You got­ta have faith: good faith and deter­mi­na­tions under the SOP Act

Build­ing and Con­struc­tion Indus­try Secu­ri­ty of Pay­ments Act 1999 (NSW)

The Build­ing and Con­struc­tion Indus­try Secu­ri­ty of Pay­ments Act 1999 (NSW) (SOP Act) pro­vides a statu­to­ry enti­tle­ment to progress pay­ments which runs par­al­lel to a con­struc­tion contract.

Under the SOP Act, a par­ty may engage a reg­is­tered adju­di­ca­tor to make a deci­sion as to the amount payable to a claimant pur­suant to pay­ment claim.

Typ­i­cal­ly, the court will take the view that an adju­di­ca­tor’s deci­sion is bind­ing on par­ties irre­spec­tive of any error of fact.

That said, how­ev­er, the courts will, and do, over­rule adju­di­ca­tion deci­sions in cir­cum­stances where, for instance, an adju­di­ca­tor com­mits a juris­dic­tion­al error e.g. where it can be shown that there has not been a bone fide ​‘good faith’ attempt by an adju­di­ca­tor to per­form his or her appoint­ed func­tion under the SOP Act.

Recent­ly the NSW Court of Appeal:

1. had to deal with a chal­lenge to an adjudicator’s deci­sion on this basis (that is, it was claimed that the adju­di­ca­tor did not act in good faith), and
2. help­ful­ly, shed some light on the lim­it­ed cir­cum­stances in which adjudicator’s deci­sion may be found to be invalid for lack of good faith. 

The facts

In Good­win Street Devel­op­ments Pty Ltd v DSD Builders Pty Ltd [2018] NSW­CA 276 (Good­win Street Devel­op­ments) the own­er and the builder were par­ties to a con­struc­tion contract.

On 19 March 2018, the own­er pur­port­ed to ter­mi­nate the contract.

On 30 April 2018 the builder served a pay­ment claim under the SOP Act on the own­er in the amount of $727,256.

On 14 May 2018 the own­er served a pay­ment sched­ule in response of $0, stat­ing that the builder owed it a sub­stan­tial sum for rec­ti­fi­ca­tion of defec­tive works and dam­age, and replace­ment of stolen items.

The builder applied for adju­di­ca­tion of the pay­ment claim. The adju­di­ca­tor pro­vid­ed her deter­mi­na­tion on 15 June 2018, award­ing the builder an amount of $265,510.

The own­er com­menced pro­ceed­ings in the Equi­ty Divi­sion of the Supreme Court of NSW seek­ing to have the deter­mi­na­tion quashed on the basis that it was invalid for want of good faith; lack of good faith was said (by the own­er) to be estab­lished by the adjudicator’s fail­ure to apply sec­tion 10(1)(b)(iv) of the SOP Act.

The above sec­tion pro­vides to the effect that, if the con­struc­tion con­tract makes no express pro­vi­sion with respect to the val­u­a­tion of the con­struc­tion work car­ried out or to be car­ried out under the con­tract, the work (if it is defec­tive) is to be val­ued hav­ing regard to, among oth­er things, the esti­mat­ed cost of rec­ti­fy­ing any defect(s).

The pri­ma­ry judge dis­missed the pro­ceed­ings and the own­er appealed to the Court of Appeal.

The impugned rea­son­ing of the adjudicator 

The own­er’s chal­lenge to the adju­di­ca­tor’s deter­mi­na­tion was lim­it­ed to a dis­cus­sion in the adju­di­ca­tor’s rea­sons under the head­ing ​“The Respondent’s off-set­ting claims”. In that regard, it was sug­gest­ed that the fol­low­ing para­graph of the adju­di­ca­tor’s rea­sons gave rise to dif­fi­cul­ties of interpretation:

“153. I acknowl­edge that in ear­li­er cer­tifi­cates, the Con­tract Admin­is­tra­tor includ­ed pho­tographs of pur­port­ed defec­tive work and incom­plete work. How­ev­er, there is no clear evi­dence pro­vid­ed from the Respon­dent that per­suades me that the Claimant was instruct­ed by the archi­tect to cor­rect par­tic­u­lar defects or finalise any incom­plete work pri­or to the ref­er­ence date, the Respon­dent [claimant?] failed to cor­rect those par­tic­u­lar defects or incom­plete work, and because it failed to do so, the own­er evoked [invoked] its right to use anoth­er per­son to rec­ti­fy the prob­lem pur­suant to Clause N4, and did so, and final­ly in by doing so, is enti­tled to off-set the cost of it.

154. Fur­ther­more, I can find no con­trac­tu­al mech­a­nism that would per­mit the Respon­dent to off­set monies for the replace­ment of stolen items.

155. Accord­ing­ly, I find the Respon­dent is not enti­tled to deduct rec­ti­fi­ca­tion costs and for damage/​replacement of stolen items under the Con­tract for the applic­a­ble ref­er­ence period.

156. I val­ue the Respondent’s off-set­ting claims in an amount Nil.”

How­ev­er, and as Bas­ten JA of the Court of Appeal not­ed at [35]:

Once the ref­er­ence to ​“the Respon­dent” in the mid­dle of par 153 is cor­rect­ed to claimant, the rea­son­ing of the adju­di­ca­tor is tol­er­a­bly clear. She was say­ing that there was no evi­dence pro­vid­ed by the own­er to sat­is­fy her that (i) the builder was instruct­ed by the archi­tect to cor­rect par­tic­u­lar defects or finalise incom­plete work pri­or to the ref­er­ence date, (ii) the builder failed to cor­rect those defects or incom­plete work, and (iii) because it had failed to do so the own­er had invoked its right to use anoth­er per­son and had there­by incurred costs which it was enti­tled to off-set.

Fol­low­ing on from that, the pri­ma­ry judge’s crit­i­cism of the adju­di­ca­tor’s rea­sons (“that she was well and tru­ly aware of the claim by the own­er that the work was in many respects defec­tive, but she made no pre­cise find­ing on the topic…The oblig­a­tion to have regard to those mat­ters required her to deal with them as a fun­da­men­tal ele­ment of this part of her deter­mi­na­tion, or as the focal point of her analy­sis.”) were, accord­ing to Bas­ten JA, by no means obvi­ous. As his Hon­our stat­ed at [37]:

The adju­di­ca­tor was look­ing for ​“clear evi­dence” that cer­tain steps had been tak­en pri­or to the ref­er­ence date, absent which, on her view of the con­tract, there was no enti­tle­ment to make an off-set­ting claim. There can be no oblig­a­tion on any deci­sion-mak­er to make a ​“pre­cise find­ing” on a top­ic where there is no evi­dence to sup­port such a find­ing, or the evi­dence is insuf­fi­cient to sat­is­fy the deci­sion-mak­er that such a find­ing should be made. Indeed, the find­ing that there is ​“no clear evi­dence” is itself a suf­fi­cient finding.

At [40] Bas­ten JA also observed that the pri­ma­ry judge had ques­tioned whether the adju­di­ca­tor had ​“grap­pled with the under­ly­ing fac­tu­al issue” (that is whether the pur­port­ed defec­tive and incom­plete work shown in that ear­li­er cer­tifi­cate remained defec­tive or incom­plete as at the date of the pay­ment claim) and that he (the pri­ma­ry judge) described that as ​“a very dif­fi­cult ques­tion”. His Hon­our, Bas­ten JA, then com­ment­ed that:

the dif­fi­cul­ty may have arisen from impos­ing a gloss on the statu­to­ry oblig­a­tion to have regard to cer­tain mate­r­i­al. So far as the fac­tu­al assess­ment was con­cerned, as the judge cor­rect­ly not­ed at [33], the adju­di­ca­tor was con­strained by the need to rely only on the mate­r­i­al sup­plied by the builder and the pay­ment sched­ule sup­plied by the own­er, the adju­di­ca­tion response being made out of time. So much appears to be accept­ed at [34].

Accord­ing­ly, and after reit­er­at­ing that the func­tion of an adju­di­ca­tor is to have regard to the mat­ters, and only the mat­ters, set out in sec­tion 22(2) of the SOP Act, Bas­ten JA (with whom Leem­ing and White JA agreed):

(a) con­clud­ed that the adju­di­ca­tor plain­ly addressed her­self to the rel­e­vant manda­to­ry con­sid­er­a­tions, and prop­er­ly applied sec­tion 10(1) of the Act on her under­stand­ing of the build­ing con­tract: at [34]-[41];

(b) not­ed that it was not sug­gest­ed that error in con­stru­ing the con­tract would have been a review­able error: at [42]; and

(c) held that the appeal ought to be dis­missed with costs: at [50].

Sum­ma­ry

The deci­sion of Good­win Street Devel­op­ments is an impor­tant one in that it high­lights the fol­low­ing matters:

1. the oblig­a­tion on adju­di­ca­tors to act in good faith should not be con­flat­ed with an oblig­a­tion to ​“grap­ple with” and form a view on all mat­ters they are required to con­sid­er. Such lan­guage invites a slide into imper­mis­si­ble mer­it review; and
2. although bad faith can­not be com­pre­hen­sive­ly defined, in the con­text of adju­di­ca­tion deter­mi­na­tions under the SOP Act it at least requires some­thing equiv­a­lent to will­ful blind­ness or con­scious mal­ad­min­is­tra­tion. As not­ed above, it was held by the NSW Court of Appeal that there was noth­ing approach­ing bad faith on the part of the adju­di­ca­tor in Good­win Street Devel­op­ments; and
3. an alle­ga­tion of bad faith on the part of a deci­sion-mak­er is a seri­ous mat­ter involv­ing per­son­al fault and should not be made by a par­ty lightly.