Australian court: issue estoppel does not apply to adjudications under the SOPA

In a case between Harlech Enterprises Pty Ltd and Beno Excavations Pty Ltd the Court of Appeal agreed with the Supreme Court that issue estoppel did not apply under the SOPA and dismissed Harlech's appeal.

This case deals with the principle of estoppel as an expression of issue estoppel, the principle that once an issue of fact or law has been finally decided, a party may not raise that issue again.

The application of issue estoppel to the various security of payment regimes has typically found support from the New South Wales (NSW) Court of Appeal’s decision in a case between Dualcorp Pty Ltd and Remo Constructions Pty Ltd. In this case, Dualcorp submitted a demand for payment of an amount previously awarded and Remo did not send a payment schedule and Dualcorp sought judgment on the claim. The Court of Appeal concluded Dualcorp had no right to enter judgment despite the apparent statutory right created by the security of payment legislation.

In the case between Harlech Enterprises and Beno Excavations, the broad application of the principle of estoppel that many have drawn from Dualcorp has been greatly diminished. It would take a brave adjudicator to continue to follow the conclusions of previous adjudicators on the facts or the law, without reflection on the issues. This outcome will certainly be welcome in circumstances where a previous adjudicator’s decision is plainly incorrect. However, it does leave scope for outcomes which many will consider unsatisfactory.

Examples of scenarios that may arise which may lead to unsatisfactory results are:

• An adjudicator rejects a claim without valuing it and the claimant seeks to pursue the same claim in a subsequent adjudication.
• An adjudicator rejects a claim and values it at zero but the claimant completes more work and seeks to pursue the claim in a subsequent adjudication.
• An adjudicator concludes a payment claim is invalid, which led to a claimant making a further claim for the same reference date, but a second adjudicator considers the initial claim was valid.

How the above problems are dealt with will likely be the subject of further debate.

Harlech was used as a vehicle through which its director was engaged by Beno as its general manager. Harlech made a payment claim under the SOPA and Beno issued a payment schedule proposing to pay nil and identifying the reasons for withholding payment. The dispute proceeded to adjudication and Harlech was entirely successful. Harlech made two further payment claims for separate work. Beno responded by way of payment schedule, again raising the same reasons for withholding payment and adding further reasons. The dispute proceeded to further adjudication and Harlech was once again successful.

The adjudicator appeared to apply the principle of estoppel in the reasoning for the determination and an incorrectly expanded interpretation of the obligation imposed by the SOPA on an adjudicator to value work at the same value as in a previous determination unless satisfied the value has changed. The adjudicator concluded that Beno was unable to re-agitate reasons for withholding payment which were the same as those considered in the first adjudication.

Beno challenged the determination. Both parties agreed the expanded interpretation of the statutory obligation to value work at the same value was incorrect. However, Harlech contended this error was not material as applying the principle of issue estoppel resulted in the same findings. The Supreme Court found issue estoppel did not apply and Harlech appealed the decision. The Court of Appeal agreed with the Supreme Court and dismissed the appeal. The Court of Appeal unanimously found that issue estoppel did not apply to adjudications under the SOPA.

Based on the Dualcorp case and a few similar cases, Mr Justice Lee in the present case said "issue estoppel in the context of security of payment legislation deviates from the principles of issue estoppel as commonly understood. Even where the doctrine has been found to operate, it is characterised as inchoate, narrow in scope, and based upon broader principles of preclusion”.

Mr Justice Lee concluded that the SOPA gives rise to some preclusion which is against abusing the processes of the SOPA, but that preclusion does not extend to findings of fact or law, stating that if an adjudicator were bound by a previous adjudicator’s findings as to the existence of a construction contract, the construction of that contract, or the agreed rate of payment under that contract, an adjudicator may not be able to perform their statutory function.

Mr Justice Kennett observes that the rough and ready nature of an adjudication and many aspects of the process means the legislature is unlikely to have intended those findings reached in one adjudication determination, even if clearly incorrect, bind the parties in relation to all subsequent adjudications. Although not argued here, abuse of process could apply to a repetitious claim under the SOPA or the re-agitation of contentions previously rejected.

Section 24(4) of the SOPA, the obligation to value in accordance with a previous adjudicator’s valuation, would have no work to do if estoppel were to apply. If estoppel applied to adjudication, parties could potentially be bound by competing estoppels, one arising from a previous adjudication and one arising from court proceedings.

Also, in this case, Mr Justice Kennett and Mr Justice Lee both mentioned the operation of the concept of abuse of process. It appears that the concept of abuse of process mentioned by Justice Kennett may have wider application than that mentioned by Justice Lee. The latter seems to base the abuse of process firmly on the terms of SOPA, while the former seems to refer to the concept and its underlying concerns more broadly.

Co-written by James Thyer of Pinsent Masons.