Challenging an adjudication determination

In the July 2013 edition of Acumen, we reported on the District Court judgment in Romaldi Constructions Pty Ltd v Adelaide Interior Linings Pty Ltd [2013] SADC 39, which concerned the Building and Construction Industry Security of Payment Act 2009 (SA) (the Act). The District Court granted an injunction preventing a subcontractor from recovering a payment an adjudicator had determined was owed to it by the contractor, thus overriding the intended operation of the Act.

The decision has subsequently been appealed twice.

The subcontractor successfully appealed that decision to the Supreme Court, where Justice Anderson discharged the injunction. The subcontractor subsequently obtained an adjudication certificate and filed it as a judgment debt in the Magistrates Court. The contractor sought a stay of execution until the contractor's claim for damages had been determined in the District Court. The Magistrate refused the stay application on the basis that it was an attempt to circumvent the decision of the Judge on appeal and the outcome of the adjudication.

The contractor unsuccessfully appealed Justice Anderson's decision and the Magistrates Court decision in the Full Court of the Supreme Court.

The decisions suggest that in certain circumstances:

• an injunction can be sought to prevent a claimant from filing an adjudication determination as a judgment debt if the injunction does not override the operation of the Act or a judicial review is sought of the adjudication determination; and
• a stay of execution can be granted in respect of an adjudication determination filed as a judgment debt if the plaintiff has established that:
  • it has an arguable case against the defendant; and
  • there is a real risk or a not insubstantial risk that the defendant will be unable to repay the adjudication amount.

Industry participants should be aware in certain circumstances even if a judgment debt is obtained in respect of an adjudication determination, payment of an adjudication amount may not be guaranteed if there is scope (either by other legislation or by a Court's jurisdiction) to prevent the judgment debt from being effected.

Appeal of the District Court decision

Adelaide Interior Linings Pty Ltd v Romaldi Constructions Pty Ltd [2013] SASC 110

The subcontractor appealed the decision of the District Court to grant the contractor an interlocutory injunction. Justice Anderson allowed the appeal and discharged the injunction, finding that:

• the grant of the injunction circumvented the objects of the Act, which is intended to create a regime for the payments of amounts owing to subcontractors; and
• in any event, the subcontractor did not have a high risk of insolvency and therefore an injunction would not have been granted according to the requirements of justice.

Justice Anderson noted that:

• the Act sets out precise steps as to the pathway by which an adjudication certificate can be obtained; and
• the subcontractor's attempts in following the natural progress contemplated by the Act had been thwarted by the District Court's order. When the subcontractor was about to register the adjudication certificate, thus making it a judgment debt, the contractor issued proceedings in the District Court.

Importantly, Justice Anderson noted that the contractor, having elected not to challenge the validity of the adjudication, cannot be permitted to circumvent the objects of the Act by taking its own action to prevent the adjudication certificate from being issued.

If a judicial review of the determination was sought, Justice Anderson suggested that a stay may be the more appropriate way of achieving justice between the parties.

Appeal of Justice Anderson's decision

Romaldi Constructions Pty Ltd v Adelaide Interior Linings Pty Ltd (No 2) [2013] SASCFC 124

The Full Court considered three issues on appeal:

• was there a ground established for an interlocutory injunction?
• was there a ground established for a stay of execution?
• did the Judge on appeal err in concluding that the proper exercise of the discretion on the material before the Judge at first instance would have been to deny a stay of execution?

Interlocutory injunction

Power to grant injunction

The Full Court noted that an interlocutory injunction can be granted:

• to preserve the subject matter of the action, where the final relief sought is proprietary, involves the taking or not taking of action or other non-monetary relief;
• to avoid the result of the action being rendered nugatory. This category applies to appeals, to an action at first instance in appropriate cases and, in principle applies to purely monetary claims; or
• in circumstances where a Mareva injunction sought.

In these proceedings, the juridical basis for the grant of an interlocutory injunction (if any) was to avoid the result of the action being nugatory.

Ground for grant of injunction

In dismissing the appeal against Justice Anderson's decision, the Full Court decided that, in the absence of a challenge against the validity of an adjudication determination, an interlocutory injunction restraining the filing of an adjudication certificate is unlikely to be granted.

In the Full Court's view, there was no suggestion that the contractor would suffer any prejudice if the adjudication certificate was issued. If the injunction was not granted, the contractor could have applied for a stay of execution of the judgment once the adjudication certificate was filed in court.

Stay of execution

Ground for grant of stay

The Full Court thought it appropriate to consider the application of the principles applying to the exercise of discretion by the Judge at first instance and the Judge on appeal on an application for a stay.

The Full Court determined that a stay of execution of a judgment founded on an adjudication certificate may be granted where:

• the validity of the adjudication is contested;
• the validity of the adjudication is not contested, but it is argued that on the merits, there was no progress payment due under the construction contract; and
• the plaintiff claims entitlement to a claim for breach of contract which does not directly impact the entitlement of the defendant to the progress payment. The contractor's appeal was based on this category.

The Full Court dismissed the contractor's appeal as the contractor had failed to establish:

• that it had an arguable case against the subcontractor for damages for breach of contract; and
• that such success would be rendered nugatory due to the dissipation of the adjudication amount and the defendant not having the means to meet a judgment in favour of the plaintiff. In this respect, the contractor was required to establish that there is a real risk or a not insubstantial risk that the defendant will be unable to repay the adjudication amount.

Exercise of discretion

The Full Court considered the following criteria as relevant to the Court's exercise of discretion in granting a stay in circumstances where a ground for grant of a stay has been established:

• the strength of the plaintiff's claim;
• whether there is a real risk or a not insubstantial risk that the defendant will be unable to repay the adjudication amount;
• the potential prejudice to the defendant if a stay was granted;
• the effect of the Act, which is to assign the risk of a subcontractor being unable to refund progress payments to the owner or head contractor to protect cash flow; and
• the entitlement of the subcontractor to the progress payment.

Both the strength of the plaintiff's claim and the effect of the Act were held to be significant factors for consideration. In addition, the contractor's failure to challenge the contractual debt was a 'powerful factor against grant of a stay'.

The Full Court's reasoning suggests that a plaintiff is more likely succeeded in obtaining a stay if it challenges the validity of the adjudication or the entitlement of the builder to the progress payment.

The appeal from the Magistrate

The Full Court held that the Magistrate:

• erred in summarily dismissing the contractor's application for a stay due to the categorisation of the application as an attempt at circumventing the Act; and
• ought to have heard the evidence and made a determination on the merits.

By seeking a stay after the adjudication certificate had been filed as a judgment debt, the subcontractor had been allowed to follow the procedure provided for in the Act. The contractor's application for a stay was not an attempt to circumvent the adjudication or the objects of the Act.

Although a lack of evidence meant the contractor's application for a stay would have ultimately been unsuccessful, the Full Court's decision suggests that a stay of execution of the adjudication certificate may be granted if a plaintiff can establish that it has an arguable case against a defendant and that there is a real risk or a not insubstantial risk that the defendant will be unable to repay the adjudication amount.

Important Disclaimer: The material contained in this article is comment of a general nature only and is not and nor is it intended to be advice on any specific professional matter. In that the effectiveness or accuracy of any professional advice depends upon the particular circumstances of each case, neither the firm nor any individual author accepts any responsibility whatsoever for any acts or omissions resulting from reliance upon the content of any articles. Before acting on the basis of any material contained in this publication, we recommend that you consult your professional adviser. Liability limited by a scheme approved under Professional Standards Legislation (Australia-wide except in Tasmania).