Cutting off the dead to save the living: Samsung v Duro [2018] WASCA 27; Duro v Samsung [2018] WASCA 28

Two recent WA Court of Appeal decisions clarify the scope of an adjudicator’s jurisdiction, issues of set-off, and the ability to sever partially invalid determinations in the context of Construction Contracts Act 2004 (WA) (CCA) adjudications. 

The decisions are significant; not least because they are two of only five occasions on which the Court of Appeal has turned its mind to the operation of the CCA since it came into operation on 1 January 2005.[1]

The first decision, Samsung C&T Corporation v Duro Felguera Australia Pty Ltd [2018] WASCA 27 (‘Samsung v Duro’), confirms (among other things) that:

• an adjudicator’s duty to dismiss an application without making a determination of its merits (see section 31(2)(a) of the CCA) does not arise if the adjudication concerns a claim for payment for both ‘construction work’ and non-‘construction work’;[2] but
  
  
• an adjudicator does not have jurisdiction to determine anything other than a ‘payment dispute’ in respect of ‘construction work’ so that an adjudicator will commit jurisdictional error if they purport to determine a payment dispute in respect of non-‘construction work’.[3]

The second decision, Duro Felguera Australia Pty Ltd v Samsung C&T Corporation [2018] WASCA 28 (‘Duro v Samsung’), confirms (among other things) that:

• in determining the merits of a ‘payment claim’ (the non-payment or disputation of which gives rise to the ‘payment dispute’), an adjudicator must determine the merits of any set-off (or other defence) upon which the respondent relies in denying liability for the ‘payment claim’;[4]
  
  
• as part of that function, the adjudicator is empowered to consider a set-off made in respect of a prior ‘payment claim’, in circumstances where that set off is raised as a defence to the ‘payment claim’ that is the subject of the adjudication (or is otherwise put in issue by the parties); and
  
  
• in the face of differing positions taken by appellate courts in South Australia and Queensland, where a portion (or portions) of a determination are infected by jurisdictional error, the infected portion(s) may be severable from any uninfected portions (which are within jurisdiction), in which case the uninfected portions are enforceable.

Facts

Both decisions originate from a subcontract by which Samsung engaged Duro to perform various works on the Roy Hill Iron Ore Project. The facts leading up to the appeal were:

• Samsung disputed Duro’s entitlement to payment for work performed between approximately November 2015 and February 2016. Duro applied for the disputes to be adjudicated under the CCA.
  
  
• By five determinations, four adjudicators determined that Samsung was liable to pay Duro amounts totalling more than $60 million.
  
  
• Duro commenced proceedings to enforce the determinations. Samsung, in turn, commenced judicial review proceedings in which Samsung challenged the validity of the determinations on various grounds (including on the ground that the determinations (incorrectly) included components relating to the payment for works which fall outside the statutory definition of ‘construction work’).
  
  
• On 14 October 2016, the Supreme Court of Western Australia (Beech J) granted Duro leave to enforce three of the determinations (‘the first, fourth and fifth determinations’), setting aside two of the determinations (the ‘second’ and ‘third’ determinations) for jurisdictional error.[5]
  
  
• Samsung and Duro, each dissatisfied with the first instance decision, appealed to the Court of Appeal.

Samsung v Duro [2018] WASCA 27 – Grounds of appeal

Samsung’s appeal sought to impugn the ‘first’ and ‘fifth’ determinations. The trial judge concluded that each adjudicator:

• erred by characterising non-‘construction work’ (work properly the subject of the ‘mining exclusion’ in section 4(3) of the CCA) as ‘construction work’; however
  
  
• the error was not one of jurisdiction, but rather was made in the exercise of the adjudicator’s function under section 31(2)(b) of the CCA, with the effect that neither determination was invalid.

Samsung argued that the adjudicators:

• Ground 1: lacked jurisdiction to consider and determine a dispute arising from a claim for payment if any of the work the subject of the claim for payment is not ‘construction work’ within the meaning of section 4 of the CCA; and
  
  
• Ground 2: in the alternative, exceeded their jurisdiction by erroneously including within their determinations amounts relating to non-‘construction work’.

The Court of Appeal agreed with ‘ground 2’, but not ‘ground 1’, of Samsung’s appeal by a 2:1 majority (Buss P and Murphy JA; Martin CJ dissenting).

Reasoning

The CCA applies to ‘construction contracts’[6] (being, contracts under which a person has an obligation to carry out, or supply goods or services relating to, ‘construction work’).[7]

Despite argument to the contrary (which Samsung abandoned on the second day of the hearing before the trial judge), the Court of Appeal had little difficulty in concluding that a contract for both ‘construction work’ and non-‘construction work’ is a ‘construction contract’ within the meaning of the CCA. As Buss P and Murphy JA observed:

‘There may be some cases (and this is one) where, under the umbrella of the one contract, a person has undertaken (1) 'obligations' to carry out construction work, or supply goods or services 'related to' construction work, as well as (2) the performance of other contractual duties. Such a contract (which may be referred to as an 'umbrella contract') would fall within the terms of the definition of 'construction contract' by reason of the former of those two matters.’[8]

The dispositive component of the Court of Appeal’s decision[9] turned on whether and, if so, to what extent, an adjudicator has jurisdiction to determine the merits of a dispute arising from a claim for payment for both ‘construction work’ and non-‘construction work’.

The Court of Appeal focused on the operation of section 31(2) of the CCA which is, most relevantly, in the following terms:

‘(2) An appointed adjudicator must, within the prescribed time or any extension of it made under section 32(3)(a) —

(a) dismiss the application without making a determination of its merits if — …

(ii) the application has not been prepared and served in accordance with section 26(1) and (2)(b) and (c); or …

(b) otherwise, determine on the balance of probabilities whether any party to the payment dispute is liable to make a payment, or to return any security …’

Samsung’s primary submission was that under section 31(2)(a)(ii) of the CCA, an adjudicator must dismiss any application for adjudication of a dispute arising from a claim for payment for both ‘construction work’ and non-‘construction work’. Samsung relied, to that end, on the following logic: (1) section 31(2)(a)(ii) of the CCA requires an adjudicator (before embarking upon a determination of the merits) to determine whether there exists a ‘payment dispute’; and (2) a dispute arising from a claim for payment for both ‘construction work’ and non-‘construction work’ is not a ‘payment dispute’.

The Court of Appeal did not accept Samsung’s primary submission, holding that the operative words of section 32(2)(a)(ii) of the CCA ‘are clearly directed to compliance with the form and service requirements imposed by s 26 [of the CCA]’ (and not the existence of a ‘payment dispute’).[10]

Samsung’s alternative submission[11] (which the Court of Appeal allowed, by 2:1 majority) was that an adjudicator will commit jurisdictional error if they, in the course of determining a ‘payment dispute’, purport to determine a dispute arising from a claim for payment for non-‘construction work’.

Martin CJ (in dissent) rejected Samsung’s alternative submission, concluding that ‘the assessment of whether work for which payment is claimed is of a kind described in the definition of construction contract is a matter to be determined by an adjudicator in the exercise of the jurisdiction conferred upon him or her by the CCA.’[12] In arriving at his conclusion, Martin CJ held:

‘significantly, in s 31 of the CCA, the legislature has specifically addressed the question of the conditions which must be satisfied before an adjudicator embarks upon the exercise of the jurisdiction conferred.

… once Samsung's arguments based upon s 31(2)(a)(ii) and s 26 are rejected, there is nothing else in the text of the CCA capable of supporting Samsung's contentions.’[13]

In contrast, Buss and Murphy JA (in the majority), held that the CCA does not confer on an adjudicator jurisdiction to determine a dispute ‘which is not, in point of law, a ‘payment dispute’ within the meaning of the [CCA]’.[14] As Buss and Murphy JA said, of adjudication applications which seek payment for both ‘construction work’ and non-‘construction work’:

‘… even though there will be no dismissal under s 31(2)(a)(i) in such a case, the absence of dismissal cannot be tantamount, in addition, to an implied conferral of jurisdiction to determine a claim for payment with respect to other contractual duties (which may, for present purposes, be called a 'non-payment claim'). That is because, under s 31(2)(b), when read in the context of s 25 and pt 3 as a whole, an adjudicator has no jurisdiction to determine any dispute other than a 'payment dispute'. There is no power under s 31(2)(b) to determine the underlying 'merits' of a dispute involving a 'non-payment claim'.’[15]

Obiter observations

While it does resolve (at least for now) the question of whether a contract for both construction work’ and non-‘construction work’ is a ‘construction contract’, the Court of Appeal’s decision provides rather less certainty in relation to:

• the scope of the CCA’s provisions which operate to prohibit, modify, and imply provisions in ‘construction contracts’;[16] and
  
  
• whether the failure to return retention or security will give rise to ‘payment dispute’ if the retention money or security relates only to the performance of ‘construction work’ (see sections 6(1)(b) and 6(1)(c) of the CCA).

While it was unnecessary for the Court of Appeal to decide either point, Martin CJ held:

‘[absent] argument to the contrary, [sections 9-23 of the CCA] appear to apply to all construction contracts, including contracts under which the contractor is obliged to carry out work which is construction work and work which is not construction work’;[17] and

‘[the] CCA confers jurisdiction upon an adjudicator to determine a payment dispute arising under a construction contract in relation to the payment of retention moneys, or the return of security held by a party without imposing any obligation upon an adjudicator to determine the extent to which the retention moneys or security related to the performance of construction work.’[18]

In contrast, after describing the principles of statutory interpretation,[19] Buss P and Murphy JA opined that:

‘[the] implied provisions apply with respect to a contractor's 'obligations' (as defined in s 3)’;[20]

‘s 9 and s 10 are concerned, at least primarily (if not exclusively - as to which it is unnecessary to decide) with payment provisions in relation to the 'obligations' of the 'contractor’’;[21] and

‘it is necessary to read sections 6(1)(b) and 6(1)(c) of the CCA as referring to retention money or security ‘for the performance of the contractor’s ‘obligations’’.[22]

Duro v Samsung [2018] WASCA 28 – Grounds of appeal

Duro’s appeal sought to impugn the trial judge’s decision with respect to the ‘second’ and ‘third’ determinations. At first instance, Beech J held:

• regarding the ‘second’ determination, the adjudicator exceeded his jurisdiction by deciding Samsung was not entitled to set off an amount of $6.6 million which Samsung had paid on account because Samsung had wrongly withheld an amount of $13.2 million from a payment previously due to Duro;[23] and
  
  
• regarding the ‘third’ determination, the adjudicator committed jurisdictional error in ordering that a $34 million amount was payable to Duro, and that the remaining components of the determination (which were not erroneous) could not be severed, so the entire determination was void.[24]

Duro appealed on the following grounds:

• Ground 1: Duro argued the ‘second’ determination was within the jurisdiction conferred upon the adjudicator by the CCA (Set-off Issue); and
  
  
• Ground 2: Duro, while conceding that the adjudicator committed jurisdictional error in ordering the $34 million amount was payable,[25] argued the judge erred in finding that severance of the other amounts that Samsung was ordered to pay Duro was not permissible (Severance Issue).

Duro’s appeal was wholly successful. The Court of Appeal unanimously found in Duro’s favour on the Set-off Issue, with Buss P and Murphy JA finding in Duro’s favour on the Severance Issue (with Martin CJ dissenting).

Set-off Issue

In the ‘second’ determination the adjudicator accepted that Samsung had made an advance payment of $6.6 million on account to Duro, but determined that Samsung was not entitled to set off that amount against Duro’s November progress claim, being the relevant payment claim. The adjudicator reasoned that because Samsung had wrongfully set-off $13.2 million for liquidated damages against Duro’s October 2015 progress claim, Samsung was not entitled to further set off the amount of $6.6 million, given there was not a balance in favour of Samsung having regard to those two amounts.

Beech J held that ‘the adjudicator was not empowered … to apply his conclusion that Samsung was not entitled to a set-off for liquidated damages to Samsung's response to an earlier, separate payment claim, and then to credit Duro with the amount of that 'wrongful' set-off against Samsung's right to credit for its payment on account.’[26]

Drawing support from Alliance Contracting Pty Ltd v James,[27] his Honour was of the view that the adjudicator's function of determining the amount of money payable by one party to the other was not at large but was confined, relevantly, by the payment claim founding the payment dispute.[28]

Martin CJ (with whom Buss P and Murphy JA generally agreed) found the primary judge had erred, accepting the following three principal submissions advanced by Duro:[29]

• first, Samsung's entitlement to deduct the liquidated damages it had claimed against Duro was put squarely in issue by both parties.[30] Indeed, because the entitlement to deduct liquidated damages and the entitlement to set off the $6.66 million payment on account were raised as defences to Duro’s claim, they were matters the adjudicator was obliged to determine;[31]
  
  
• second, in order to determine whether Samsung was liable to make a payment to Duro in respect of the November progress claim, it was necessary for the adjudicator to determine whether Samsung's payment of $6.66 million on account had in fact given rise to a credit in the balance of account between Samsung and Duro which could be set off against the amount which Duro claimed in the November progress claim.[32] Martin CJ confirmed that an adjudicator is required to ascertain entitlement to payment as at the date of the determination, so that all evidence which is relevant to the amount of the liability, if any, as at the date of determination should be received by the adjudicator.[33] His Honour held this was, in effect, what the adjudicator did; and
  
  
• third, the adjudicator correctly only allowed Duro to use Samsung’s wrongful withholding of $13.1 million as a shield to Samsung’s claim to set off $6.6 million – not as a sword whereby Duro was entitled to payment of the difference.[34]

In so finding, Martin CJ confirmed[35] previous decisions (including Alliance Contracting) to the effect that adjudicators are obliged to determine whether the entitlement to the payment claimed has been satisfied, entirely or in part, by set-off,[36] and that a counterclaim cannot be used as a sword resulting in a determination that money is payable to the respondent.[37]

Severance Issue

The adjudicator’s ‘third’ determination was that Samsung was liable to pay Duro $49.6 million, made up of three components:

• an amount said by Duro to have been certified as payable by Samsung but 'set off' in the sum of approximately $34.2 million;
  
  
• amounts claimed in respect of the 'car dumper claims' totalling approximately $14.7 million; and
  
  
• part of an amount claimed for certain commissioning costs totalling approximately $0.7 million.

At first instance, Beech J held that:

• the adjudicator exceeded his jurisdiction in finding that the $49.6 million was payable to Duro because he included, in jurisdictional error, the amount of $32.4 million in his calculations; and
  
  
• the $14.7 million and $0.7 million amounts were not severable from the adjudicator's decision because the court ‘has no power to substitute a different adjudicated amount to reflect that part of the amount that is unaffected by jurisdictional error’.[38]

On appeal, Buss P and Murphy JA framed the relevant question as ‘whether the [CCA], properly construed, reveals a legislative intention that an adjudicator's determination under s 31(2)(b) as recorded in or evidenced by his or her decision under s 36, is to operate as an organic and indivisible whole.”[39] Their Honours held it did not,[40] for the following reasons:

• first, the CCA recognises the essential statutory function of the adjudicator will commonly involve the determination of identifiable, divisible, amounts;[41]
  
  
• second, sections 33 (interest) and 36(c)(i) (content of the determination) of the CCA operate on the basis that a determination may involve a determination of divisible amounts with different consequences;[42]
  
  
• third, the effective operation of sections 38 to 43 of the CCA does not depend upon an adjudicator's determination operating as an organic and indivisible whole;[43] and
  
  
• fourth, the CCA is beneficial legislation, and accordingly the decisions of adjudicators, to the extent that they deal with the adjudication of a 'payment dispute', within the meaning of s 31(2)(b), are to have the fullest operation.[44]

Buss P and Murphy JA held that if followed, applying the common law principles of severance, that the invalid component of the determination could be severed from the remainder of the determination. This is because the invalid part of the adjudicator’s determination did not influence the making, or form an integral or essential element, of the valid part of his decision.[45] Hence, certiorari was available to quash the determination with respect to the $34.2 million component of the determination, but the $14.7 million and $0.7 million amounts remained valid.

In contrast, Martin CJ followed a number of decisions in Western Australia,[46] New South Wales,[47] and Queensland[48] (including the decision of the Queensland Court of Appeal)[49] in which it had been held that the determination required of an adjudicator, being of ‘the’ amount due and owing, is a single composite determination which cannot, and should not, be regarded as made up of severable and divisible components.[50] His Honour declined to follow the contrary decision of the Full Court of the Supreme Court of South Australia.[51]

As a result, the invalid component of the determination could not be severed from the remainder, rendering the entire determination void. Martin CJ warned that concluding that the invalid portion of the determination could be severed is a:

‘conclusion that the court has power to make orders which would, in effect, result in a different determination to that made by an adjudicator, taking effect at a time outside the time constraints imposed by the CCA, and without regard to any events which had taken place between the original determination and the decision of the court, [and] would result not only in curial usurpation of the powers and functions conferred exclusively upon an administrative decision-maker, but would also be contrary to the general scheme and purpose of the legislation.’[52]

Key takeaways

Samsung v Duro makes clear that adjudicators exercising jurisdiction under the CCA cannot award payment for work which does not satisfy the statutory definition of ‘construction work’. That being the case, prospective applicants (contractors and subcontractors) should, to the extent possible, take care to clearly separate each claim item and claim amount, so that an adjudicator can distinguish between claims for payment for ‘construction work’ and non-‘construction work’ in the event that a dispute reaches adjudication. While there is room for further debate on where the dividing line lies, prospective applicants should also treat claims for ‘mixed items’ (items which relate to ‘construction work’ and non-‘construction work’, such as preliminaries and off-site overheads) with caution.

The good news (for applicants) is that the existence of jurisdictional error in a favourable determination does not necessarily spell complete disaster. Duro v Samsung clarifies that an adjudicator's determination is valid to the extent that it is possible to sever, in accordance with common law principles, any part of the determination which suffers from jurisdictional error. Respondents will, therefore, need to consider the quantum of the work the subject of a determination which (arguably) falls short of ‘construction work’ in deciding whether to commence judicial review proceedings.

The Court of Appeal’s decisions reflect the current position. At the time of writing, neither Samsung nor Duro has applied to the High Court for special leave to appeal either decision (and the 28 day period for doing so has expired). However, there is much to be said for the strength of Martin CJ’s dissenting reasons, which will not be tested unless and until the High Court has an occasion to consider the issues (including, in particular, the issues regarding severance) that are the subject of the appeals.