Insights

In brief - Consider risks of SOP Scheme adjudications and take care when drafting "pass through" provisions within subcontracts 

Across two unanimous decisions, the High Court has provided much needed clarity for two aspects of the Security of Payment scheme in New South Wales and South Australia (SOP Scheme). In Probuild Constructions (Aust) Pty Ltd v Shade Systems Pty Ltd [2018] HCA 4, the High Court confirmed that courts do not have jurisdiction to quash adjudication determinations for non-jurisdictional errors of law on the face of the record. Separately, in Maxcon Constructions Pty Ltd v Vadasz [2018] HCA 5, the High Court provided a clear warning to head contractors to structure their performance security requirements carefully lest they be considered "pay when paid" provisions. 
 
Focusing on Probuild, while the decision confirms the status quo in New South Wales, a deeper understanding of the High Court's reasoning highlights potential national challenges ahead. 

Probuild and courts' jurisdiction to quash adjudication determinations for non-jurisdictional errors of law

By denying judicial review for non-jurisdictional errors of law, the High Court confirms the SOP Scheme as an "[interim,] speedy and effective means of ensuring cash flow to builders from the parties with whom they contract". (Probuild quoting R J Neller Building Pty ltd v Ainsworth [2009] 1 Qd R 390 400–401 [39].)
 
In Probuild, the non-jurisdictional error of law centred on alleged errors made by the adjudicator in interpreting the liquidated damages provisions of the construction contract. 
 
At first instance, the primary judge considered that the SOP Scheme did not exclude judicial review for non-jurisdictional errors of law. This position was out of step with previous courts' interpretation of the SOP Scheme and was subsequently overturned by the Court of Appeal before special leave to appeal to the High Court was granted. 
 
The core argument made by the appellant was that, in absence of "clear words" in the statute, or a clear legislative intention to oust the jurisdiction, it was open for courts to quash adjudication determinations for non-jurisdictional errors of law (Probuild 9 [25]). The High Court unanimously found that the clear legislative intention did exist.
 
This interpretation of the SOP Scheme was supported on several bases:
 
  • the unique form of adjudication established by the SOP Scheme
  • the limited timeframes for adjudication under the SOP Scheme
  • the informal nature of adjudication under the SOP Scheme, and
  • the lack of appeal rights from an adjudication determination (Ibid 12–16 [35]–[43].) 
The High Court stated that:
 
[t]o permit potentially costly and time-consuming judicial review proceedings to be brought on the basis of error of law on the face of the record, regardless of whether an adjudicator had exceeded the limits of their statutory functions and powers, would frustrate the operation and evident purposes of the statutory scheme. (Ibid 17 [48].)
 
A further factor underpinning the High Court's decision was that adjudication determinations only constitute an interim determination of the parties' respective rights and obligations under the construction contract. The SOP Scheme does not prevent disputes being resolved through civil proceedings under the construction contract. The High Court considered this to be the appropriate mechanism for resolving errors of law made by an adjudicator. Of course, recovering any overpayment will likely have severe time and cost implications for a party. While the High Court recognised these risks, they were considered a natural consequence of the SOP Scheme. (Ibid 18–19 [51].)
 
While Probuild settles the position in New South Wales (and, as will be seen, in South Australia), the question becomes whether the decision will have wider national implications. This is of particular importance for Victoria, as judicial review for non-jurisdictional error of law on the face of the record has been available for some time. (See, eg, Amaysa Enterprises Pty Ltd v Asta Developments (Aust) Pty Ltd [2015] VSC 233, [37], referring to Hickory v Schiavello (2009) 26 VR 112.) Given that the High Court's reasoning in Probuild focused on the legislative intent of the SOP Scheme, it would seem that Victoria, with a legislative scheme similar to New South Wales, may be bound to adopt the same approach. 

Maxcon and "pay when paid" provisions in a subcontract

Maxcon also contained issues of quashing adjudication determinations for non-jurisdictional errors of law. As the relevant provisions were not materially different, the High Court held that the provisions of the South Australian SOP Scheme, like those in New South Wales, ousted judicial review for non-jurisdictional error of law on the face of the record. (Maxcon 2 [5].) The substantial part of the decision, however, focused on potential "pay when paid" provisions in a subcontract.
 
While it is common practice for contractors to "pass down" obligations under a head contract in their contracts with subcontractors, care should be taken to ensure that this "pass down" does not cross the line imposed by the SOP Scheme and become a "pay when paid" provision.
 
In Maxcon, the subcontract provided that the subcontractor's performance security (cash retention equal to 5% of the contract sum) would be returned in two stages:
 
50% – 90 days "after CFO is achieved", and
50% – 365 days "after date of CFO" (Maxcon 2–3 [8].)
 
"CFO" was defined as:
 
the certificate of occupancy and any other Approval(s) required under Building Legislation which are required to enable the Works lawfully to be used for their respective purposes in accordance with [Maxcon's] Project Requirements. (Ibid 5–6 [19].)
 
Most Australian SOP Schemes define a "pay when paid" provision as one that makes a party's liability to pay or the due date for payment contingent or dependent on:
 
  • payment by a third party
  • the date on which a payment is made by a third party, or
  • the operation of another contract*
At adjudication, the adjudicator accepted a submission that the performance security provisions in the subcontract amounted to a "pay when paid" provision and were inoperative under the SOP Scheme.
 
The High Court agreed, holding that:
 
[as the] certificate of occupancy was dependent on certification by the builder, Maxcon, that the building work had been performed in accordance with the issued documents, including the head contract…the due dates for payment of the retention sum were dependent on something unrelated to [the subcontractor's] performance. (Maxcon 7 [24] –[25].) 
 
As a result, the return of performance security provisions amounted to the third type of "pay when paid" provisions. 
 
Interestingly, the High Court did not discuss the ultimate effect of a declaration that the return of performance security was an inoperative "paid when paid" provision. Many construction contracts contain a provision severing any clauses that are later found to be void or inoperative. If the relevant provisions were automatically severed, the question becomes "when would a head contractor's entitlement to the retention moneys cease?" There is no clear answer to this question. It may be that the effect is similar to the Peak principle for principal caused acts of prevention (see Peak Constructions (Liverpool) Ltd v McKinney Foundation Ltd (1970) 1 BLR 111), with a head contractor having to return the security within an unspecified "reasonable" time, but the issue appears yet to be determinatively resolved.
 
* See, eg, Building and Construction Industry Security of Payment Act 1999 (NSW) section 12(2); Building and Construction Industry Security of Payment Act 2002 (Vic) section 13(2); Building and Construction Industry Payments Act 2004 (Qld) section 16(2). Note that in the Northern Territory and Western Australia, a "pay when paid" provision is limited to only provisions that make the liability of a party (Party A) contingent (whether directly or indirectly) on Party A being paid an amount by another person (whether or not a party). See Construction Contracts (Security of Payments) Act (NT) section 12, Construction Contracts Act 2004 (WA) section 9.

Will "Legally Unreasonable" Jurisdictional Error be the next potential challenge?

While the debate over non-jurisdictional errors of law appears to have ended for now, a recent decision of the Supreme Court of New South Wales has raised a potentially novel new method to challenge adjudication determinations.
 
In Bouygues Construction Australia Pty Ltd v Southern Cross Electrical Engineering [2017] NSWSC 1665, the Supreme Court indicated its willingness to consider whether an adjudicator's legal analysis and conclusion was so "legally unreasonable" as to amount to jurisdictional error. 
 
Striking an oddly similar tone to non-jurisdictional error of law, a "legally unreasonable" jurisdictional error is one where an adjudicator makes a decision "which lacks an evident and intelligible justification." (Bouygues, quoting Minister for Immigration & Citizenship v Li (2013) 249 CLR 332 (Hayne, Kiefel and Bell JJ) 367 [76].) In Bouygues, the alleged error occurred when the adjudicator determined that the parties had agreed to forgo applying liquidated damages solely on the assertions of the claimant, without any supporting evidence or admission by the respondent that the agreement existed. (Bouygues, [15]–[19].) The applicant, Bouygues, asserted however, that this was a different type of error than that considered in Probuild. (Ibid [29].) 
 
The situation remains fluid, however, as Bouygues was merely an interlocutory application seeking to stay the enforcement of the adjudication determination. The substantial issues are yet to be considered, particularly in light of the reasoning in Probuild. Nevertheless, Bouygues remains a case of interest.

Probuild and Maxcon provide lessons for construction industry participants

Given the unique payment and adjudication structures inherent within the SOP Scheme, cases interpreting the scope of parties' rights must be followed carefully. Probuild and Maxcon are a useful reminder to the construction industry, at the very least in New South Wales and South Australia, of the risks inherent within adjudications under the SOP Scheme and the need to take care when drafting "pass through" provisions within subcontracts. 

This article has been published by Colin Biggers & Paisley for information and education purposes only and is a general summary of the topic(s) presented. This article is not specific legal advice. Please seek your own legal advice for any questions you may have. All information contained in this article is subject to change. Colin Biggers & Paisley cannot be held responsible for any liability whatsoever, or for any loss howsoever arising from any reliance upon the contents of this article.​

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