Victorian Court of Appeal considers adverse inferences to be drawn from failure to respond to a payment claim

1155 Nepean Highway Pty Ltd v Promax Buildings Pty Ltd [2020] VSCA 253

The recent Victorian Court of Appeal decision in 1155 Nepean Highway Pty Ltd v Promax Buildings Pty Ltd [2020] VSCA 253 examines the inferences that an adjudicator can draw from the absence of supporting material provided by the respondent to a payment claim.

The plaintiff, Promax Building Pty Ltd (Promax), was engaged to build 26 apartments for a contract price of $8,595,000. On 15 July 2019, Promax submitted a claim under s 14 of the Victorian Building and Construction Industry Security of Payment Act 2002 (Vic) (SOP Act) for a progress payment. No payment schedule was issued by the respondent, 1155 Nepean Highway Pty Ltd (Nepean), in response to the payment claim.

Promax notified Nepean of its intention to apply for adjudication and gave Nepean a further two business days in which to provide a payment schedule in accordance with s 18(2) of the SOP Act. Once again, Nepean did not provide a payment schedule. As a result, s 21(2A) of the SOP Act prevented Nepean from filing an adjudication response, meaning that the only material before the adjudicator was Promax’s adjudication application.

The adjudicator issued a determination in favour of Promax, finding that it was entitled to the full amount claimed, as well as adjudicator’s fees and interest.

Even though it had failed to file a payment schedule, Nepean challenged the adjudicator’s determination in subsequent proceedings in the Supreme Court of Victoria, and then the Court of Appeal. Nepean argued, among other things, that the adjudicator had erred in finding that Nepean's failure to provide a payment schedule meant that that no credible challenge could be made to Promax’s claim. Nepean also argued that the adjudicator had improperly relied on photos of the works without comparing those works to the contract drawings.

Before the Court of Appeal, Nepean argued that the trial judge had erroneously approved the approach of the adjudicator by drawing adverse inferences from Nepean's failure to adduce contradictory material in the adjudication, even though the statutory prohibition in the SOP Act prevented Nepean from lodging an adjudication response.

The Court agreed. ‘The applicant's silence in the adjudication could not be taken as indicating anything at all about the strength of its case’ in the circumstances. Here, the fact that Nepean had not provided a payment schedule meant that section 21(2A) of the SOP Act prevented Nepean from lodging an adjudication response. Also, the adjudicator had not sought further submissions or material under section 22(5).

Relevantly, however, the Court went on to distinguish between an adverse inference based on the absence of an adjudication response and Nepean's earlier failure to serve a payment schedule.

To the latter, the Court reasoned that:

‘…an inference drawn, not from the absence of an adjudication response but from the applicant’s failure to provide a payment schedule, is in a different position… A recipient of a payment claim may be taken to know of the critical significance of a payment schedule to the operation of the Act in general and to the making of an adjudication determination in particular. … As a matter of common sense, a recipient of a payment claim who does not respond to it might rationally be thought to have no basis upon which to contest it.’

On that basis, the Court held that it was ’permissible for an adjudicator to infer, based on the failure of a recipient of a payment claim to provide a payment schedule, that the recipient was not in a position to contest the claim’.

In the end, the Court declined to find that the adjudicator drew the inference identified by Nepean.

Nepean also argued that the contract drawings constituted part of the ‘construction contract’ which was required to be considered by the adjudicator pursuant to section 23(2)(b) of the SOP Act, so that a failure to have regard to them rendered the determination void under section 23(2B). Although not forming a separate ground of appeal, the Court considered this argument and made observations regarding what constitutes ’the provisions of the construction contract from which the application arose‘ for the purposes of section 23(2)(b). The Court observed:

’…two interpretations are open. On the broader view, all the contents of documents having force as part of the contract or arrangement constituting the construction contract make up the provisions of that contract. On a narrower reading, the provisions of a construction contract are to be found only in the contract executed by the parties, and not in other documents incorporated by reference in that document.’

Ultimately the Court concluded that the text of section 23(2)(b) supports the narrower approach, noting (among other things) that the use of the expression ’the provisions of the construction contract’, rather than ‘the construction contract’ in section 23(2)(b) suggests that the section ‘contemplates something other than the whole of the construction contract as broadly defined’. In reaching this conclusion, the Court also adopted a practical approach consistent with the expeditious conduct of adjudications. The Court determined that section 23(2)(b) sets a basal level of contractual material that an adjudicator must always consider, while empowering the adjudicator to demand further submissions, including the provision of documents, where the adjudicator considers that the parties have not provided all ‘relevant documentation’.[1]

[1] [Note: The above material provides a summary only of the subject matter covered, without an assumption of a duty of care by Resolution Institute or Clayton Utz. The material is not intended to be nor should it be relied upon as a substitute for legal or other professional advice. Copyright in the material is owned by Clayton Utz.]