BCIPA – Adjudicator’s Certificates – Good faith & Brodyn Pty Ltd’s decision

 

 Queensland Bulk Water Supply Authority t/a Seqwater v McDonald Keen Group P/L (in liq) & Anor [2010] QCA 7  I refer to my earlier postings in respect of the mechanism of the Building Construction Industry Payments Act 2004 Qld (“ BCPIA”).

 

Her Honour Holmes JA delivered the leading judgment, with His Honour Fraser JA concurring and Fryberg J, whilst agreeing the appeal should be dismissed not deciding the point about questions of good faith under the BCIPA and leaving open the question about the facsimile being a contractual document.

An adjudicator’s certificate was issued for an amount of $11 million, which was converted into a judgment pursuant to section 31(1) of the BCIPA. The appellant sought to have the judgement set aside on the basis the adjudicator’s certificate was void because the adjudicator had not acted in good faith, had taken into account a facsimile as part of the contractual documents and had failed to accord natural justice.

Her Honour applied Brodyn Pty Ltd v Davenport (2004) 61 NSWLR 421; [2004] NSWCA 394, in respect of the grounds of setting aside an adjudicator’s certificate:

[38] Brodyn concerned the Building and Construction Industry Security of Payment Act 1999 (NSW), cognate legislation to the Payments Act. Apart from some minor and inconsequential difference in the nouns used, s 25(4)(a) of that Act was in identical terms to s 31(4)(a) of the Payments Act. Hodgson JA (with whose judgment the other members of the Court agreed) observed that a judgment made by the filing of an adjudication certificate could be set aside on appropriate grounds, either as authorised by rules of court allowing for the setting aside of judgments obtained ex parte, or as implied by s 25(4) itself, when it referred to commencing proceedings to have the judgment set aside6. If the Supreme Court were to quash the arbitrator’s determination or declare it void, that order could support the setting aside of the judgment on the basis that there was no determination to support it; to do so would not be to challenge the adjudication within the meaning of s 25(4), which assumed an existing determination which was challenged.

[39] I am unconvinced by MKG’s argument that the availability of review under the Judicial Review Act and its subsequent removal by amendment create a different statutory context which would justify not following Brodyn. If anything, it seems to me that the amendment to the Judicial Review Act brought the availability of challenge to judgments based on adjudicators’ decisions squarely into line with the position as it exists in New South Wales, reinforcing the appropriateness of following Brodyn on this point. From that follows an acceptance that s 31(4) does not preclude a declaration that the adjudicator’s determination is void, or the setting aside of a judgment obtained by the filing of the adjudication certificate, where there is no valid determination.

The good faith test

[40] In Brodyn, Hodgson JA went on to say that the scheme of the Act under consideration there indicated that judicial review was not available on the basis of

non-jurisdictional error of law. But an adjudicator’s purported determination would be void if it did not meet the statutory conditions essential for a valid determination, which were, that there be: a construction contract between claimant and respondent to which the Act applied; service of the payment claim; the making of an adjudication application to an authorised nominating authority; reference of the application to an eligible adjudicator who accepted it; and the determination by the adjudicator of the application by determining the amount of the progress payment, the date on which it became due, and the rate of interest payable and the issue of a determination in writing.

[41] What the Act intended to be essential (on a Project Blue Sky7 analysis) was: “compliance with the basic requirements … a bona fide attempt by the adjudicator to exercise the relevant power relating to the subject matter of the legislation and reasonably capable of reference to this power (cf R v Hickman; Ex parte Fox and Clinton (1945) 70 CLR 598), and no substantial denial of the measure of natural justice that the Act requires to be given.”8

It was, Hodgson JA went on to say, sufficient to avoid invalidity if an adjudicator considered only the matters referred to in s 22(2) of the New South Wales Act (the equivalent of s 26(2) of the Payments Act) or bona fide addressed them as to what was to be considered.

[42] The reference in Brodyn to Hickman is to Dixon J’s qualification as to the circumstances in which a privative clause would protect a decision:

“provided always that [the decision-maker’s] decision is a bona fide attempt to exercise its power, that it relates to the subject matter of the legislation, and that it is reasonably capable of reference to the power given to the body.”9

6 In Falgat Constructions Pty Ltd v Equity Australia Corporation Pty Ltd [2006] NSWCA 259, Handley JA also suggested that the Court’s power under the equivalent of s 100(3)(b) to make “any other orders it considers appropriate” in a proceeding relating to a matter arising under a construction contract would allow it to set aside or vary a judgment entered by the filing of an adjudication certificate.  

7 Project Blue Sky Inc v Australian Broadcasting Authority (1998) 194 CLR 355 at 390 – 391.

8 (2004) 61 NSWLR 421 at 442.

9 (1945) 70 CLR 598 at 615.  

Some helpful insight was provided in respect of good faith:

[43] The requirement identified by Hodgson JA, of a bona fide attempt by the adjudicator to exercise the relevant power, in turn led to the controversy between the parties at first instance, and here, as to whether good faith should be considered against a broad or narrow test. MKG contended for the latter approach, in particular relying on a series of decisions of the Full Court of the Federal Court: SBBS v Minister for Immigration and Multicultural and Indigenous Affairs;10 Minister for Immigration and Multicultural and Indigenous Affairs v SBAN11 and Minister for Immigration and Multicultural and Indigenous Affairs v NAOS.12

[44] Counsel for MKG asserted that the nine propositions set out in SBBS, as modified by later decisions, should be applied. Those propositions are reproduced below from the judgment in that case, with references omitted: “First, an allegation of bad faith is a serious matter involving personal fault on the part of the decision-maker. Second, the allegation is not to be lightly made and must be clearly alleged and

proved. Third, there are many ways in which bad faith can occur and it is not possible to give a comprehensive definition. Fourth, the presence or absence of honesty will often be crucial…

The fifth proposition is that the circumstances in which the court will find an administrative decision-maker had not acted in good faith are rare and extreme. This is especially so where all that the applicant relies upon is the written reasons for the decision under review.

Sixth, mere error or irrationality does not of itself demonstrate lack of good faith. Bad faith is not to be found simply because of poor decision making. It is a large step to jump from a decision involving errors of fact and law to a finding that the decision-maker did not undertake its task in a way which involves personal criticism.

Seventh, errors of fact or law and illogicality will not demonstrate bad faith in the absence of other circumstances which show capriciousness.

Eighth, the court must make a decision as to whether or not bad faith is shown by inference from what the tribunal has done or failed to do and from the extent to which the reasons disclose how the tribunal approached its task.

Ninth, it is not necessary to demonstrate that the decision maker knew the decision was wrong. It is sufficient to demonstrate recklessness in the exercise of the power.”13

[45] In SBAN,14 the Full Court of the Federal Court added this qualification to the ninth proposition (again set out without references):

“As with other areas of the law where wrongful intent is in issue, reckless indifference may be the equivalent of intent. But this is not to say that the test is objective. The inquiry is directed to the actual state of mind of the decision-maker. There is no such thing as deemed or constructive bad faith. It is the ultimate decision … which must be shown to have been taken in bad faith. Illogical factual findings or procedural blunders along the way will usually not be sufficient to base a finding of bad faith. Such defects can be equally explicable as the result of obtuseness, overwork, forgetfulness, irritability or other human failings not inconsistent with an honest attempt to discharge the decision-maker’s duty.

Questions of professional ethics arise. An allegation of bad faith, like an allegation of fraud, should not be advanced by an advocate unless there are proper grounds for doing so

Bad faith may manifest itself in the form of actual bias. Actual bias in this context is a state of mind so committed to a conclusion already formed as to be incapable of alteration, whatever evidence or argument may be presented. It is something more than a tendency of mind or predisposition. Apprehended bias, resting as it does on what

may be observed objectively, as distinct from the actual state of mind of the decision-maker, is quite different. While it has been suggested that actual bias may occur subconsciously, that would not establish bad faith in the relevant sense …”

[46] In NAOS, the Court expressed some doubt as to the usefulness of the seventh SBBS proposition, which suggested that capriciousness could support an allegation of bad faith; it was, they said, more relevant to questions of unreasonableness. At any rate, the qualification proposed in SBAN should be applied to the seventh proposition so as to

“make it clear that want of bona fides will only be made out in such circumstances where whim or fancy has consciously been preferred to considered judgment.”

[47] MKG submitted that the primary judge was wrong to distinguish the line of Federal Court authority which derived, as did the test in Brodyn, from the Hickman requirement of good faith. That error had led him to reject the need to show personal misconduct or fault on the part of the decision-maker in order to demonstrate lack of good faith. Section 107 of the Payments Act, consistently with the narrower approach, protected an adjudicator from personal liability for anything done or omitted to be done in good faith in performing his functions or what he reasonably believed was the performance of his functions.

10 (2002) 194 ALR 749.

11 [2002] FCAFC 431.

12 [2003] FCAFC 142.  

13 At 756.

14 At [8] – [10].  

Her Honour opined:

[51] I incline to the view that the absence of good faith may not be the exact converse of bad faith, and I agree with the learned primary judge that the content of what is required may vary according to context. But I am not entirely convinced of the significance his Honour attributed to the context here, and, more particularly, to the interim character of the arbitrator’s decision. In that context, of the Payments Act which is designed to provide an expeditious mechanism for payment, and which allows of further proceedings, unaffected by the arbitrator’s decision, to determine the parties’ contractual rights, I think there is a good deal to be said for a narrow approach to questions of good faith. However, as will emerge from what follows, I agree with the learned primary judge that on either test, QBWSA has not demonstrated a want of good faith on the adjudicator’s part.

And further:

[55] The complaint that the learned primary judge failed to assess the adjudicator’s lack of good faith against the whole of the reasons must be rejected, given his Honour’s detailed consideration of the entirety of the adjudication decision.18 Indeed, one might observe that it was QBWSA’s submissions which invited a piecemeal approach to the adjudicator’s reasons. An example was the complaint that the adjudicator’s reference to the first tender was irrelevant, and served as evidence of his desire to achieve a favourable outcome for MKG regardless of the contract’s terms. But the comments were plainly made in response to what QBWSA had said in its adjudication response to the effect that the amount now claimed was almost the entire contract sum again. They were perhaps, peripheral, but they were certainly not indicative of some illicit intent. Similarly, criticisms of QBWSA and its project manager were, in context, unsurprising; they were hardly revelatory of some larger design.

[56] The assertion that the learned judge had accepted mere reference to relevant clauses as satisfying the requirement that the adjudicator have regard to the contract is equally unfounded. His Honour properly identified the many references to clause 12.1 in the adjudication decision, but also explained that the reading of the identified parts established that the adjudicator not only was “very conscious” of what the clause contained, but reached his conclusion by reference to its provisions as he understood them. As his Honour observed, on occasions the adjudicator expressed views which he then put to one side, acknowledging that they were not relevant to his conclusion on whether a latent condition existed by reference to clause 12.1.

[57] The adjudicator specifically considered clause 14.1 of the job specification, which, he said, correctly, did not affect QBWSA’s liability to pay for latent conditions under clause 12.1. Insofar as he described what was said in the facsimile as inconsistent with clause 14.1, I am inclined to think that was not really so. The clause required tenderers to fully inform themselves in accordance with the general conditions of the contract, but no such requirement in the general conditions was identified; clause 12.1 did not impose one. Clause 14.1’s disclaimer of any representation that the information in the geotechnical report completely indicated the actual conditions along the route, or any warranty as to the correctness of its description of the naturally occurring materials did not necessarily conflict with the facsimile’s assertion, that the report provided “adequate information” to allow the pricing of rock excavation as a lump sum. At any rate, I do not think there is any force in the suggestion that the adjudicator applied the facsimile so as to overcome the effect of clause 14.1.

[58] The submission that the learned primary judge wrongly excused error in the light of the limited time available to deliver the adjudication determination appears to refer to his Honour’s observation that the adjudicator’s omission to mention BMD Major

Projects firstly, did not establish that he had failed to consider the case and secondly, was unsurprising, given the constraints imposed by the time limits for completion of his task. The latter comment was a proper one; as has been recognised elsewhere, the very short timeframes allowed for adjudicator’s decisions make the “precision aimed for in litigation … not practically achievable”.19

[59] In the same connection, it was submitted that the adjudicator could not have turned his mind to BMD Major Projects, because, had he done so, he would not have arrived at the reasoning he did in relation to risk allocation under clause 12.1(a); hence the learned judge erred in finding that his failure to mention the case did not carry the implication that he had not considered it. But the submission is simply untenable; BMD Major Projects was relied on by MKG for another purpose altogether, and QWBSA sought to distinguish it on its facts. There was no reason for the adjudicator to consider what it said about risk allocation.

[60] As to the valuation of MKG’s claim, the adjudicator patently did not treat the absence of any offer by QBWSA of an alternative means of calculation, or product of calculation, as in itself warranting allowance of what MKG sought. He accepted MKG’s estimate, having considered and rejected QBWSA’s criticisms of it. His approach may be contrasted with that of the adjudicator in Halkat v Holmwood Holdings, who was said to have decided to prefer the contractor’s assessment of the work done, without examination of its merits or defects, because he took a dim view of the principal’s submissions on unrelated issues.

[61] As the learned primary judge, correctly, with respect, observed, it was not to the point to ask whether a court would have come to the same conclusion as the adjudicator; the question was whether he had arrived at his conclusion by a process which failed to consider the matters set out in s 26(2). The evidence which he had relied on, including the estimate, was within the range of the considerations identified in that section. A contention that the decision was void on the basis that there was no evidence on which the adjudicator could determine the amount of the claim was rejected. That reasoning was, in my respectful view, entirely correct.

[62] The argument that there was a failure to accord natural justice must fail, absent a conclusion that the facsimile was used by the adjudicator as the basis for constructing an alternative contract.

18 Queensland Bulk Water Supply Authority v McDonald Keen Group P/L & Anor [2009] QSC 165 at [39]-[54].  

Brisbane Barrister – David Cormack

 

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