Will the Court Grant a Stay of the Adjudicator’s Determination?

In the vein of the case law position, given the increasing insolvencies of businesses in the construction industry, it becomes hard to see why a company would even roll the dice and commence an adjudication application if the judgment can be ‘stayed’ by a Court based on the strength of a respondent’s potential claim against the risk the claimant may be insolvent. Certainty however, how a Court may consider the matter in a post-covid world with today’s current challenges facing the construction industry including increasing inflation and supply chain disruptions, may change the balance of the two competing policy considerations of Building and Construction Industry Security of Payment Act 1999 (NSW) (SOPA), namely to promote cash flow and to ensure the rights of the parties under the construction contract are upheld.

When considering whether to grant the stay of an adjudicator’s judgment, the Court in Hakea Holdings Pty Limited v Denham Constructions Pty Ltd; BaptistCare NSW & ACT v Denham Constructions [2016] NSWSC 1120 looked to the two competing policy considerations of SOPA, namely to:  

1. alleviate financial impact on businesses and subcontractors by promoting cash flow and greater transparency in the contracting chain by allowing a simple and inexpensive avenue for contractors and subcontractors to obtain progress payments for construction work or related goods and services; and 
2. ensure that the rights of the parties under the construction contract are not impacted, that they are respected, and upheld. 

The Court went further by identifying key factors for the Court’s consideration when balancing these two competing policies:  

1. the strength of the applicant’s claim; 
2. the basis of the applicant’s claim;

• does the applicant challenge the adjudicator’s determination? 
• does the applicant challenge the debt the subject of the determination? 
• the absence of a challenge to the debt is a powerful factor against the grant of the stay (Romaldi at [110]

3. the risk that the contractor will become insolvent. 

On appeal from the District Court to the Supreme Court in Adelaide Interior Linings v Romaldi Constructions [2013] SASC 110, the claimant sought to have the District Court’s granting of an injunction set aside and thus be granted the ability to seek the enforcement of the adjudicated amount pursuant to SOPA.  

In considering the competing policy considerations of SOPA, the Supreme Court held that the process contemplated by SOPA involved the claimant enforcing payment of the adjudicated amount and that, by preventing this, the District Court had permitted the respondent to circumvent the provisions of SOPA.  

His Honour Justice Anderson commented on the respondent’s submissions of the possible future insolvency of the claimant that would entitle the respondent to obtain a stay on enforcing the determination of an adjudicator. Further to this, his Honour noted the clear balancing act of the competing policy considerations of SOPA and that this may be irrecoverable to a successful respondent in any future proceedings. His Honour concluded that there had to be a high level of likelihood of insolvency before any stay will be granted. With respect to the respondent’s submissions about the claimant’s potential insolvency, his Honour found this to be hearsay. The claimant’s director provided clear contrary statements that they were not at a risk of going insolvent.  

Ultimately, the Court upheld the objective of SOPA, being that cash flow for contractors and subcontractors needs to be protected under a ‘pay now, argue later’ mechanism which allows subcontractors to be paid adjudicated amounts for construction work, regardless of any ongoing disputes relating to the performance of the contract.  

In the decision of Modcol v National Buildplan Group [2013] NSWSC 380, the Court considered on appeal at [40] whether the granting of a stay would be contrary to the purpose of a voluntary administration. The Court noted that the purpose of a voluntary administration is to maximise the chances of the claimant at financial risk to continue to trade. It was noted that this can only happen if the claimant received a cash injection by way of the respondent paying the adjudicated determination amount owed to the claimant. This would also maximise the chances of a DOCA being entered into following the second creditors meeting.  

His Honour considered at [38] the submissions on behalf of the claimant’s Counsel that their: 

“claim was based on its rights under SOPA…the object of the Act was to enable persons in his client’s position to obtain prompt payment of progress payments for construction work and related goods and services, and to provide mechanism for the enforcement of that right. Thus, he submitted, the policy of SOPA provided a basis for justifying the grant of leave and, indeed, for enabling his client to pursue its rights through in full: that is to say, to recovery of judgment and the obtaining of a s 7 certificate.” 

However, His Honour ultimately concluded that the granting of leave to be revoked and that proceedings to be stayed at [42] because if in the event the claimant was liquidated, the respondent would be disadvantaged:  

“If, however, there is no arrangement and the company does not continue in business, the likely result is winding-up. Clearly, a payment which would have the effect of giving a significant advantage to one unsecured creditor over others would not be consistent with the scheme of the Act for winding-up on insolvency.”