Courts quash adjudicator's determination!Nov 2015 |
The recent decision of the Supreme Court of Western Australia in Laing O’Rourke Australia Construction Pty Ltd v Samsung C & T Corporation1 has provided some helpful insight on the willingness of the courts to quash determinations of adjudicators made under the Construction Contracts Act 2004 (WA) (Act). In most state jurisdictions, applicants applying to have an adjudicator’s determination quashed, will be tasked with the onerous exercise of establishing that:
- The decision was made as a result of jurisdictional error;
- There has been a denial of natural justice;
- The decision was given in bad faith;
- The decision was procured by fraud; or
- The decision was one which the adjudicator had no power to make.
An adjudicator’s decision will remain binding, and create a statutory liability to pay unless one of the above can be proved.2 If the award remains unpaid, the successful party may seek the leave of the court to register the adjudicator’s decision and enforce it as a judgment.3 In this case the court had to consider whether the adjudicator had fallen into jurisdictional error by misapplying the terms of the construction contract.
Brief factual overview
In February 2014, Samsung C & T Corporation (Samsung) and Laing O’Rourke Australia Construction Pty Ltd (LORAC) entered into a contract in which LORAC agreed to undertake construction work at the Roy Hill Iron Ore Project in Pilbara (Contract). The Contract incorporated amended AS 4902-2000 general conditions of contract for design and construct, and contained the following terms relevant to the dispute:
- Clause 37.1, which enabled LORAC to make progress claims under the Contract for completed works;
- Clause 39A.1, which gave Samsung the right to terminate the Contract "at any time for its sole convenience"; and
- Clause 39A.2, which made provision as to LORAC’s rights and obligations where the Contract was terminated under cl 39A.1. Clause 39A.2 was expressed to survive termination of the Contract under cl 39A.1.
In February 2015, Samsung terminated the contract for convenience, and subsequently both parties entered into a deed, which provided that Samsung would make certain payments to LORAC. A payment of $45 million was made on account under the deed.
After Samsung paid the $45 million sum, LORAC submitted an adjudication application under the Act, and was successful in obtaining two separate determinations with the effect that Samsung had to pay LORAC $44,140,518.
Samsung commenced Supreme Court proceedings seeking writs of certiorari to quash the adjudicator’s determinations on the basis of jurisdictional error. Conversely, LORAC sought leave to enforce the determinations as judgments of the Supreme Court.
In determining the matter, Mitchell J considered the following three issues:
Should the first adjudicator’s determination be quashed because there was no payment dispute, or alternatively because the adjudicator did not properly form an opinion that there was a payment dispute?4
Samsung advanced the argument that there can be no payment dispute under the Act5 until the date for payment under the Contract had elapsed. To that end, Samsung contended that there was no payment dispute in circumstances where (at the time of making the adjudication application) LORAC’s only right to payment existed under 39.2A, and the due date for payment in that clause had not passed.
His Honour rejected Samsung’s position, preferring the interpretation that a payment dispute arose when a payment claim was rejected or disputed, even if the time for payment provided for in the relevant contract had not arrived. Accordingly jurisdictional error was not found on this ground.
Should both determinations be quashed because the adjudicator failed to exercise or understand his adjudicative function, adopted illogical and irrational reasoning or made an unreasonable decision?6
This argument was premised on the fact that, in respect of the first adjudication application, the adjudicator in making his determination had not referred to cl 39A.2 of the Contract, but referred to cl 37, which did not survive termination.
His Honour later made a finding that LORAC’s entitlement to any payment under the Contract could only exist through cl 39A.2, but that the first payment claim was not a claim made under cl 39A.2. Accordingly, his Honour found that the adjudicator had failed to determine the payment dispute by reference to the terms of the Contract, had failed to engage in the task which the Act required him to undertake, and consequently provided a determination which was not authorised by the Act.
In making the second determination the adjudicator did refer to cl 39A.2(a) of Contract, but failed to provide a determination on the value of the adjusted contract sum. By determining that Samsung was liable to pay without finding that the adjusted subcontract sum would not be exceeded, the adjudicator failed to apply the standard of proof required by the Act, and failed to apply the concluding words of cl 39A.2(a) in determining the dispute.
In the circumstances, his Honour held that in respect of both determinations the adjudicator had failed to exercise or understand his adjudicative function, and so had committed jurisdictional error.
Should leave to enforce the determinations be refused because the determinations are invalid or because the payments on account required by those determinations have already been made under the Deed?7
In determining this question his Honour cited the established principle that the court ought to grant leave to enforce a determination of an adjudicator as a judgment of the court, unless it is satisfied that a valid reason exists to refuse a grant of leave.8
In refusing leave, his Honour found that the payment of $45 million under the deed was a payment on account by Samsung to LORAC in respect of Samsung’s liability to make a termination payment under cl 39A.2(a), and that Samsung had already made the payment which would have been required under the first and second adjudications (if those determinations were validly made).9 In those circumstances, his Honour refused to exercise his discretion to grant leave to enforce the determinations as a judgment.
What does this mean?
The decision provides helpful guidance on when a payment dispute arises under the Act. Contracting parties should be aware that a payment dispute, for the purposes of the Act, may arise irrespective of whether the liability for payment under the relevant contract has arisen at the point in time that the payment claim is issued. Focus is instead placed on whether the payment claim is wholly or in part in dispute.
The decision also provides helpful insight into what the courts will consider in determining whether an adjudicator’s decision may be quashed and more specifically what matters may lead to a finding of jurisdictional error.
Undertaking such an exercise will involve identification of the limits of the authority conferred on the adjudicator, and an analysis of the facts to determine whether those limits have been exceeded. Courts in other jurisdictions have found that the incorrect construction of a contractual provision by an adjudicator, who erroneously decides the value of a progress payment, will not necessarily result in jurisdictional error.10 While the present case does not contradict that principle, it does confirm that the incorrect construction of a contractual provision might amount to a jurisdictional error in circumstances where the error gives rise to an inference that the adjudicator has misunderstood the nature or scope of his or her statutory function.11
1  WASC 237.
2 Section 38 and 39 of the Act.
3 Section 43 of the Act.
4 Laing O’Rourke Australia Construction Pty Ltd v Samsung C & T Corporation  WASC 237 .
5 Section 6 of the Act.
6 Laing O’Rourke Australia Construction Pty Ltd v Samsung C & T Corporation  WASC 237 .
8 Cape Range Electrical Contractors Pty Ltd v Austral Construction Pty Ltd  WASC 304.
9 Laing O’Rourke Australia Construction Pty Ltd v Samsung C & T Corporation  WASC 237 [274 - 276].
10 BM Alliance Coal Operations Pty Ltd v BGC Contracting Pty Ltd  QSC 346 , approved in Watpac Construction (Qld) Pty
Ltd v KLM Group Ltd  QSC 236.
11 Laing O’Rourke Australia Construction Pty Ltd v Samsung C & T Corporation  WASC 237 .