Halkat Electrical Contractors Pty Ltd v Holmwood Holdings Pty Ltd [2007] NSWCA 32

What the court decided

Holmwood Holdings Pty Ltd was the proprietor of a building project and Halkat Electrical Contractors Pty Ltd was its electrical contractor [1]. Holmwood terminated the contract before the works were complete [4]. On 3 June 2005 Halkat served a payment claim for a balance of $127,406.67 plus GST, made up of contract work, variations, interest and loss of margin for what it described as wrongful termination [4]. For a number of elements of the works, the claim gave the contract sum, a percentage said to be complete and an amount, but in several instances the amount did not match that percentage of the contract sum [5]. Holmwood's payment schedule of 21 June 2005 took that point, allowed different and sometimes lower percentages, deducted contra charges and retention and said that Halkat owed it $83,265.50 [7].

Holmwood's adjudication response relied on Mr Dann's assessment and an Enginuity report on the value of the work [10]. It also raised two points described as jurisdictional: that there was no construction contract because the contract named the proprietor as Homewood, and that the claim had been served by Halkat's solicitor rather than by Halkat itself [10]. The adjudicator rejected both points, and it was not argued on appeal that he was wrong about their lack of merit [13].

On the value of the work, the adjudicator found the Enginuity report of no assistance, said it could not be regarded as an independent assessment and said he had no evidence from which he could arrive at a value independently [14]. Mindful of Holmwood's "unmeritorious challenges" to the validity of the payment claim and of a deduction for liquidated damages of $89,100 that he regarded as unjustified, he said he was "more inclined to believe the claimant" and adopted Halkat's valuation of $152,000 rather than Holmwood's $59,376 [14]. With agreed variations of $7,400 and after deducting the amount already paid, he determined that Holmwood pay $116,598.35 including GST [12], [15].

At first instance, Brereton J directed himself by Brodyn Pty Ltd v Davenport (2004) 61 NSWLR 421, under which a determination is void if the basic and essential requirements of the Act are not met or there is no bona fide attempt by the adjudicator to exercise the power [17]. He held the determination void because the adjudicator had not had regard to relevant provisions of the contract, had not made a bona fide attempt to determine the matter and, in the alternative, had not paid regard to the payment schedule [1], [2], [22]. On the bona fide ground, he considered that the adjudicator had "substituted caprice for conscientious judgment" [21]. Halkat challenged each of those conclusions on appeal [24]. It did not maintain a faint challenge to what Brodyn had said about bona fides [25].

Giles JA agreed that the determination was void, although his reasons differed in part from the trial judge's [3]. He considered that the fundamental defect in the determination could be explained without a detailed examination of what Brodyn meant by a bona fide attempt to exercise the power [26]. Under section 22 the adjudicator was to determine the adjudicated amount by considering the matters listed in section 22(2), and he did not make a determination if he reached that amount by a process wholly unrelated to them [26]. That was what this adjudicator had done: he expressly said he lacked evidence to value the work independently and preferred Halkat's valuation because of Holmwood's unmeritorious challenges to the validity of the claim [26].

His reference to being inclined to believe the claimant did not make the determination more respectable [27]. In Giles JA's view, the unmeritorious challenges were "not a basis for belief or disbelief", and belief was not something that could properly be spoken of in relation to a corporate body [27]. The adjudicator had therefore failed to meet an essential precondition for a valid determination [27].

That was enough to dispose of the appeal, so Giles JA did not consider the grounds based on the contract provisions or the payment schedule, adding that his silence was not to be taken as approval of all of the trial judge's reasons [28]. He observed that the substance of the trial judge's reasoning was that the adjudicator had ignored the relevant contract provisions altogether, which might more readily be treated as a failure to comply with a basic and essential requirement of the Act, rather than overlooking one particular provision [29]. He also observed that, in describing the failure as jurisdictional error, the trial judge appeared to depart from the test of invalidity in Brodyn, which asked whether the legislature intended a requirement to be an essential precondition to a determination [29]. The appeal was dismissed with costs, and Santow JA and Tobias JA each agreed with Giles JA [30], [31], [32].

Why it matters

Under the Act as it then stood, the Court of Appeal held that an adjudicator who reaches the adjudicated amount by a process wholly unrelated to the matters in section 22(2) has not made a valid determination. It found that this adjudicator had done so where, having said he had no evidence on which to value the work independently, he adopted the claimant's valuation because the respondent had made unmeritorious challenges to the payment claim's validity. The Court did not decide the grounds based on the contract provisions or the payment schedule, and did not rest its decision on the trial judge's reasoning about bona fides.

The decision applied the Act as it then stood. Readers should check the current Act and later authority before relying on it.

Numbers in square brackets are paragraph numbers of the judgment. This note summarises a decided case for education and is not legal advice. See how the notes are written.