Two recent cases considered by the New South Wales Court of Appeal confirm that only a substantial denial of procedural fairness by an adjudicator in determining an adjudication application will be a jurisdictional error under the Building and Construction Industry Security of Payment Act 1999 (NSW) (‘SOP Act’). Whether there has been a substantial denial of procedural fairness will turn on the particular circumstances of the case.
In Demex Pty Ltd v McNab Building Services Pty Ltd [2023] NSWCA 261, Demex was subcontracted by McNab to undertake remediation earthworks, where large quantities of asbestos contaminated materials were removed offsite and clean fill was imported onsite. Under the construction contract, payment claims rendered for the works were to be measured in cubic metres.
Demex rendered a payment claim. The evidence in support of that payment claim took the form of dockets expressed in terms of weight (tonnes). Those amounts were then converted into cubic metres in the payment claim, however the manner in which the conversion had been undertaken was not explained by Demex in its payment claim or in its subsequent adjudication application.
In its payment schedule, McNab argued that it had no liability to pay any amount claimed and claimed that Demex owed $1.35 million. In its adjudication response, McNab criticised Demex’s method of calculating its entitlement but did not suggest an alternative approach to converting weight into volume.
The adjudicator determined the matter in favour of Demex, calculating for himself the conversion rates that Demex had applied for the works based on the information in the payment claim. He stated that the conversion rate used by Demex for the import work items was reasonable in light of industry standards. He found support for the conversion rate used by Demex for the export work items in a contractual document.
McNab challenged the determination on the grounds of a denial of procedural fairness in relation to the approach adopted by the adjudicator regarding the conversion rates. At first instance, Black J found in favour of McNab and declared the determination void. Demex appealed. The appeal was allowed by the New South Wales Court of Appeal (Kirk JA, Mitchelmore and Adamson JJA agreeing).
The Court of Appeal reasoned that McNab had provided a sophisticated payment schedule and adjudication response. McNab also understood that Demex had applied some conversion rate, which was readily calculable, however provided no submission as to why the particular conversion rates were or were not appropriate. In those circumstances the Court held that McNab was at least given the opportunity of ascertaining the relevant issues. McNab did reasonably apprehend that the issue of the conversion rate was a live one and was provided an opportunity for meaningful participation enabling it fairly to respond. It was held:
[88] Thus even on a more general approach to procedural fairness, McNab cannot complain that it was not given a fair opportunity to address the conversion rate issue because it was not spelt out in express terms by Demex. As regards the statutory scheme here, it certainly cannot be said that there has been a substantial denial of procedural fairness in this regard, taking account of all of the circumstances.
The Court noted that the facts present were not analogous to those cases dealing with the issue of where an adjudicator decides a dispute on a basis that neither party has contended and does not provide them the opportunity to make submissions on the issue. This was because the application of a conversion rate was implicit in Demex’s claims and was understood by McNab, who chose to make no alternative submissions as regards what rate ought be applied.
As regards the adjudicator attributing significance to a contractual document to reach his conclusion, the Court noted at [93], “[r]elying on a document in support of a conclusion where that potential reliance had not been foreshadowed by either party or the decision-maker does give rise to a question about whether procedural fairness has been accorded.” However, in the circumstances of this case, there was no substantial denial of procedural fairness such as to constitute jurisdictional error. This was because the adjudicator used the document in a confirmatory way, and McNab was on notice of the use of a conversion rate, choosing not to make a submission on what the rate should be.
The Court held at [96] and [97] that although the adjudicator went further than necessary in himself calculating the conversion rate applied by Demex and satisfying himself that that rate was reasonable:
“the fact that he did so caused McNab no prejudice as McNab was no worse off than it would have been if the adjudicator had not addressed the issue, let alone in circumstances where it had had reasonable notice of the issue and had chosen to make no submissions on the point. It cannot be said that there was substantial practical injustice in all the circumstances. That conclusion can also be expressed in terms of materiality. Where the adjudicator was not required to address the issue in order to resolve the dispute, going further than required to confirm Demex’s position created no realistic possibility of a different outcome.”
In A-Civil Aust Pty Ltd v Ceerose Pty Ltd [2024] NSWCA 7, the Court of Appeal dismissed an appeal against the finding of a denial of procedural fairness in Ceerose Pty Ltd v A-Civil Aust Pty Ltd (No 2) [2023] NSWSC 345. At first instance, Richmond J found that there was a substantial denial of procedural fairness as the adjudicator had decided the claim for the retention monies on a basis for which neither party had contended and without putting the parties on notice and giving them an opportunity to be heard. The consequence was that part of the adjudication determination was set aside.
A-Civil attacked Richmond J’s decision on the grounds that: (i) the basis on which the adjudicator determined the claim for retention monies was “on the table” by reason of submissions that the parties made; (ii) alternatively, even if the basis on which the adjudicator determined the claim was not “on the table”, Ceerose should have anticipated that the adjudicator would need to decide the question of whether the retention money should remain with Ceerose or be released.
The Court of Appeal dismissed the appeal against Richmond J’s finding of a substantial denial of procedural fairness. Leeming JA (White JA and Mitchelmore JA agreeing) held:
[4] The question in such cases is whether the party has been given a fair opportunity to be heard. That will turn on an evaluative judgment of “what is in play”, to use the parties’ metaphor. I respectfully agree with Kirk JA’s observation in Demex at [33] that a reviewing court should view sceptically arguments involving high degrees of specificity in this regard. The parties are often (as they were in the present case) sophisticated, and it is not necessary to spell out every aspect of their dispute. The issues in most disputes are familiar, and only rarely will there be scope for an adjudicator to determine them in a way which could not be anticipated thereby amounting to procedural unfairness. However, as Mitchelmore JA explains, in this particular case, the reasons given by the adjudicator for determining that A-Civil was entitled to the retention monies were so far removed from the submissions advanced by both of them that this is a rare case where there has been a substantial breach of the obligation to accord procedural fairness. The primary judge was correct so to conclude.
These two decisions reinforce the high hurdle to be cleared to prove a denial of procedural fairness in the content of the SOP Act, with it being necessary to show that it is substantial and also material. The recent comments of the High Court of Australia with regard to materiality should also be taken into consideration: LPDT v Minister for Immigration, Citizenship, Migrant Services and Multicultural Affairs [2024] HCA 12.
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Copyright declaration: the text to this article is extracted from the Security of Payment (NSW) chapter in the Thomson Reuters for the loose-leaf subscription service, Commercial Arbitration Law & Practice, contributed by Vikram Misra.
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