High Court confirms limited scope to overturn construction adjudicator’s findings; finds certain retention clauses prohibited

The High Court of Australia has found that an adjudicator’s award under security of payments legislation in New South Wales and South Australia cannot be challenged unless an adjudicator acts beyond power.

In two decisions handed down in February 2018, Maxcon Constructions Pty Ltd v Vadasz [2018] HCA 5 and Probuild Constructions (Aust) Pty Ltd v Shade Systems Pty Ltd [2018] HCA 4, the court held that:

“the [court]… may grant relief (whether in the nature of certiorari or otherwise) for jurisdictional error by an adjudicator appointed under the Security of Payment Act; but the provisions of the Security of Payment Act, like the provisions of the New South Wales Act, oust the Supreme Court’s jurisdiction to make an order in the nature of certiorari to quash an adjudicator’s determination for error of law on the face of the record that is not a jurisdictional error.” Maxcon at [5]. The court emphasised that an adjudication did not finally determine the rights of the parties under a construction contract and that it was open to seek relief by commencing separate court proceedings, rather than seeking to challenge the adjudication itself.

The effect of these decisions is that even when an adjudicator misinterprets the law or a construction contract, the court cannot quash the decision unless it can be shown that the adjudicator has acted beyond their jurisdiction or beyond power. This is consistent with findings of the WA Supreme Court in O’Donnell Griffith Pty Ltd v John Holland Pty Ltd [2009] WASC 19 concerning adjudicators appointed under the WA Construction Contracts Act 2004. It highlights the importance of choosing adjudicators wisely.

The court in Maxcon also found that a retention provision, enabling a head contractor to deduct monies from an amount owing to a subcontractor pending the release of a certificate of occupancy in respect of the works, would depend on completion being achieved under the head contract with the owner, and thus constituted an unlawful ‘pay when paid’ provision. The court found that a ‘pay when paid’ provision under the South Australian legislation:

“asks whether, on its proper construction, the provision “makes the liability to pay money owing, or the due date for payment of money owing, contingent or dependent on the operation of another contract”. Here,the retention provisions did just that: they made the due dates for payment contingent or dependent on “CFO”. And for “CFO” to be achieved, there had to
be issued a certificate of occupancy and “any other Approval(s) required under Building Legislation which [were] required to enable the Works lawfully to be used for their respective purposes in accordance with [Maxcon’s] Project Requirements”. Those Project Requirements were to be ascertained from the head contract. “CFO” required satisfactory completion of the head contract before the dates for the release of the retention sum could be calculated, let alone for the retention sum to be released. Accordingly, there was no error of law on the part of the adjudicator.” 

In view of the above, contracts containing retention provisions ought to be reviewed to ascertain whether they may be construed as ‘pay when paid’ provisions, and thus be inoperative under the relevant legislation in your State.

In WA, the comparable provision (section 9 of the Construction Contracts Act 2004) prohibits provisions that render payment to one person contingent on payment being received from another. In that way, it does not refer more generally to the ‘operation of another contract’ as was the case in Maxcon and may be distinguishable to that extent, but care should still be taken that the drafting of any retention provisions do not ‘indirectly’ rely on payment from another party.

Contact Perth Commercial Lawyers for advice on the implications of the above decisions for your construction contracts.