Security of Payment: What constitutes a “method of resolving disputes” and the adjudicator’s role in assessing value

In this recent decision, the Court of Appeal held that a mediation-based dispute resolution clause in a construction contract did not oust the jurisdiction of an adjudicator under Victorian security of payment legislation, and that an adjudicator is not bound by a valuation certified by a superintendent under a contract.

SSC Plenty Road Pty Ltd v Construction Engineering (Aust) Pty Ltd [2016] VSCA 119

Background

SSC Plenty Road Pty Ltd (“SSC”) engaged Construction Engineering (Aust) Pty Ltd (“Builder”) to design and construct a shopping centre in Reservoir for approximately $35 million.  The Builder issued a payment claim under the Building and Construction Industry Security of Payment Act 2002 (“Act”), which proceeded to adjudication. SSC applied for judicial review of the adjudicator’s determination on grounds that the Adjudicator:

1. wrongly took into account “excluded amounts”; and
2. failed to value the work in accordance with the Act, by failing to adopt the Superintendent’s pricing.

In SSC Plenty Road Pty Ltd v Construction Engineering (Aust) Pty Ltd [2015] VSC 631 (the “Primary Decision”), Vickery J rejected SSC’s arguments, but found for SSC on a limited ground and remitted part of the decision back to the original adjudicator. SSC appealed.

On 26 May 2016, the Court of Appeal (Santamaria, Beach and McLeish JJA) upheld the Primary Decision.

First ground: “excluded amounts” – method of resolving disputes

Broadly, s 10A(3) of the Act permits a payment claim for “second class” variations if, among other things, the consideration under the contract exceeds $5 million, but the contract does not provide a “method of resolving disputes”.  In this way, the legislation supplies what is missing by allowing inclusion of the variation claim in the payment claim to be adjudicated.

Clause 42 of the contract provided a process of dispute resolution extending up to mediation. By clause 42.1A, the parties acknowledged and agreed that the process in clause 42 was a method for resolving disputes for the purposes of the Act.

SSC argued that clause 42 was a “method of resolving disputes” and therefore the variations claimed ought to have been “excluded amounts”. Vickery J disagreed. His Honour held that a contractual provision which simply mandates attendance at a mediation, and ceases there, without more (such as arbitration), does not amount to a “method of resolving disputes” for the purposes of the Act.  His Honour also rejected SSC’s reliance on clause 42.1A on the basis that it offended s 48 of the Act –  ‘no contracting out’ – and was therefore “a superfluity of no force and effect and is void.”

In agreeing with his Honour, the Court of Appeal explained that:

1. the specific language employed by the Act suggests that the “method of resolving disputes” must result in an actual resolution of the dispute, rather than merely defining the forum for discussion of it;
2. the language and objects of the Act supported a construction that would result in a binding resolution of a dispute in the event that the Act did not apply;
3. where a variation is an excluded amount by reason of the consideration exceeding $5 million, the alternative means of determining the variation (that is, the contractual mechanism) should be certain and final; and
4. pursuant to s 48(2), clause 42.1A was void as an agreement to contract out of the Act.

Second ground – is the adjudicator bound to accept the superintendent’s pricing?

At trial, the issue arose whether, by reason of s 11(1)(a) of the Act, which requires an adjudicator to value work ‘in accordance with the terms of the contract’, the adjudicator was obliged to adopt the price that had been certified by the superintendent.

Vickery J held that “an invitation for an adjudicator to merely adopt a superintendent’s certificate, without more, is not a contractual provision of the kind contemplated by s 11(1)(a) of the Act… and would be inconsistent with the adjudicator’s statutory task of independently assessing the evidence of value.”

Again, the Court of Appeal agreed with the trial judge. In arriving at that conclusion, their Honours observed that:

1. the role of the adjudicator is strictly statutory, and therefore the question is what is provided for in the Act;
2. the contract made no express provision in respect of the construction work that was to be valued;
3. accordingly, the matter fell to be adjudicated under s 11(1)(b) of the Act;
4. in doing so, the adjudicator must ‘have regard’ to certain stipulated matters including ‘the contract price for the work’, which obligation could not be understood to mean that the adjudicator was bound by the contract price;
5. contracts which provided that the price of work would be that determined by a third party such as an architect or a superintendent required an examination, in each case, of the terms of the contract including other provisions which may permit a party to challenge the superintendent’s pricing by invoking any relevant dispute resolution provision. Applying that principle, it could not necessarily be said that the price determined by the superintendent in accordance with the contractual procedures was ‘final’.

The Court of Appeal also agreed with the ‘thrust’ of a long line of NSW decisions on the equivalent provision that the adjudicator must calculate the progress payment in accordance with the terms of the contract, which were to the effect that the provision meant ‘calculated on the criteria established by the contract’, and did not mean ‘reached according to mechanisms provided by the contract’: per Hodgson JA in John Holland Pty Limited v Roads & Traffic Authority of New South Wales & Ors [2007] NSWCA 19.

Further, the Court identified that under s 23 of the Act, the adjudicator is required ‘to determine’ the amount of a progress payment by consideration of the matters set out in s 23(2), and only those matters. Requiring an adjudicator to adopt a price stipulated by the superintendent is inconsistent with the making of the determination required by the Act.

Discussion

The Court of Appeal has clarified the meaning of a “method of resolving disputes” as, essentially, a procedure that is capable of resulting in a binding decision. This decision ought inform those drafting the relevant provisions of construction contracts. For instance, the inclusion of a mandatory and binding dispute resolution regime may be preferable for principals who wish to avoid the potential risks of adverse adjudication determinations (notwithstanding their provisional nature) of large disputed variation claims.

As for the method of valuation, by reaffirming the primacy of the Act over the contract in prescribing the adjudicator’s role, the decision aligns with the NSW position that an adjudicator is not required to adopt a price determined by the superintendent.