Australia: A pig with lipstick is still a pig! Judicial review and the Construction Contracts Act 2004 (WA)

The recent Western Australian Supreme Court decision in Delmere Holdings Pty Ltd v Green [2015] WASC 148 is interesting for three reasons.

First, it is an example of the Court emphasing the importance of defining carefully what is alleged to be the 'payment claim' and the 'payment dispute' in an application for adjudication under the Construction Contracts Act 2004 (WA) (Act).

Second, the decision provides further (although not conclusive) guidance on what constitutes a 'payment claim' for the purposes of s 3 of the Act.

Third, it is another example of the Court quashing an adjudication determination on the basis of jurisdictional error committed by a non-legally trained adjudicator.¹

The decision also touches on a growing body of case law giving guidance about the exercise of the Court's discretion to grant leave to enforce adjudication determinations under s 43 of the Act.

BACKGROUND FACTS

By a construction contract dated 20 December 2013, Delmere (as head contractor) engaged Alliance (as subcontractor) to carry out fabrication, supply, delivery and installation works in relation to plant piping and general infrastructure works at Cape Lambert, Western Australia.

The contract contained (in clause 34 (GC34)) a comprehensive regime (involving a number of steps) by which the cost of a direction to vary the scope of work could be added to the contract price.

In accordance with the procedure for making a variation claim, Alliance issued (on 9 October 2014) a variation claim expressed as having been made pursuant to clause 34(d)) (VC17).

Some two weeks later (on 24 October 2014), Delmere's engineer rejected VC17.

Subsequently, Alliance applied for adjudication of what it asserted was a payment dispute arising from Delmere's rejection of VC17. Alliance sought to categorise VC17 as a 'payment claim' (for the purposes of s 3 of the Act) and Delmere's rejection of VC17 as giving rise to a 'payment dispute' (for the purposes of s 6 of the Act). In its adjudication application Alliance submitted that, despite the complicated contractual mechanics in GC34 dealing with pricing variation works, it was entitled to claim "reasonable remuneration" for the variation works, in accordance with a term to be implied into the contract. Thus, Alliance made the "audacious" argument that VC17 was, in fact, a payment claim under the implied term which, when rejected, gave rise to a payment dispute.

On 10 November 2014, after Alliance had served its adjudication application, but before Delmere served its adjudication response, Alliance issued an invoice (Invoice 024) backdated to 9 October 2014, for the works claimed for in VC17.

In Delmere's adjudication response, it annexed a copy of Invoice 024 and contended that that invoice was the relevant 'payment claim' and that there was, therefore, no identifiable 'payment dispute' upon which Alliance should have based its adjudication application.

The adjudicator determined that Delmere should pay to Alliance an amount of almost $900,000. In arriving at that finding, the adjudicator concluded (erroneously):

1. That VC17 (rather than Invoice 024) was the relevant 'payment claim' which, given its rejection, in turn gave rise to a 'payment dispute'.
2. He was not entitled to consider Invoice 024 because that document had not been included in Alliance's submissions. Even though:
3. 1. it had been included in Delmere's adjudication response; and
   2. the logical impossibility of it being included in the adjudication application given it was not created until after the adjudication application had been served.

3. The implied term argued for by Alliance ought to be implied into the construction contract.
4. Thus, Alliance was entitled to "reasonable remuneration" for changes made by Delmere to the construction methodology. The change to the construction methodology caused "unjust enrichment and hence, a right in equity to be paid for such an act or circumstance."

THE ARGUMENTS

Alliance applied under s 43(2) of the CCA for leave to enforce the determination as a judgment of the court. Delmere applied (on 22 January 2015) for certiorari to quash the adjudicator's determination. The two proceedings were heard together.

The thrust of Delmere's application was that the adjudicator committed a jurisdictional error in finding that Alliance's VC17 was a 'payment claim' and that the rejection of that claim by Delmere's engineer was a 'payment dispute'.

In short, Delmere contended that, at the time Alliance filed its adjudication application, there was no relevant 'payment claim' and therefore no 'payment dispute'. Consequentially, the adjudicator "was never jurisdictionally enabled to proceed with [the] adjudication". Delmere argued that the existence of a 'payment claim' and of a 'payment dispute' were "fundamental elements, necessary to validly commence an adjudication application under [the Act]". Thus, the adjudicator ought to have summarily dismissed Alliance's application under s 31(2)(a) of the Act.

In response, Alliance argued that the four criteria set out in s 31(2)(a) of the Act are 'broad' jurisdictional facts and, further, the existence of a 'payment claim' or of a 'payment dispute' were also to be approached as being 'broad' jurisdictional facts. Thus, Alliance submitted, whether or not a 'payment claim' or 'payment dispute' ever actually existed should have no bearing upon whether or not the reviewing court should quash the adjudicator's determination. Alliance argued that the reviewing court could not evaluate for itself whether a 'payment claim' or 'payment dispute' had, in fact, existed but, rather, the court's review was limited to scrutinising the process of reasoning adopted by the adjudicator.

THE COURT'S DECISION

Kenneth Martin J found the adjudicator was in jurisdictional error as identified by Delmere. Accordingly his Honour issued orders absolute for certiorari quashing the adjudicator's determination. Consequently, Alliance's enforcement application under s 43 was dismissed.

Central to Martin J's reasoning were the complex contractual mechanics in the parties' construction contract regarding valuing variation claims and the compelling evidence that VC17 was, on its face, drafted and submitted to Delmere's engineer in compliance with those contractual mechanics. His Honour described Alliance's attempt, in its adjudication application, to re-cast VC17 as a payment claim as "something akin to an exercise in applying 'lipstick to a pig.'"

Having found that there was no payment claim, and thus no payment dispute, in existence at the moment the adjudication application was commenced, his Honour turned to consider the effect of that finding. His starting point was the terms of s 25 of the Act which his Honour held created four "necessary jurisdictional facts", namely:

1. the existence of a 'construction contract';
2. the existence of a 'payment dispute';
3. the existence of a 'payment claim'; and
4. that the payment dispute arises under the 'construction contract'.²

His Honour held that he did not need to enter into the debate in the authorities about whether the jurisdictional facts he had identified were broad or narrow. It was sufficient for his reasoning that the facts were objective, factual and fundamental to the adjudicator's jurisdiction. The existence of a payment dispute under a construction contract was a core, objective, jurisdictional fact and the existence of that fact was capable of being evaluated objectively without any need for complicated contractual construction exercises. His Honour concluded that the adjudicator fell into jurisdictional error by failing to observe the objective fact that no payment dispute existed at the moment the adjudication application was served. That failure was amplified by the adjudicator's misconceived failure to review Invoice 024, which would have confirmed the otherwise obvious conclusion that there was no payment dispute in existence when the application was made.

THE ALTERNATIVE ANALYSIS

Delmere also argued that the adjudicator fell into jurisdictional error by misconstruing the words "payment claim" in the Act as including a claim for unjust enrichment or a claim in equity. While it was not necessary for his Honour to find on this point, he provided brief comments about the issues.

Central to this issue was the adjudicator's reliance on the decision in ASIC v Edwards³ in support of the proposition that there was an implied term in the contract that Alliance ought to be awarded a reasonable remuneration for changes in methodology.

Martin J said that the difficulty with that conclusion is that it is manifestly in error. The decision cited by the adjudicator does not provide support for the implication of such a term, rather it is a rather orthodox example of the application of "well accepted" principles regarding quantum meruit claims.

The court reviewed the relevant paragraphs of the adjudicator's determination on this point at length and was unable to reconcile the reasoning with the current state of the Australian law. For that reason he held that he would have quashed the decision on that basis alone. In making that finding Kenneth Martin J essentially reiterated the view he had expressed in Red Ink Homes Pty Ltd v Court⁴ that while

no unduly technical or legalistic approach should be taken towards picking apart the reasons of an adjudicator ... where a clear jurisdictional error is shown in an adjudicator's decision, [the] court cannot turn a blind eye

ENFORCEMENT UNDER S 43

Having decided that the determination should be quashed it was unnecessary for Martin J to decide the enforcement application. However, his Honour noted that

if Delmere's judicial review application [had failed] then, absent some extraordinary, intervening circumstance, a registration of that Determination as an order of this court would usually follow.

While it was not argued in the case, this passage may be taken to set a higher threshold (an "extraordinary, intervening circumstance") than that set by Corboy J in Thiess Pty ltd v MCC (Mining) Western Australia Pty Ltd⁵ and Pritchard J in Cape Range Electrical Contractors Pty Ltd v Austral Construction Pty Ltd⁶ who each held that a 'sufficient reason' would be needed in order for a court to refuse leave under s 43.

In this case Martin J found that if he had been unable to quash the determination he would have stayed the enforcement application because of his satisfaction to a standard of "almost certainty" that Delmere would have later overturned the determination in litigation or arbitration. How the test of 'extraordinary intervening circumstance' will be deployed by dissatisfied parties in the future remains to be seen. It may be a useful starting point for an argument that, in circumstances where the determination is infected with obvious and manifest errors of law, then it ought not be enforced as a determination if a substantive dispute resolution mechanism is in operation.

Footnotes

¹ See, for example, Red Ink Homes Pty Ltd v Court [2014] WASC 52.

² As to the requirement that the claim be made "under" a construction contract, his Honour held that claims in quasi contract such as quantum meruit are not made under a construction contract as they were not claims "for a liquidated amount falling due under a contract."

³(2005) 220 ALR 148.

⁴ [2014] WASC 52.

⁶ [2012] WASC 304.

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