No estoppel by earlier judicial review of SOPA adjudication

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Posted By and on 31/01/22 at 10:54 AM

Where final judgment is entered in a proceeding, a party to that proceeding may be estopped (precluded) from bringing subsequent proceedings against the other party or from raising an issue of fact or law in subsequent proceedings against the other party related to the finally determined proceeding’s issues.

However, in Gemcan Construction Pty Ltd v Westbourne Grammar School (Enforcement of Arbitral Award) [2022] VSC 6 (the Gemcan Case), the Supreme Court of Victoria held that an arbitrator was not estopped from determining a question of substantial breach, in circumstances where the validity of a takeout notice alleging substantial breach had been considered as part of an earlier judicial review of an adjudication determination made under the Building and Construction Industry Security of Payment Act 2002 (Vic) (the SOP Act).

Background

In July 2016, Gemcan Construction Pty Ltd (Gemcan) and Westbourne Grammar School (Westbourne) entered into a contract for work at the Newport campus for approximately $1.7million (the Contract).

Between February to April 2017, Westbourne purported to serve three show cause notices on Gemcan. Each of the show cause notices alleged that Gemcan was in substantial breach of the Contract. On each occasion, it also subsequently issued a notice to Gemcan purporting to take the whole of the remaining work out of the hands of Gemcan. In response, Gemcan claimed that the show cause notices were invalid and when Westbourne alleged that Gemcan was trespassing, Gemcan demobilised and purported to accept Westbourne’s repudiation.

In May 2017, Gemcan submitted a payment claim to Westbourne claiming approximately $430,000. Westbourne responded with a “nil” payment schedule. Gemcan applied for adjudication under the SOP Act and the adjudicator determined that Westbourne should pay Gemcan approximately $241,000 (the Adjudication Determination).

Westbourne sought judicial review of the Adjudication Determination in the Supreme Court of Victoria. Robson J found (amongst other things) that the third show cause notice given by Westbourne (the Third Show Cause Notice), alleging substantial breach by Gemcan, was valid. This meant that there was no reference date for Gemcan’s payment claim, and that the Adjudication Determination was made without jurisdiction and was quashed.

In October 2019, Gemcan served a notice of dispute on Westbourne claiming approximately $486,000 and referred the dispute to arbitration under the Contract (which Westbourne unsuccessfully disputed in the Supreme Court of Victoria). The arbitrator found (amongst other things) that he was not estopped from making a determination on the question of substantial breach by Gemcan. The arbitrator determined that Gemcan had not committed any substantial breach of the Contract and awarded Gemcan approximately $318,000 plus interest (the Arbitral Award).

Westbourne applied to the Supreme Court of Victoria (the Court) for an order to set aside the Arbitral Award under section 34 of the Commercial Arbitration Act 2011 (Vic) (the Commercial Arbitration Act) on the basis that it conflicted with the public policy of the State. Westbourne submitted that the conflict arose because the decision of Robson J in respect of the Adjudication Determination meant that the arbitrator was estopped from finding that Gemcan was not in substantial breach of the Contract.

Gemcan separately applied to the Court for an order to enforce the Arbitral Award. The Court heard and determined both applications together.

Estoppel by Judgment

Where final judgment has been given, four rules of finality can apply to subsequent proceedings between the same parties:

  1. Res Judicata, which merges (and therefore extinguishes) any right or obligation which is the subject of the judgment, meaning that a plaintiff’s only right is to enforce the judgment or order;
  2. Cause of action estoppel, which precludes a party from asserting any right or obligation which has been determined to exist (or not to exist) by a judgment in the finally determined proceeding;
  3. Issue estoppel, which precludes a party from raising an ultimate issue of fact or law, which was resolved in the final judgment; and
  4. Anshun estoppel, which precludes a party from raising an issue of fact or law in subsequent proceedings, where it was unreasonable for that party not to have raised that issue of fact or law in the finally determined proceeding.
Decision of the Supreme Court of Victoria

In the Gemcan Case, the Court considered:

  • whether, by operation of issue estoppel or Anshun estoppel, the arbitrator was precluded from finding that Gemcan was not in substantial breach of the Contract; and
  • if the answer to (a) was that an estoppel operated, did the arbitrator’s error mean that the Arbitral Award conflicted with, or was contrary to, the public policy of the State?
Issue estoppel

The Court determined that no issue estoppel arose by reason of the decision of Robson J. In reaching this decision, the Court adopted the approach taken by the High Court of Australia in Hoysted v Federal Commissioner of Taxation (1921) 29 CLR 537, at 553 to determine that the question posed (and decided by Robson J) was Assuming that Gemcan had committed a substantial breach of the Contract, was the Third Show Cause Notice invalid by reason of it being served after Westbourne had already taken the works out of Gemcan’s hands?” (emphasis added).

The Court observed that, as the adjudicator had determined that the show cause notices given by Westbourne were invalid for technical reasons (rather than for want of substantive breach by Gemcan), it was not necessary or appropriate for Robson J to consider whether Gemcan had committed a substantial breach of the Contract as part of the judicial review of the Adjudication Determination. The Court also observed that none of the material before Robson J upon the judicial review required the judge to consider the question of substantive breach by Gemcan and that neither party raised issue or argument regarding that question.

Anshun estoppel

The Court found that no Anshun estoppel arose because it was not unreasonable for Gemcan to avoid contending during the judicial review that the show cause notices were invalid on the basis that there was no substantial breach of the Contract by it.

The Court observed that the purpose of the SOP Act is to ensure a prompt “pay now and argue later” approach through the adjudication process and that disputes over amounts finally due would be resolved by a court or other agreed dispute resolution procedure at a later time. The Court observed that the extent of interlocutory steps required to determine the question of substantial breach by Gemcan would be akin to those required for a full trial (rather than those for a judicial review) and would “drive the proverbial ‘B-double’ through the legislative scheme” established by the SOP Act.

Conflict with public policy

To cover the possibility that its findings on estoppel were wrong, the Court also considered whether an error by the arbitrator on estoppel could cause the Arbitral Award to conflict with public policy. The Court held that there was no conflict. In reaching this decision, the Court considered TCL Air Conditioner (Zhongshan) Co Ltd v Judges of the Federal Court of Australia (2013) 251 CLR 533, in which the Federal Court of Australia concluded that public policy should be construed narrowly, such that it was “limited to the fundamental principles of justice and morality” which meant that a court would only exercise its power in respect of an arbitral award where there was “real practical injustice or real unfairness…”.

Impact of the Gemcan Case

The Gemcan Case provides clarification of the finality principle (specifically, issue estoppel and Anshun estoppel) in circumstances where proceedings are commenced subsequent to judicial review of a SOP Act adjudication determination.

It is now clear that a party may not be estopped from raising a substantive issue of fact or law in subsequent proceedings, where that issue was not explicitly dealt with (or could not be properly dealt with) as part of an earlier judicial review of a SOP Act adjudication determination.

Moving forward, parties at all levels of the contracting chain will need to consider consciously the issues of fact and law raised as part of a SOP Act judicial review application, for strategic reasons. Introducing or limiting issues of fact and law may impact the available breadth of subsequent proceedings by reason of issues of estoppel.

If you have any questions in relation to this case, please don’t hesitate to contact our Construction & Engineering team.

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KHQ Lawyers - Jack Fry

Jack Fry Lawyer

Jack is a lawyer in our Construction & Engineering team. He has experience representing clients in a variety of disputes concerning commercial and domestic building defects, protection works, breach... Read More

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Catherine Bell Principal Solicitor

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