This article was written by Travis Toemoe and Mathew Briggs.
The High Court recently handed down two important decisions on security of payment legislation in the Probuild and Maxcon Construction cases.
The Court looked at the New South Wales and South Australian security of payment legislation and confirmed that the legislation does not permit a Court to review and quash determinations of adjudicators for non-jurisdictional errors of law.
Key elements in the High Court’s reasoning were:
- the purpose behind the legislation, specifically that it was enacted to “reform payment behaviour in the construction industry”;
- the fact that an absence of judicial review did not entrench the adjudicators decision (the disputing party can pursue civil proceedings for a final determination); and
- the potentially costly and time consuming review process could frustrate the operation and evident purposes of the statutory scheme (which has a strong focus on cash flow).
The Court’s decisions have implications for all parties to construction contracts, including that:
- parties should consider the contractual regime for the provision of security by subcontractors and avoid cash retention from monthly progress payments where repayment is tied to other contracts/events (and consider other regimes such as the use of bank guarantees);
- they face the very real risk that an adjudicator (who in some circumstances may not be a lawyer) makes a non-jurisdictional error of law. Parties face such risks in the context of a security of payment system, where:
- Courts cannot review determinations the subject of such errors; and
- the operation of the Act cannot be excluded or restricted in any way.
- where faced with an adjudication, parties need to ensure that their case is presented in a clear and compelling manner before any adjudicator to reduce the risk of non-jurisdictional errors of law being made. The more complicated the contract terms (e.g. in respect of liquidated damages or other claims), the greater the risk of a non-jurisdictional error being made.
For parties unhappy with an adjudication determination, the cases confirm they will need to pursue time consuming civil proceedings in order to seek to recover the amounts paid to the other party (while the other party has the benefit of the cash flow).
Background and previous decisions
Probuild (New South Wales)
Probuild and Shade Systems were parties to a contract whereby Shade Systems would supply and install external louvres for an apartment development. Shade Systems submitted a Payment Claim and Probuild issued a Payment Schedule in response. In its Payment Schedule, Probuild sought to apply liquidated damages.
Shade Systems referred the Payment Claim to adjudication, with the Adjudicator finding that Probuild was not entitled to apply liquidated damages. Probuild applied to the Supreme Court of New South Wales for orders quashing the determination. At first instance, Emmett AJA overturned the Adjudicator’s decision because the Adjudicator erroneously determined:
- that no entitlement to liquidated damages arose until practical completion or termination of the subcontract; and
- Probuild needed to demonstrate that Shade Systems was at fault for the delay for which it claimed liquidated damages.
This decision was overturned by the Court of Appeal on the basis that the Supreme Court did not have jurisdiction to review the Adjudicator’s determination for a non-jurisdictional error of law on the face of the record.
It is worth noting that in the Court of Appeal, both parties accepted that each of the 2 errors was an error of law on the part of the adjudicator. The issue was not agitated on appeal to the High Court.
Maxcon Constructions (South Australia)
Maxcon and Mr Vadasz entered into a contract for the design and construction of piling for an apartment. The contract contained a clause to the effect that Mr Vadasz would provide security in the form of "cash retention" corresponding to five percent of the contract sum to ensure due and proper performance of the contract.
Mr Vadasz submitted a Payment Claim and Maxcon issued a Payment Schedule in response, which assessed the amount payable and deducted a retention sum. Mr Vadasz referred the claim to adjudication.
The Adjudicator determined that the retention clause was a ‘pay when paid’ provision and therefore not enforceable. Maxcon applied to the Supreme Court for an order setting aside the determination. At first instance, Stanley J dismissed the application, finding that there was an error, but that it did not form part of the record.
On appeal, the Full Court found the error was incorporated into the record, but that it was obliged to follow the New South Wales Court of Appeal’s conclusion in Probuild that the legislation excludes the review of adjudication determinations on the grounds of an error of law on the face of the record.
High Court’s Decision
The Court dismissed the appeals in both cases, confirming that the effect of the legislation is to oust the Supreme Court’s ability to overturn a determination for non-jurisdictional errors on the face of the record. In doing so, the Court had regard to the purposes of the legislation and the fact that determinations from an adjudicator do not constitute a final resolution of the dispute.
Other notable findings – ‘pay when paid’ provisions
In the Maxcon case, a critical issue (by reason of Mr Vadasz’ notice of contention) was whether the cash retention provisions in the relevant contract amounted to a ‘pay when paid’ provision. If so, the retention provisions were of no effect.
Under the contract, 50% of the retention was to be released 90 days after “CFO” (effectively completion) and the remaining 50% to be released 365 days after CFO.
The Court concluded that this amounted to a ‘pay when paid’ provision, and was therefore unenforceable. This was because repayment of the retention was not related to Mr Vadasz’s performance of the works, but rather was dependent on:
- certification by Maxcon that the building works has been performed in accordance with issued documents (including the head contract); and
- regulatory approvals (and certificate of occupancy) being granted by the council.
 Probuild Constructions (Aust) Pty Ltd v Shade Systems Pty Ltd & Anor  HCA 4 (Probuild)
 Maxcon Constructions Pty Ltd v Michael Christopher Vadasz (trading as Australasian Piling Company) & Ors  HCA 5 (Maxcon)
 Probuild at 
 Probuild at 
 Probuild at 
 Probuild Constructions (Aust) Pty Ltd v Shade Systems Pty Ltd  NSWSC 770 at  and 
 Shade Systems Pty Ltd v Probuild Constructions (Aust) Pty Ltd (No 2)  NSWCA 379
 Shade Systems Pty Ltd v Probuild Constructions (Aust) Pty Ltd (No 2)  NSWCA 379 at 
 Maxcon Constructions P/L v Vadasz & Ors (No. 2)  SASC 156 at 
 Maxcon Constructions Pty Ltd v Vadasz (No. 2)  SASCFC 2 at  and 
 Maxcon at 
 Maxcon at