Judicial review of adjudication determinations - a new expansive approach?

In brief

In a recent decision, the Supreme Court of Western Australia quashed two adjudication determinations on the basis of jurisdictional error. At the core of the decision was a finding that the adjudicator had misapplied the terms of the relevant construction contract. The decision suggests that an expansive approach will be taken to the judicial review of adjudications under the Construction Contracts Act 2004. Partner Jeremy Quan-Sing and Law Graduate James Illich report.

The facts

In February 2014, Samsung C & T Corporation – Roy Hill's EPC contractor – and Laing O'Rourke Australia Construction Pty Ltd entered into a $215 million subcontract under which Laing O'Rourke agreed to undertake landside port construction work at Roy Hill's project in the Pilbara (the contract). The contract incorporated general conditions amended from AS 4902-2000.

The relevant provisions of the contract included:

• Clause 37 – setting out the standard progress payment regime under the contract;
• Clause 39A.1 – giving Samsung the right to terminate the contract 'at any time for its sole convenience'; and
• Clause 39A.2 – setting out a regime for determining Laing O'Rourke's entitlements where Samsung terminated the contract for convenience under clause 39A.1.

Clause 39A.2 was expressly stated to survive termination of the contract for convenience. By contrast, with the exception of clause 37.8 (which provided for Samsung's right of set-off), there was no express provision providing that the progress payment regime under clause 37 survived termination of the contract.

Until January 2015, progress payments were made in the manner contemplated by clause 37. However, a dispute arose and on 10 February 2015 Samsung terminated the contract for convenience in accordance with clause 39A.1. Following termination, Samsung and Laing O'Rourke entered into an 'Interim Deed' that provided for Samsung to make certain payments to Laing O'Rourke. Samsung made a payment of $45 million on account under the Interim Deed.

Laing O'Rourke purported to make further payment claims under the contract and triggered two adjudications under the CCA. It was successful and the combined effect of the adjudication determinations was that Samsung was required to pay Laing O'Rourke a further $44.1 million.

The decision

Jurisdictional error by the adjudicator

Justice Mitchell found that the adjudicator had committed a jurisdictional error by failing to resolve the payment disputes by reference to the terms of the contract.

In relation to the first determination:

• The adjudicator had based his decision on the progress payment regime under clause 37 of the contract.
• Justice Mitchell found that clause 37 (with the exception of clause 37.8) had not survived termination of the contract.  His Honour found that the adjudicator had not considered whether clause 37 survived termination, nor did the adjudicator refer to clause 39A.2 in relation to the relevant payment claim. In doing so, the adjudicator had failed to identify the provision of the contract that, after termination, governed Samsung's liability to make any payments.
• As a result, Justice Mitchell held that the adjudicator had failed to resolve the dispute by reference to the terms of the contract and had therefore misapprehended the nature of the function he was required to perform (resulting in jurisdictional error).

In relation to the second determination, Justice Mitchell found that the adjudicator had correctly referred to clause 39A.2 of the contract, but had failed to satisfy himself of two key matters that he had been required to consider.

• First, the adjudicator had not satisfied himself that the amount the subject of the payment claim would not, when added to the amounts already paid or payable to Laing O'Rourke, be more than the contract sum (adjusted in accordance with the contract). Although this assessment was expressly required under clause 39A.2 the adjudicator had not done so, concluding that there were 'too many vagaries' to allow him to determine the adjusted contract sum.
• Second, the adjudicator had to determine whether, under clause 37.8 of the contract, Samsung was entitled to a right of set-off. Samsung had relied on clause 37.8(b) of the contract but the adjudicator found this clause to be ambiguous. However, the adjudicator failed to resolve that ambiguity and reach a conclusion as to the proper construction of the clause. Instead, the adjudicator ignored clause 37.8(b) and proceeded to make his determination by reference to clause 37.8(a), which was not a clause relied on by Samsung.

Although Justice Mitchell accepted that the mere misconstruction of a construction contract will not, of itself, constitute jurisdictional error, this decision suggests that a failure by an adjudicator to make a determination by reference to the 'correct' terms of a construction contract (ie, a misapplication of the terms) may in some circumstances amount to jurisdictional error.

Laing O'Rourke has filed an appeal notice, and we expect that this is something that the Court of Appeal will be asked to consider.

When does a 'payment dispute' arise?

Section 6(a) of the CCA provides that a payment dispute arises if 'by the time when the amount claimed in a payment claim is due to be paid under the contract, the amount has not been paid in full, or the claim has been rejected or wholly or partly disputed'. Justice Mitchell held that, on the proper construction of s6(a), a payment dispute can arise before the amount claimed in a payment claim is due, if the payment claim is wholly or partly disputed. (Under an alternate reading of s6(a), Samsung had asserted that a payment dispute could not arise prior to the time when, under the relevant contractual provisions, the amount claimed in the payment claim was due).

This decision essentially affirms the interpretation of s6(a) of the CCA applied by the SAT in Blackadder Scaffolding Services v Mirvac Homes (which, as a decision of the SAT, was not binding on the Supreme Court).