Is jurisdiction limited by the notice of adjudication?

Since the Construction Contracts Act came into force in 2003, it has been assumed that the notice of adjudication determines and limits the jurisdiction of an adjudication; an approach taken in the UK (see JG Walker Groundworks Ltd v Priory Homes (East) Ltd [2013] EWHC 3723 (TCC)).  That assumption has always been questionable and has lead to parties lifting the wording of the notice out of the claim, deferring the issue of the notice until the claim is fully prepared and, in some cases, submitting that the basis of the claim, including legal argument, should be identified in the notice.

While the adjudication process is seen, particularly by lawyers, as a significant inroad in a party's legal rights to understand the case against them, face their accuser and be given the opportunity to be heard, these arguments may be a step too far.

In broad terms, a party to a construction contract has the right to refer a dispute to adjudication (section 25).  Disputes are broadly defined.  The procedure is then the issue of a notice of adjudication (section 28); appointment of an adjudicator (section 33); submission of an adjudication claim ((section 36); response to that claim (section 37); and reply and rejoinder (section 37A).  The adjudicator then has 20 working days to provide a determination (sections 45 to 48), which can be entered as a judgment (section 73), and a respondent can oppose enforcement only on very limited grounds (section 74).  The determination can then be enforced in the same manner as any judgment of the court (section 77).

More critically, there is no provision in the adjudication procedure for counterclaim or set-off, though abatement may be available.  Specifically, if the adjudicator holds that a sum of money is due, the successful party may enforce the payment of the amount determined as a "debt due" (section 59) and in any proceedings to recover that debt, a court is enjoined from considering any counterclaim, set-off or cross-demand (section 79).

The issue then arises, how definitive should the notice of adjudication be, to what extent is the adjudication claim limited buy the notice and, perhaps peripherally, what should the adjudicator properly determine?  Should he or she "go to the heart" of the issues in dispute, or simply resolve the issues referred to in the notice?

In Alaska Construction + Interiors Auckland Ltd v LaHatte and Lovich Floors Ltd [2020] NZHC 1056, Justice Woolford considered these issues for the first time in any depth.

Alaska was the head contractor in an apartment development, and Lovich a subcontractor.  The development did not go well for Lovich; there were arguments about quality of work and Alaska brought in other contractors to complete some of Lovich's work; and inevitably there were disagreements about payment.  Lovich issued a payment claim for $113,443.71 on 16 December 2019.  On 20 January 2020, before the time period for issuing a payment schedule had passed, Lovich issued a notice of adjudication claiming $113,490.86 and identified the dispute as to whether or not Alaska was obliged to pay that sum.

It appears that the notice did not disclose a cause of action, and specifically did not raise the default payment regime in section 22, apparently as the time period for providing a payment schedule had not at that stage passed.  In any event, no payment schedule was issued, and Lovich argued in the adjudication claim that the full amount claimed was due.  The adjudicator determined the amount claimed due on the basis no payment schedule had been issued, and awarded costs against Alaska.  On that basis, the adjudicator also held that there was no need for him to determine the merits of the amount claimed or any of the underlying issues in dispute.

Alaska sought judicial review of the determination on three grounds:

  1. there was a breach of natural justice, as Lovich only raised the issue of no payment schedule in the adjudication claim and not in the notice of adjudication;
  2. the adjudicator failed to discharge his statutory function by not determining the underlying dispute; and
  3. there was an unreasonable exercise of a statutory power by awarding costs against Alaska on an indemnity basis.

The first point raises the jurisdictional issue, with Alaska arguing that Lovich had "unilaterally modified" the dispute.  As mentioned above, the status of the notice of adjudication is somewhat murky under the NZ Act.

In the UK, section 108 of the Housing Grants, Construction and Regeneration Act 1996 provides, in similar terms to our Construction Contracts Act, that a party to a construction contract "has the right to refer a dispute arising under the contract for adjudication".  Section 108 then goes on to provide in very loose terms, for the adjudicator to determine the dispute.  This has lead to the finding that the notice defines the scope of the referral to adjudication, and that if the adjudicator purports to decide matters not referred to him or her, on a true construction of the notice, then the determination will not be enforced.

In the New Zealand context, this has lead to a rigid belief that the notice determines the limits of the adjudicator's jurisdiction in absolute terms, and in extreme cases, counsel has argued, as they did in Alaska v Lovich, that the notice must disclose the grounds upon which the claimant argues that it is entitled to the relief sought.

The Construction Contracts Act is notably different to the UK legislation; primarily in that it is far more procedurally prescriptive.  More critically, the notice must only state "the nature and a brief description of the dispute" (see section 28(2)(b)) compared to the UK's "notice of intention to refer a dispute to adjudication"; whereas under our legislation the adjudication claim must "specify the nature or the grounds of the dispute and, to the extent relevant, be accompanied by a copy of the notice of adjudication" (see section 36(2)(a)).  Two critical distinctions must be drawn - first it is only the claim which must specify the grounds of the claim, and not the notice, and second there must be a basis upon which the notice may have become irrelevant to the claim.  That is not to say that the claimant has carte blanche to depart from the notice, but it is clear from the express wording of section 36 that the notice is superseded by the claim as it includes greater detail outlining the basis for the claim.

The notice achieves little more than giving the respondent advance warning that a claim is coming, and brief particulars of what it will cover.  This approach is reinforced by the requirement that the adjudicator is to take account of the Act; the construction contract; the claim, the response, the reply and any rejoinder; the report of any expert; site investigation; and any other matters the adjudicator reasonably considers necessary (see section 45), within the constraints of natural justice (see section 41(c)).  There is no reference to the notice of adjudication in section 45.  Its purpose, it is suggested, is to do little more than notify an intention to refer a dispute relating to a specific project to adjudication.  It must identify the dispute in general terms and specify the relief sought, but little more than what is prescribed.  On the limits of jurisdiction, clearly an adjudicator can only determine a dispute identified in the notice, and cannot go outside those issues; but beyond that the notice has little relevance.

On this point, Justice Woolford held that there had been no breach of natural justice as Alaska was well aware of the claim by Lovich.

On the second point, his Honour held that the lack of a payment schedule had been referred to adjudication in the claim, and therefore the adjudicator had determined the dispute put to him.  The underlying dispute could at any time have been referred to adjudication initiated by Alaska, or in arbitration or court.

On the third point, Justice Woolford accepted the adjudicator's reasoning that the consequences of a failure to provide a complying payment schedule is well known in the construction industry, and therefore the failure by Alaska to address this issue had the consequences outlined in section 56 & 57 of the Act.

The case is interesting in its no-nonsense approach to the challenge to the adjudicator's determination, and reinforcing the approach outlined by the Court of Appeal in Rees v Firth that the proper recourse for an unhappy party to adjudication is to refer the underlying dispute for substantive hearing either in further adjudication or arbitration.  The case also provides useful clarity on the jurisdictional limits on a notice of adjudication - it need only outline in general terms the background to the dispute and, perhaps in more precise terms, what is sought.  Its purpose is to give notice that a dispute is being referred to adjudication and what relief is sought - it is not definitive of the arguments to be raised in support of the claim.