The McNab v Demex decision is particularly noteworthy for those carrying out or subcontracting any construction work that involves transporting materials on a schedule of rates basis. The key takeaways from the case include:

• If the construction contract provides for a specific method of calculating claims (i.e. volume of materials removed), the claim should be calculated by the stipulated method
• If the contract allows for converting the materials from one form of measurement to another (i.e. volume to weight (a conversion factor)), then the claim should clearly articulate where the agreed conversion factor can be found in the contract and contain clear calculations of how this conversion factor was applied
• Conversion factors are inherently risky pricing mechanisms and should only be incorporated into contracts in very specific circumstances
• An adjudicator is required to request further submissions if considering a position not raised by either party and it will be a denial of natural justice if the adjudicator fails to do so.

The facts in this case

McNab Building Services Pty Ltd (McNab) entered into a subcontract with Demex Pty Ltd (Demex) for asbestos removal from a contaminated site in Tweed Heads, NSW.

Demex submitted a payment claim for approximately $2.8 million for works completed under the contract. In response to the payment claim, McNab scheduled an amount of nil. Demex disputed McNab’s assessment of the payment claim and subsequently lodged an adjudication application. In his determination, the adjudicator found that McNab was liable to pay Demex $1,390,882. McNab subsequently appealed the adjudicator’s determination to the Supreme Court of NSW.

The key issue in this matter was whether the adjudicator had denied McNab procedural fairness in applying a conversion factor for certain excavated materials (volume to weight) not put forward by either of the parties without first seeking further submissions on the point.

The contract provided for payment of any extra-over excavated material to be paid by reference to the volume of material removed from site. In support of its claim, Demex provided more than 4,650 pages of tip dockets, truck dockets and waste transport certificates, all of which recorded the weight of the material removed rather than the volume. Demex’s claim was based on applying an unspecified and unarticulated conversion factor to the tip and truck dockets to convert the tonnages to the contractually required volume in cubic metres.

In determining the appropriate conversion factor to be applied, the adjudicator identified and relied on a conversion factor for excavated soil in the departures schedule forming part of the contract without seeking the parties’ submissions regarding the correctness in doing so.

The adjudicator applied these conversion factors despite strong submissions and evidence from McNab in its adjudication response that the conversion factor was unreliable in circumstances if the tonnage of material removed did not have a linear correlation to the cubic metres of that material due to the varying type of natural material in the ground, the moisture content of the material and other material being removed with the natural material.

In its consideration of this matter, the Court determined that the adjudicator ultimately adopted a position that was not put forward by either of the parties and failed to request the parties’ submissions on these matters. As a result, the Court quashed the adjudicator’s determination, finding that he had denied McNab natural justice. With the adjudicator’s determination quashed by the Court, Demex must either lodge another adjudication application or rely on the mechanism contemplated by the dispute resolution provisions of the contract to recover the allegedly unpaid amounts, adding further time and expense to what has undoubtably already been a costly exercise.

This situation could have been easily avoided had Demex properly articulated its claim by reference to the conversion factor contained in the contract or had the adjudicator simply asked the parties for further submissions on this point.

Further information / assistance regarding the issues raised in this article is available from the authors, Megan Palmer, Partner and Joshua Murgatroyd, Associate or your usual contact at Moray & Agnew.