator’s determination. The essential issues that it raises are:

1. was there one contract between the parties (as AWE contended and the Adjudicator found), or were there several?

2. If there were several contracts, was each of them a construction contract for the purposes of the Act?

3. Did the Adjudicator carry out his statutory function of valuing the construction work performed by AWE under any construction contract? (I realise that the legislation refers not only to “construction work” but also to related goods and services. Since that latter concept played no part in the hearing, it may be put to one side).

4. Did the Adjudicator deny natural justice to Suprima, or fail to carry out part of the task entrusted to him by the Act, in the way that he dealt with Suprima’s claim of defective work?

The factual background

6. AWE’s payment claim related to a large number of invoices that it submitted to Suprima in 2014 and 2015. Four of those invoices, numbered 108704, 108705, 108707 and 108708, are presently contentious.

7. Invoice 108705, evidencing what Mr Weinberger of Counsel, who appeared for Suprima, called the first contract, relates to work the subject of a quotation number TB4220312 (quotation 312). That quotation comprised two sections. One, Parts A to N, related to “New Flour and Bulk Bags”. The other, Part P, related to “Grain Handling System Bulk Materials”. On 29 July 2013, Suprima accepted the first section (parts A to N) of that quotation, but not the second. Mr Weinberger accepted that the contract thereby formed was a construction contract for the purposes of the Act.

8. The contract so formed was varied by the inclusion of further items of work, which were the subject of invoice 108708. Mr Weinberger accepted that the contract as so varied was (or remained) a construction contract.

9. Also on 16 July 2013, AWE sent a further quotation, number TB4220544 (quotation 544) to Suprima. That quotation comprised two parts. The only relevant part is the second, headed “Sifting Flour Project”. It appears to be common ground that Suprima accepted the “Sifting Flour Project” part of quotation 544 by email dated 13 November 2013. Mr Weinberger characterised the contract so formed as the second contract. Ms Culkoff of Counsel, who appeared for AWE, characterised the contract formed by acceptance of the second part of quotation 544 as a further variation to the contract arising from acceptance of the first section of quotation 312.

10. Invoice 108707 refers to what Mr Weinberger characterised as the third contract (and Ms Culkoff characterised as a third variation to the original contract). That contract appears to have arisen from discussions leading up to 3 July 2014, on which date AWE sent an email to Suprima offering to carry out work described in that email for the price stated in it. The parties agree that this offer was accepted, and that the email records the basic terms of the bargain struck between them.

First issue: one contract or several?

11. The Adjudicator appeared to reason that there was one contract between the parties, varied from time to time by the addition of further items of work. Ms Culkoff supported the Adjudicator’s reasons. She pointed to the fact that the email acceptance of the first section of quotation 312 stated specifically, among other things, that:

At this point in time, we will only be accepting the work, that is covered by the Flour System and the Bulka Bag System for Line 2.

…

For the sake of completeness, at this time, we will not be accepting any of your additional quotes for Grain Systems, Dusting Flour Systems and any rectification quotes for the existing Flour Systems faults / problems

…

- Any additional work on Minto’s Material Handling, will be discussed with you, on a case by case basis

…

- At this point in time, no further work, [sic] will be undertaken re the return dough system, back into the mixer bowls. This can be discussed further, once we have decided upon the mixing system for line

- We would like to reserve our right to re discuss [sic] the price with you, as per your and my emails E Mails [sic] dated 17th July 2013.

12. I do not agree that there was but one contract, varied from time to time. What Mr Weinberger called, and I will call, the first contract was a contract for the performance of discrete identified items of work: the supply, delivery, installation and commissioning of the materials handling system described in the relevant section of quotation 312. I do of course accept that, as was common ground between the parties, this first contract, the subject of invoice 108705, was varied at some stage to comprise as well the work the subject of invoice 108708. Presumably, that common position reflects the reality that the work the subject of invoice 108708 comprised alterations or improvements to items of plant and equipment the subject of invoice 108705.

13. However, on the evidence as it stands, there is no reason to think that the work that was the subject of invoices 108704 and 108707 had anything to do with the work the subject of the first contract, either as originally made or as varied. Each of those invoices seems to me to refer to work the subject of a separate contract made by acceptance of a separate quotation. In the case of invoice 108704, the underlying quotation is quotation 544. In the case of invoice 108707, the quotation appears to be comprised, or restated, in the email of 3 July 2014 to which I have referred. The only common feature is that all the work relates to Suprima’s Minto Factory.

14. On the evidence, neither Suprima nor AWE sent to the other some form of contractual terms (whether by way of purchase order from Suprima or quotation from AWE) purporting to set out or have the effect that there would be an overarching contract to which the parties might add items in the future. They appear to have contracted with each other on the basis that quotations were sought, and accepted in part, from time to time.

15. Further, on the evidence, the work done by AWE was by no means the whole of the work undertaken by Suprima in connection with the upgrade of its factory premises. The work done by Suprima appears to have amounted to about 25% by value of the total work. It would appear to be the case that Suprima contracted with others for other parts of the upgrading works. To my mind, it is consistent with the pattern of dealing shown that from time to time Suprima would order from AWE, and AWE would supply, deliver, install and commission, items of plant and equipment.

16. The words of the email acceptance of quotation 312 on which Ms Culkoff placed reliance (see at [11] above) seem to me to speak against, rather than for, the conclusion that, in her submission, should be drawn from them. First, AWE received at least two quotations (quotations 312 and 544). Second, initially Suprima accepted only the first section of quotation 312. It then stated clearly that no additional quotations were accepted and that any further work would be discussed “on a case by case basis”.

17. The obvious inference from that email acceptance is that if Suprima required further work from AWE, it would enter into a separate contract or contracts for that work. In my view, that is precisely what happened.

18. I should note that Ms Culkoff relied on what I had said in Class Electrical Services v Go Electrical [2013] NSWSC 363 at [27] and [33] to [36]. In those paragraphs, I dealt with what I perceived to be a distinction, arising on the particular facts of that case, between an agreement as to the terms on which construction work would be done if requested, and an agreement (or undertaking) to carry out construction work. With the greatest of respect to Ms Culkoff, I do not understand how what I there said has any relevance to the facts of the present case, save insofar as it supports (in a way unhelpful to AWE) what I have said at [14] above.

Second issue: construction contracts?

19. As I have noted, Mr Weinberger accepted that the first contract, both as made and as varied, was a construction contract.

20. Mr Weinberger’s argument in relation to the second contract was based on the proposition that it required the supply and commissioning of some sort of movable flour handling system. However, a computer generated sketch that formed part of the material before the Adjudicator (and before the Court), indicates that the equipment comprises a frame that is bolted to the factory floor, to be used to decant or sift flour into mobile bins. That understanding is confirmed by the way AWE described the work in a statutory declaration of a Mr Baillie. Suprima did not cavil with his description. Mr Weinberger’s submissions seem to have been based on a misreading of the description. The only wheeled equipment would appear to be the “portable wheeled containers”, or bins, that would be deployed under the flour decanting station by Suprima’s workers.

21. The flour decanting station appears from the sketch to be a substantial piece of equipment, bolted to the floor and, no doubt, connected to the factory electricity supply. The parties did not address submissions as to whether, properly understood, it is or is not to be regarded as a fixture; as forming part of the land. I see no reason to speculate on this topic. It is enough to say that the challenge that was made was based on a misconception as to the nature of the equipment the subject of the second contract. Once that challenge fails, there is no reason, on the evidence, to think that the Adjudicator’s overall conclusion was wrong, in its application to the flour decanting station.

22. I turn to the work the subject of the third contract (the subject of invoice 108707). That work appears (from the email of 3 July 2014) to include “flow meters at end points, installation, additional solenoids, [and] lagging”, in addition to drafting or design work. From the description given in the payment claim (again coming from Mr Baillie’s statutory declaration), it appears to relate “to pipework for the chilled water, yeast and canola water pipework”.

23. Mr Weinberger’s submissions did not indicate why it was that the works the subject of the third contract ought not be regarded as construction work. That may reflect the fact that his attack was focused primarily on the Adjudicator’s reasoning, which (as I have indicated) regarded all the contractual work as being done pursuant to one contract, varied from time to time. (I note, in fairness to the Adjudicator, that he considered particular items of work that were the subject of particular orders, and concluded that they were not variations to the contract, and did not require the performance of construction work.) In any event, as it seems to me, the brief description of the works given, involving as it appears to do pipework (or additional pipework) for plant and equipment that may well have been fixtures, is consistent with the work’s having been, or amounted to, construction work.

24. In circumstances where the evidence does not compel (of course, on the balance of probabilities) the conclusion that the work the subject of the third contract was anything other than construction work, and indeed is consistent with its having been construction work, I am not prepared to conclude that the Adjudicator erred. I accept of course that in my view the Adjudicator erred in characterising the contractual situation as consisting of one contract varied from time to time, rather than three contracts, one of which was varied. But the real question is whether Suprima has shown that any of the (on my view) three contracts was other than a construction contract for the purposes of the Act. In my view, it has not done so.

25. I add two points. First, if, there were but one contract – the first contract, as varied from time to time – the conclusion just expressed would follow a fortiori. Second, if the contracts required AWE to undertake some construction work for Suprima, they would be construction contracts for the purposes of the Act even, if, as well, they required AWE to undertake work that was not construction work. The second point becomes relevant because, as I say at [36] below, Suprima never sought to identify items of non-construction work under any of the contracts.

26. It follows, in my view, that Suprima has not shown that the Adjudicator lacked jurisdiction to deal with the merits of the Adjudication application.

27. Before leaving this issue, I should note that I do not accept Mr Weinberger’s attacks on the alleged paucity of the Adjudicator’s reasons. The Adjudicator directed himself, correctly, by reference to the definition of “construction work” given in s 5 of the Act. He gave reasons why, in his view, the work in question fell within aspects of paras (b) and (c) of s 5(1). The reasons that he gave were brief. But they were logical; and they were based on the facts as the parties had presented them to him.

28. The Adjudicator advanced, as a separate reason for concluding that the work in question was construction work, that it related to the construction or extension of “industrial plant” (see s 5(1)(b) of the Act). He noted that the parties had not addressed submissions to that precise point. I thought at one point that, by relying on “industrial plant” as an additional reason for his conclusion, the Adjudicator may have denied Suprima natural justice. I raised this with the parties. Mr Weinberger did not adopt the suggestion.

29. On reflection, I do not think that the Adjudicator denied natural justice to Suprima by referring to the concept of “industrial plant”. Suprima had raised, as a challenge to AWE’s entitlement to make a payment claim, that none of the work the subject of the contracts between it and Suprima was construction work. (Its concession as to the first contract, both as made and as varied, only came in the course of submissions in this Court.) It had every opportunity to address the constituent elements of the definition of “construction work” in s 5 of the Act. It must have been obvious, to anyone who had read that definition and who had even a basic understanding of the work the subject of those contracts, that it was work relating to plant and equipment installed or to be installed in Suprima’s Minto factory.

30. Suprima put the “construction work” issue before the Adjudicator in a way that did not condescend to any degree of detail. The Adjudicator engaged with the question as Suprima had framed it. It does not seem to me that it would now be open to Suprima to complain (and I repeat that it has not complained) that in one respect it had not been given an opportunity to put submissions on an additional matter that, in the Adjudicator’s view, supported the conclusion that the work in question was construction work.

Third issue: failure to value “construction work”

31. Mr Weinberger submitted that it had been incumbent on the Adjudicator to go through all the items of work comprised in each invoice the subject of the payment claim, for the purpose of deciding for himself:

1. whether or not each item was an item of construction work; and

2. to the extent that it was, valuing it; or

3. to the extent that it was not, disregarding it.

32. Suprima relied on ss 9 and 10 of the Act. I set them out, so far as they are relevant:

9      Amount of progress payment

The amount of a progress payment to which a person is entitled in respect of a construction contract is to be:

(a)     the amount calculated in accordance with the terms of the contract, or

(b)     if the contract makes no express provision with respect to the matter, the amount calculated on the basis of the value of construction work carried out or undertaken to be carried out by the person (or of related goods and services supplied or undertaken to be supplied by the person) under the contract.

10      Valuation of construction work and related goods and services

(1)     Construction work carried out or undertaken to be carried out under a construction contract is to be valued:

(a)     in accordance with the terms of the contract, or

(b)     if the contract makes no express provision with respect to the matter, having regard to:

(i)     the contract price for the work, and

(ii)     any other rates or prices set out in the contract, and

(iii)    any variation agreed to by the parties to the contract by which the contract price, or any other rate or price set out in the contract, is to be adjusted by a specific amount, and

(iv)     if any of the work is defective, the estimated cost of rectifying the defect.

…

33. The Adjudicator, having concluded that there was but one contract and that it was a construction contract, took the course of identifying items of work that had been added by variations and that were clearly not of themselves items of construction work. He did not go through the entire quotations, line by line (as in all seriousness, Suprima had submitted he should) to determine, on some a priori basis, whether and if so to what extent each line item could or could not be said to amount to construction work. Mr Weinberger submitted that this approach was essentially incorrect. I do not agree.

33. I start by setting out paras (a), (b), (c) and (e) of the definition of construction work in s 5 of the Act:

(a)     the construction, alteration, repair, restoration, maintenance, extension, demolition or dismantling of buildings or structures forming, or to form, part of land (whether permanent or not),

(b)     the construction, alteration, repair, restoration, maintenance, extension, demolition or dismantling of any works forming, or to form, part of land, including walls, roadworks, power-lines, telecommunication apparatus, aircraft runways, docks and harbours, railways, inland waterways, pipelines, reservoirs, water mains, wells, sewers, industrial plant and installations for purposes of land drainage or coast protection,

(c)     the installation in any building, structure or works of fittings forming, or to form, part of land, including heating, lighting, air-conditioning, ventilation, power supply, drainage, sanitation, water supply, fire protection, security and communications systems,

…

(e)     any operation which forms an integral part of, or is preparatory to or is for rendering complete, work of the kind referred to in paragraph (a), (b) or (c), including:

(i)     site clearance, earth-moving, excavation, tunnelling and boring, and

(ii)     the laying of foundations, and

(iii)     the erection, maintenance or dismantling of scaffolding, and

(iv)     the prefabrication of components to form part of any building, structure or works, whether carried out on-site or off-site, and

(v)     site restoration, landscaping and the provision of roadways and other access works,

35. The work in question clearly involved the alteration, in some respects identified by the Adjudicator, of the existing factory premises. It also included the construction or alteration of works forming or to form part of the Minto premises, and of plant and equipment in those premises, and the installation in those premises of industrial plant that, on the face of things, would form part of the land. It might also be said to include work integral to, preparatory for, or rendering complete, works of the kind that I have described.

36. In circumstances where Suprima did not assist the Adjudicator by identifying specific parts of the works that, in its submission, could not be regarded as construction work, I do not understand why it was incumbent on the Adjudicator to attempt to do so. Suprima put its case before the Adjudicator, on this question, at a level of extreme generality. I add that it presented its case to the Court in the same way. Mr Weinberger did not trouble to identify specific parts of the works that, in his submission, could not be construction work; a fortiori, he did not identify the reasons why that could not be so.

37. In my view, the Adjudicator dealt with the case as it had been put to him. It was not incumbent on him to go further, particularly in the absence of submissions from Suprima.

Fourth issue: the claim for defective work

Introduction

38. Mr Weinberger submitted that the Adjudicator had not dealt, in an appropriately reasoned way, with its claim for defects. That, he submitted, was a breach of the Adjudicator’s essential statutory function. Alternatively, he submitted, it amounted to a denial of natural justice.

39. Mr Weinberger relied on a number of decisions. Without being disrespectful either to him or to the decisions that he cited, I think that the position for which he contended emerges sufficiently from the judgment of Vickery J in SSC Plenty Road Pty Ltd v Construction Engineering (Aust) Pty Ltd [2015] VSC 631. His Honour said at [76] that the task of adjudication requires, at least, “a determination as to whether the construction work the subject of the claim has been performed and its value”, and that a failure to undertake this task “is a failure to comply with a basic and essential requirement of the [Victorian] Act”.

40. Although of course Vickery J was dealing with the Building and Construction Industry Security of Payment Act 2002 (Vic), I think that the two Acts are sufficiently analogous to make his Honour’s observations directly applicable. I note that at [77] to [84], Vickery J referred with apparent approval to a number of decisions of the Courts in this State.

41. Vickery J summarised the work required of an Adjudicator at [101] of his reasons. I set that paragraph out in its entirety:

[101]   Drawing the threads together, the following may be said of an adjudicator’s assessment of a payment claim under the Act in Victoria:

(a)    The adjudicator is required to determine and apply what the adjudicator considers to be the true construction of the Act in the light of the current case law.

(b)    The adjudicator is required to determine and apply what the adjudicator considers to be the true construction of the construction contract.

(c)    In addition to the matters to be determined and considered under ss 23(1) and (2), and excluded under s 23(2A) of the Act, an adjudication requires, as a minimum, the following critical findings to be made (the “critical findings”):

(i)    a determination as to whether the construction work the subject of the claim has been performed (or whether the relevant goods and services have been supplied); and

(ii)    the value of the work performed (or the value of the goods and services supplied).

(d)    Construction work carried out or related goods and services supplied are to be valued in accordance with the terms of the construction contract (if the contract contains such terms) pursuant to ss 11(1)(a) and 11(2)(a).

(e)    In the absence of any express provision in the construction contract providing a mechanism for an adjudicator to undertake the assessment of value, the valuation assessment is to be undertaken in accordance with s 11(1)(b) (for work) and s 11(2)(b) (for goods and services), having regard to the matters set out in those sub-sections, namely:

(i)    the contract price for the work or the goods and services;

(ii)    any other rates set out in the contract;

(iii)    if there is a claimable variation, any amount by which the contract price or other rate or price set out in the contract, is to be adjusted as a result of the variation; and

(iv)    if the work or goods are defective, the estimated cost of rectifying the defect.

(f)    If a construction contract contains a binding schedule of rates within the meaning of s 11(1)(b)(ii) (for work) and s 11(2)(b)(ii) (for goods and services), the adjudicator is required to have regard to the schedule in assessing value if s 11(1)(b) or s 11(2)(b) apply. Further, the adjudicator should state in the adjudication determination whether and how the schedule of rates was applied in the assessment of value, if it in fact was applied, or state why the schedule of rates was not applied.

(g)    However, without measures, evidence or submissions being provided to the adjudicator in a coherent fashion in respect of defined categories of work (or goods and services) the subject of a contractual schedule of rates, in most cases it would not be possible for an adjudicator to safely apply the schedule in assessing the value of the claim. In such circumstances the adjudicator may have regard to a schedule of rates, but would not be remiss in not applying it.

(h)    The adjudicator is obliged to make the critical findings on the whole of the evidence presented at the adjudication.

(i)    The adjudicator, having decided that the respondent’s submissions and material should be disregarded, cannot simply adopt the amount claimed by the claimant (for example, in the payment claim or in the adjudication application).

(j)    The adjudicator must proceed to make the critical findings by:

(i)    fairly assessing and weighing the whole of the evidence which is relevant to each issue arising for determination at the adjudication;

(ii)    drawing any necessary inferences from the evidence, or from the absence of any controverting material provided by the respondent, including an inference that if there is no controverting material, no credible challenge can be made to the value of the claim advanced by the claimant. Such an inference may be considered in the context of the evidence as a whole;

(iii)    arriving at a rational conclusion founded upon the evidence;

(iv)    in so doing, is not called upon to act as an expert; and

(v)    is not entitled to impose an onus on either party to establish a sufficient basis for payment or a sufficient basis for withholding payment.

(k)    Pursuant to s 23(3) of the Act, the adjudicator must include in an adjudication determination both the reasons for the determination and the basis upon which any amount or date has been decided. In providing these reasons the adjudicator must summarise the central reasons for the making of the critical findings in the adjudication determination with as much completeness as the time permitted under the Act will allow.

The evidence before the Adjudicator

42. Suprima’s case, as it was put to the Adjudicator in the adjudication response and supported by statutory declarations of its employees, was that the work in question was of no value to it. For example, Mr Martin, the general manager of the Minto factory, said at [31] to [34] of his statutory declaration forming part of the adjudication response:

[31]   The Claimant’s attempted commission during that period was wasteful of many of the Respondent’s employee hours and thousands of dollars of ingredients in order to try and achieve a proper functioning food process and delivery system. In essence, the commissioning has never successfully occurred.

[32]   Eventually the Respondent terminated the commissioning process on about 1 September 2015 because the Claimant was simply unable to make any significant improvement with the automated bakery line and the Respondent needed to manufacture saleable finished goods in order to run its business.

[33]   As a result of the failure of commissioning of the automated bakery line the Respondent had to revert to manual weighing of ingredients so as to ensure reliable manufacturing of the dough, incurring significant additional time and cost.

[34]   The Respondent disputes that the Claimant commissioned the plant and equipment successfully or at all. It was never successful. By comparison, the Respondent’s other automated bakery line (Line 1), can produce 1,000 frozen doughs from a batch with nil or negligible rejections. The performance of the plant and equipment installed by the Claimant did not achieve anything like that success rate. With food/recipes you need to be boringly consistent, you need monotonous accuracy. A recipe is a recipe and it must be accurate 100% of the time. The Claimant spent many hours trying to get their system to perform, without success. They threw a large amount of resources at their attempts of commissioning, and now seek to charge the Respondent for it, but never got the automated food delivery and processing system to perform at an acceptable level.

43. Mr Martin also said, at [52] to [56] and [62] of his statutory declaration:

[52]   The Respondent purchased an Ingredient Delivery Systems from the Claimant. We bought a flour delivery system, we bought a liquids delivery system from AWE (water, yeast, Canola oil) and we bought a Minor Ingredient Delivery system. These ingredient systems need to be manufactured to a standard and must work reliably. The Claimant has not delivered us ingredient systems that work. The hardware is in place, but the quality and the process within the system are lacking. The minor ingredient delivery system in particular is far from where it needs to be, in fact it simply does not work. The Claimant has now had 12 months to get the system to work and it is still unable to get positive results. In my opinion, we have not bought an ingredient delivery system that properly functions.

[53]   I refer to paragraph 153 of Mr Baillie’s statutory declaration.

[54]   I had many discussions with Brad Baillie during July and August 2015 while they were struggling with commissioning. The Claimant had people working on the system every day during that time and no matter what they did to improve its performance it was not able to achieve a fully automated ingredient delivery system. Near the middle of August 2015 I told Brad Baillie that I was getting to the point that I didn’t think their system was ever going [sic] work. Eventually I told Brad Baillie that the Respondent wanted to try to run the system without any of the Claimant’s people on site as I felt they were starting to fudge the operation and the results of the system. I knew that if they were not hooked up to the system electronically then the system would perform to its own capability. It didn’t perform at all well so we shelved its use and reported the outcome to Brad.

[55]   I refer to paragraph 154 of Mr Baillie’s statutory declaration.

[56]   The simple fact is that the Claimant was given plenty of opportunity over the past 12 months to get the system to work. They could not achieve a result.

…

[62]   In my opinion, 6 accurate deliveries out of 10 is not acceptable. In my opinion, it is the fault of the Claimant’s system, and not the fault of others, that 4 out of 10 deliveries in the system failed.

44. Again, Mr Bernhardi, a project engineer employed by Minto, said at [28] to [32] of his statutory declaration submitted with the adjudication response:

[28]   There are basically two separate systems and functions for equipment supplied by the Claimant. They are:

(a)   Additional equipment to upgrade our existing flour delivery to include flour delivery to line 2 (the Flour System).

(b)   An ingredient bulker bag system that would convey consistent and accurately weighed batches of ingredients to line 2 mixers (the Bulka Bag System).

[29]   In regard to the Flour System, I believe that the Claimant did not design a system to function satisfactorily. The Respondent provided advice and detailed control methods that showed the requirements were practical and achievable.

[30]   Unfortunately, the Bulka Bag System was manufactured at the Claimant’s Chinese factory and the Respondent was unable to comment on the system until it arrived at the premises.

[31]   The ingredient Bulka Bag System installed by the Claimant is a disaster and flies in the face of Mr Baillie’s claim of 20 years’ experience in materials handling and process control.

[32]   During the time that I was at the Respondent’s premises I never saw the Claimant’s Bulka Bag System operating successfully, in consistent and automated scaling accurately across the range of ingredients on any specific recipe.

The Adjudicator’s reasons

45. The Adjudicator dealt with these allegations in a somewhat curious way. First, at [100] of his reasons, having referred to Suprima’s allegation of express and implied warranties as to fitness for purpose and the like, he said that there were no “express or implied statements in respect of ‘warranties and guarantees’” in the material before him, and that Suprima “has not provided any supporting documentation to substantiate its submissions”.

46. Quite how there could be documentation of an implied warranty is a matter of some doubt. The real point, however, is that in the ordinary way, a contract for the supply, delivery, installation and commissioning of industrial plant might well be thought to include at least implied warranties that the plant in question would be of merchantable quality, and reasonably fit for purpose (to the extent that the purpose had been made known to the supplier). That was Suprima’s case. The Adjudicator did not engage with this aspect of it.

47. However, the Adjudicator did touch on the topic of defective work. He did so at [169] to [174] of his reasons:

169.   With reference to the payment schedule, the respondent submits that “none of the agreed works has been designed, manufactured, supplied, installed or commissioned as agreed, promised, warranted or guaranteed and has resulted in our client suffering substantial and ongoing losses.” In this adjudication determination, I have referenced the respondent’s submissions as ‘defects’.

170.   With reference to the payment schedule, the respondent does not make any specific submissions to identify which areas of the design, manufacture, supply, installation or commissioning are not in accordance with the terms of the construction contract.

171.   With reference to the statutory declaration made by Tim Baillie contained at Tab E of the adjudication application, the claimant has set out its reply to the respondent’s broad submissions in respect of the ability of the installed works to perform as required. The claimant submits that the issues being experienced by the respondent are a result of:

●   “a defect in mixer feed in grate, which is not part of the AWE works, blinding and holding minor ingredients;

●   Suprima operator errors by putting software into manual modes;

●   Suprima (Allen Bernhardi, Larry Martin and Ken Davidson) being heavily involved in the design of the works and directing numerous modifications to the standard AWE designs which has ultimately affected the final design and operation of the works.”

172.   With reference to the adjudication response and the statutory declarations included therein, the respondent disputes the claimants submissions. I am satisfied from the information before me that the system installed by the claimant is not performing to the level that the respondent expected. However, the respondent has only made broad submissions in respect the alleged defects.

173.   With reference to Attachment A of the payment claim and specifically invoice 108705, the claimant did not claim for the Micro Ingredients Stations or the Installation and Commissioning of the Micro Ingredients Stations. The Micro Ingredients Stations are referred to by the claimant as a ‘Disputed Item’. The value of the works not claimed by the claimant is $92,200.00. I am satisfied that the non-inclusion of the Micro Ingredients Station works in the payment claim is a reasonable allowance to address any works that may still be required to resolve any ongoing defects.

174.   The payment schedule does not identify a specific value in respect of the alleged ‘defects’. No deduction is made for ‘Defective Work’ in this adjudication determination.

48. I shall return to the issue of the “Micro Ingredients Stations”.

Submissions

49. Mr Weinberger submitted that, in dealing with the defects claim in the way he did, the Adjudicator had neglected an essential part of his function. Mr Weinberger submitted that the essence of Suprima’s case as to defective workmanship was that the plant and equipment that AWE had supplied was useless, and hence of no value to Suprima.

50. Mr Weinberger submitted that the Adjudicator appeared to have accepted that the plant and equipment was in some respects defective (he relied on [172] of the reasons). In those circumstances, Mr Weinberger submitted, it was necessary for the Adjudicator to consider the complaint and, if he found it substantiated, to make some reasoned allowance.

51. As has been seen, the Adjudicator sought to deal with this by referring to the “non-inclusion of the Micro Ingredients Station works in the payment claim”. Mr Weinberger submitted that this approach was essentially fallacious.

52. Ms Culkoff supported the Adjudicator’s reasoning. She submitted that Suprima had chosen to put its defects case at a level of extreme generality, and that the Adjudicator was justified in treating it in the same way. On that basis, she submitted, the Adjudicator had done all that the Act required in respect of the alleged defects.

53. Ms Culkoff submitted that in any event, a mistake made in the performance of the calculation of the amount of a progress payment in accordance with ss 9 and 10 of the Act was not jurisdictional but, rather, a mistake within jurisdiction. She relied on what I said in Clyde Bergemann v Varley Power [2011] NSWSC 1039 at [51] to [53].

54. I concluded in those paragraphs, having reviewed a number of authorities in the preceding paragraphs, that if an adjudicator did not calculate the amount of a progress payment in accordance with the terms of a subcontract, because he misconstrued or misapplied the relevant contractual provisions, there was no excess of, or failure to exercise, the jurisdiction given to him under the Act. I set out those paragraphs:

[51]   The significance of his Honour's observations lies in the fact that the peremptory, or what Mr Corsaro submitted was the mandatory, language of s 9 (the use of the words "is to be") governs both para (a) and para (b). If Mr Corsaro's submission is to be accepted, a failure to comply with s 9(b) (in a case where it applied, because para (a) did not) would, equally, amount to jurisdictional error. It is clear from what Allsop P said in Plaza West that his Honour did not regard the adjudicator's failure, in that case, to attend to the requirements of s 9(b) as vitiating his determination.

[52]   The reasoning of Hodgson JA in the three cases to which I have referred, of Basten JA in the second, and of Allsop P in the third, is in my view consistent with the approach that Palmer J took to s 9(a) in Multiplex, and supports my view that s 9(a) is not a condition of jurisdiction but, rather, a description of the mechanical aspects of the essential task to be performed in the exercise of the jurisdiction that is conferred. In my view, it would be most unusual for a mechanical provision such as s 9 to be characterised as jurisdictional.

[53]   Accordingly, I conclude that even if the adjudicator did misconstrue or misapply the relevant contractual provisions, and as a result did not calculate the amount of the progress payment to which Varley was entitled in accordance with the terms of the subcontract, he did not thereby exceed, or fail to exercise, the jurisdiction entrusted to him by the Act.

Decision

55. On reflection, I have come to the conclusion that the Adjudicator did fail to discharge this aspect of his statutory function, and that, by failing to deal in a reasoned way with a fundamental part of Suprima’s case, he denied it natural justice. The Adjudicator concluded at [172] that the system installed by AWE was not performing to Suprima’s requirements. Because of the approach that the Adjudicator had taken on the question of implied warranties, he did not consider whether this was a breach of any applicable implied warranty. More fundamentally, however, he did not inquire whether, as Suprima had put, the plant was essentially of no value to it.

56. The essence of Suprima’s complaint, as articulated by Mr Martin, was that the plant and equipment commissioned from AWE was worthless, because it was not capable of operating with the requisite degree of accuracy. He said at [52] of his statutory declaration that although the hardware had been installed, it was not operating as required. The consequence, as he said at [54] was that “we shelved its use” – i.e., as I understand it, stopped using the equipment.

57. Mr Bernhardi too, supplied evidence of defects in the operation of the plant and equipment that AWE had supplied and installed. Although his evidence was given at a greater level of generality than Mr Martin’s, it nonetheless provides some corroboration for the proposition that the plant and equipment had never operated successfully.

58. The Adjudicator simply failed to engage with this evidence. He might have accepted it; he might have questioned it; he might have rejected it. We do not know, because his reasons do not show what (if anything) he made of it. Instead, the Adjudicator referred (at [170]) to the absence of “specific submissions to identify which areas … are not in accordance with the terms of the construction contract”. However, that appears fundamentally to misunderstand the way in which Suprima put this aspect of its case.

59. I accept of course that the Adjudicator did refer at [171] to Mr Baillie’s statutory declaration setting out a response to Suprima’s case. However, he expressed no view as to which of the two competing positions should be regarded as correct. The most that one can infer is that he appears to have perceived that the system was not operating as it should (although even there, he characterised the issue as one of Suprima’s expectations rather than in terms of any applicable implied warranty).

60. Then, and illogically in my view, the Adjudicator decided that the cost of rectifying “any ongoing defects” was reasonably covered by the Micro Ingredients Stations issue. The Micro Ingredients Stations were items of plant or equipment, three in number, that, apparently, AWE had contracted to supply, deliver, install and commission. The cost of the items was in total $55,500.00, and the cost of installation and commissioning was in total $36,700.00 (in each case net of GST). Invoice 108705 had included a claim for the cost of supplying, installing and commissioning the Micro Ingredients Stations. However, the payment claim referred to these as “disputed items removed from invoice/claim”.

61. There are in my view two problems with this part of the Adjudicator’s reasons. First, there is no reasoning whatsoever to indicate why that sum of $92,200.00 (were it properly to be regarded as some sort of offset) would cover defects of the magnitude asserted by Suprima. Thus, the Adjudicator’s reliance on this offset could not amount to an attempt to value any defective work; and the statutory duty to give reasons has not been discharged.

62. Second, and more fundamentally, that item formed no part of the payment claim nor of the adjudication application. There is no suggestion that AWE was abandoning the Micro Ingredients Stations claim. But even it were, that was, presumably, because it recognised that the claim was unsustainable. How, then, could the abandoned amount of $92,200.00 operate (on either basis) as an appropriate allowance for the possible cost of rectification of other defective works? The answer is simple: it could not.

63. In my view, this aspect of the Adjudicator’s reasons fails, in a fundamental way, to deal with an essential element of Suprima’s “defence”. It follows, in my view, that in this respect the Adjudicator failed to perform his statutory task, and that additionally, and in consequence, he denied Suprima an essential element of natural justice.

64. Nor do I think that any different conclusion follows by reference to what I had said in Clyde Bergemann (see at [54] above). I am not sure that Ms Culkoff went so far as to submit that there was some difference of principle between my reasons in those paragraphs of Clyde Bergemann, and the reasons of Vickery J in SSC Plenty at [101] (set out at [41] above). If she did, I do not agree. In my view, there is no difference.

65. Vickery J set out the elements of the statutory task that an Adjudicator is required to perform once he or she accepts an adjudication application (see s 19 of the Act). As his Honour, in my respectful view correctly, said, the essential task is to determine the amount (if any) of the progress payment to be paid, the date of payment, and the rate of interest (see s 22(1) of the Act). His Honour, at [101] of SSC Plenty, broke down that statutory task into the steps there set out. In short, his Honour set out what it is that an adjudicator is required to do in the proper exercise of the jurisdiction entrusted to him or her by the (in that case, Victorian) Act.

66. It follows both from what his Honour said in SSC Plenty and from what I said in Clyde Bergemann that the performance of any one of the steps identified by Vickery J must be the performance of a step, or task, within jurisdiction. For the reasons I gave in Clyde Bergemann (and what I said there was hardly novel), a mistake in the performance of some one or more of those steps would be regarded as a mistake within jurisdiction: as I said in Musico v Davenport [2003] NSWSC 977 at [122], a mistake that the Act permits an adjudicator to make.

67. However, this case is not concerned with a mistake made within jurisdiction: a mistake as to the construction or application of a term of the contract; a mistake as to the calculation of an amount payable under the contract; or a mistake as to the ascertainment of some other ingredient of the calculation. It is, rather, concerned with a failure to carry out at all an element of the statutory task; a failure arising from the way in which the Adjudicator in this case dealt with the allowance for defective work.

68. I add only that even if this were incorrect, and there is no more than a mistake within jurisdiction, it would not help AWE. Even on that assumption, it must be the case that the Adjudicator failed to deal with an essential, indeed fundamental, aspect of Suprima’s case. He simply did not engage with the case that Suprima had put, and as a result failed to consider the fundamental basis on which, it said, it did not owe any money whatsoever to AWE.

Conclusion

69. Suprima has thus made good its claim to relief. The primary relief that it claims is set out at [6] to [8] of its summons filed on 11 December 2015:

[6]   An order that the First Defendant be restrained, until further order, from taking any further steps in relation to or arising from the Second Defendant’s adjudication determination dated 27 November 2015 in relation to adjudication application number ABCDRS NSW 54 (the adjudication determination), including making any request under s.24 of the Building and Construction Industry Security of Payment Act (the Act) for an adjudication certificate and filing any such adjudication certificate as a judgment for a debt in a Court pursuant to s.25 of the Act.

[7] In the alternative, an order pursuant to section 69 of the Supreme Court Act 1970 that the adjudication determination be quashed.

[8]   A declaration that the adjudication determination is void.

70. In my view, Suprima is entitled to relief as sought, but on a final basis. Since prayers 6 and 7 are in the alternative, there should be an order in terms of prayer 6 and a declaration in terms of prayer 8.

71. In addition, Suprima is entitled to the return of the money it paid into Court as the price of securing interlocutory injunctive relief.

72. As matters stand, I see no reason why Suprima, having succeeded, should not have its costs. I accept that it raised several arguments, one only of which succeeded; but the fact is that the extent of that success was all that was needed to justify the grant of relief.

73. I make the following orders:

1. Order that the first defendant be restrained from taking any further steps in relation to or arising from the second defendant’s adjudication determination dated 27 November 2015 in relation to adjudication application number ABCDRS NSW 54 (the adjudication determination), including making any request under s.24 of the Building and Construction Industry Security of Payment Act (the Act) for an adjudication certificate and filing any such adjudication certificate as a judgment for a debt in a Court pursuant to s.25 of the Act.

2. Declare that the adjudication determination is void.

3. Order that the sum of $561,584.01 paid into Court by the plaintiff on 18 December 2015, together with any interest accrued thereon, be paid out to the plaintiff forthwith.

4. Order the first defendant to pay the plaintiff’s costs.

5. Make no other order as to costs.

6. Direct that the exhibits be handed out.

7. Direct that these orders be entered forthwith.

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Decision last updated: 21 July 2016