Adjudication Update and Caselaw

SOME PRACTICAL ISSUES

CONFLICTS OF INTEREST

ESTABLISHING GROUND RULES

DEALING WITH CHALLENGES TO JURISDICTION

REPLIES

RULES OF NATURAL JUSTICE

CONDUCT OF CONFERENCES

SITE INSPECTIONS

GST

Auckland: 12 March 2013Wellington: 13 March 2013

Christchurch: 14 March 2013

DEREK S FIRTH COMMERCIAL BARRISTER, CHARTERED ARBITRATOR, ADJUDICATOR

P O Box 36 375 l AUCKLAND 0748 l NEW ZEALAND

T: +64 9 307 9129 l M: +64 21 933 747 l F: +64 9 307 9130 l e: dsfirth@ihug.co.nz

Website: www.derekfirth.com

Address for courier deliveries: 25 Sylvan Avenue, Northcote, Auckland, New Zealand 0627

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CONFLICTS OF INTEREST

Some leading statements of principle on this topic are as follows:

JUDGES:

The present test in New Zealand is whether “a fair-minded and informed lay observer might reasonably apprehend that there is a real and not remote possibility that the judge might not bring an impartial mind to the resolution of the question the judge is required to decide”. (Saxmere Company Limited v Wool Board Disestablishment Company Limited [2009] NZSC 72, [2010] 1 NZLR 35.)

As Tómas Kennedy-Grant points out in “A Review of the Cases on the Arbitration Act 1996, as at 19 December 2012” (refer to his website), independence and impartiality are different concepts, although the same facts may give rise to questions both of independence and impartiality. His paper contains a definitive analysis of relevant cases and articles on this topic

See also the article by Susannah Shore of Victoria University, “To Disclose or Not?” in NZ Lawyer online.

ARBITRATORS:

The test is, of course, the same.

ADJUDICATORS:

There do not appear to have been any cases, at least in New Zealand, on the independence or impartiality of adjudicators but there is no reason why the test should not be identical to that for judges and arbitrators.

LOCAL AUTHORITY POLITICIANS SITTING IN A QUASI JUDICIAL ROLE:

I have included this for comparison and completeness and to add a slightly wider dimension to the topic. Particularly as many adjudicators, by writing on various topics, have shown a predisposition to certain views.

Local Authority politicians (usually elected because of certain manifesto policies) often have to sit in a judicial role as members of boards or committees which decide a range of valuable rights of citizens. This happens regularly in relation to planning matters; also with Local Boards determining rights in relation to leases and many other things.

The following statements were made Island Farm v Bridgend County Borough Council [2006] EWHC 2189:

In principle, councillors must in making decisions consider all relevant matters and approach their task with no preconceptions. But they are entitled to have regard to and apply policies in which they believe, particularly if those policies have been part of their manifestos.

… the fact that a particular policy is included in a manifesto does not mean it must be implemented.

… Whether [all the circumstances which have a bearing on the suggestion that the tribunal was biased] would lead a fair-minded

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and informed observer to conclude that there was a real possibility that the tribunal was biased …

The fair-minded and informed observer must be taken to appreciate that predisposition is not predetermination and that councillors can be assumed to be aware of their obligations.

I believe there is a little similarity here with judges, arbitrators and adjudicators who have authored various papers or texts and expressed views on certain topics.

The real question for local authority politicians, and I suggest also for judges, arbitrators and adjudicators who have expressed prior views, is whether they have predetermined the point (not permissible) or simply have a predisposition towards the point (permissible).

The nub of the issue is whether or not a fair-minded and informed observer would conclude there is a real possibility that the adjudicator might be biased. This does not necessary imply a bias in a morally wrong or mischievous way, but a clinical objective test of the possibility of bias.

If there is an obvious conflict or likelihood of bias, then a person approached to adjudicate must simply decline. It is usually best for that person to say they are not free to accept appointment. It can sometimes be best not to give reasons. Sometimes it will be quite wrong to give reasons because that could divulge a confidence.

The AMINZ acceptance form contains the following statement:

I declare that:

(Please delete whichever of the following two statements does not apply)

I am independent of each of the parties and intend to remain so; and that, to the best of my knowledge, there are no circumstances, past or present, likely to give rise to any doubts as to my impartiality or independence in the eyes of either/any of the parties

OR

I am independent of each of the parties and intend to remain so, but I wish to draw to your attention the following circumstances, which I hereafter disclose because I consider that they may be likely to give rise to doubts as to my impartiality or independence in the eyes of either/any of the parties.

(Use separate sheet.)

It is very important that the intended adjudicator addresses this completely openly and honestly.

These particular declarations originate from the standard ICC international arbitration practice and until recently it was the practice of the ICC to disqualify anyone who answered the second question to the effect that the position was such and such but they did not believe it affected their ability to sit as an arbitrator. (This was a little unfair because the

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potential arbitrator thought at the time when the alternative was being answered that he or she still had a chance!)

However, the ICC has now changed its practice to be more flexible and, as the NZ Alternate Member of the ICC Court, I have participated in a number of decisions permitting arbitrators to sit because the detail that they divulged did not really amount to disqualifying conflict or bias.

It is a question of degree and the position can often change with time.

For example, some years ago if my former firm was involved I divulged the fact that I was a former partner and then left it to the parties to decide whether or not they would like me to be appointed. With the passage of time, having left that firm in 1995, I now see no reason to mention it. After all, there are a number of former partners from different law firms who sit as judges and they probably see no need to mention it from day one!

The question of having acted for a party can be more difficult. I used to do work for some major construction companies and major employers. When one of them was a party to a potential adjudication where I was invited to be adjudicator, I raised this and left it for the parties to decide. They always agreed that I should continue. With the passage of time, I will probably not mention it again if the situation arises.

Another interesting area is where one has given a decision in the past involving one of the parties to the proposed new adjudication. I take the view that the answer is “it depends”. If, as a result of that former adjudication, I became privy to its confidential pricing or other practices or formed an adverse view as to the integrity or honesty of its executives, then I simply decline appointment. If the previous adjudication was just another “run of the mill” construction dispute, then I did not bother to mention it.

ESTABLISHING GROUND RULES

While it is clear that it is impossible to contract out of certain statutory provisions, it is equally clear that other matters may be determined by agreement.

Additional jurisdiction scope is an example (s 38 (a)). Where there is no stated prohibition, then it seems to be accepted that the parties are free to agree – an example being to extend the statutory time limit within which the determination has to be issued.

It is in this setting of the scope of permitted agreement it is sometimes prudent for an adjudicator to establish some additional ground rules as a condition of acceptance of appointment.

The most common example is the payment of security for costs, but it need not end there.

Some examples follow of matters which seem to fall within the scope of permitted agreement and which might be sensibly addressed at the time of appointment (either as a condition of appointment or, if the adjudicator is brave enough to wait, then by prompt agreement (hopefully) after appointment, if that can be achieved):

Agreement to communicate by fax and email – this can only be done by consent (Regulations 9 and 10) and without consent this can become a burdensome constraint. It might be sensible to insist on personal or courier delivery for certain prime documents or bulky documents. It is usually helpful to have soft copies as well because the adjudicator may wish to include passages from them in the determination.

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No communication with the adjudicator unless copied to the other side – to lawyers and experienced parties, this does not need to be said, but for parties without litigation experience or without legal representation it is essential. Unless forewarned, many just assume a right to communicate privately with the adjudicator.

When to deal with costs – the CCA prescribes for one determination which, ipso facto, must deal with everything including costs. This is often not sensible with larger matters. It can sometimes be helpful to state prior to appointment or to obtain agreement following appointment that costs can be dealt with following the issue of the determination and that any necessary extra time is agreed.

Conference or questions and answers – after the claim has been delivered it can be helpful to ask the parties to turn their minds to the question of a conference or not. Although this is entirely within the jurisdiction of the adjudicator, it is certainly sensible to consult the parties as to their views. The parties should be reminded at the time of appointment that a conference is discretionary, it is only for the purpose of enabling the adjudicator to clarify any matter for his or her assistance, and it is not an opportunity for cross examination or the presentation of further evidence. This is best explained very firmly at the outset so that the claimant knows that it may never have an opportunity to say another word or deliver another document after the claim has been presented; similarly, the respondent must understand that it could be in the same position after the response is delivered. The parties must clearly understand this before those documents are prepared. This is colloquially known as each side possibly having “one shot” (even including in relation to costs unless agreed otherwise!).

Some adjudicators, myself included, now encourage parties to forego a request for a conference in favour of accepting that the adjudicator may issue a series of questions as he or she works through the written material. Although this can have the disadvantage of questions being asked, the answers to which are to be found in the material not yet read, I think that disadvantage is clearly outweighed by the advantage of enabling the adjudicator to get on with a review of the written material and clarify points as he or she proceeds. Obviously, if there is likely to be an answer in an obvious place elsewhere, the question should be deferred until that has been checked.

Dealing with answers to questions – as I have learnt from bitter experience, there are times when answers are best delivered seriatim and other occasions when the answers are best delivered simultaneously. Both approaches can give rise to requests for further comment and these have to be dealt with on a common-sense basis having regard to the Rules of Natural Justice. They have to be strictly managed to very tight timeframes. They must not be allowed to get out of control (sometimes easier said than done).

DEALING WITH CHALLENGES TO JURISDICTION

It is well established that the jurisdiction of an adjudicator stems from the Notice of Adjudication.

It would seem reasonably clear that an adjudicator can determine his or her jurisdiction even if it is found that there was no contract between the parties to the adjudication: Patel v Pearson Limited, High Court, Wellington, CIV 2008 – 485 – 2571, 24 April 2009 Miller J; Origin Energy Resources (Kupe) Limited v Tenix Alliance New Zealand Limited (High Court, Auckland, CIV 2010 – 404 – 106, 19 January 2010, Potter J); and M van der Wal Builders & Constructors Limited v Walker (High Court, Auckland, CIV 2011 – 404 – 83, 26 August 2011, Christiansen A J.)

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Counterclaims, as such, cannot be addressed. The proper course is for the respondent to commence a new adjudication in which it will be the claimant. However, if a counterclaim is also, in law, a set-off then the set-off can be considered as a defence but only up to the amount of the claim in the adjudication.

Respondents can be extremely difficult and throw up every possible impediment. This will sometimes include a challenge to jurisdiction which may or may not be well-founded.

Regardless of the apparent merits, it must be dealt with properly and swiftly.

It will also usually mean extending the time within which the response is to be delivered so that the challenge can be decided still leaving a reasonable amount of time to deliver the response.

Usually the respondent will argue that he or it should not be put to the time, trouble and expense of preparing a fulsome response (bearing in mind it may be their “only shot”) when there is a valid challenge to jurisdiction. Such an argument is, of course, correct in principle – if the challenge is well-founded.

Also, remember that a baseless challenge can be reflected in costs.

Also, adjudicators can take comfort from the UK decision of Paul Jensen Limited v Staveley Industries plc (7 September 2001, Wigan County Court) in which it was held that even if a challenge to jurisdiction is upheld, the adjudicator is still entitled to be paid his or her reasonable fees!

The overriding legal question is going to be whether or not the evidence and submissions relied upon by the respondent to challenge jurisdiction are sufficiently discrete and “stand alone” to justify dealing with the challenge before the response has to be delivered, or whether the submissions and evidence relied upon by the respondent are or will be so “intermingled” with the merits of the claim that the question of jurisdiction should be deferred and be dealt with in the final determination.

If you focus on that critical question, that will then enable you to deal efficiently with the challenge immediately (one way or the other).

If the basis of challenge is discrete, for example the wrong party has been named, the contract was not a construction contract, a Payment Claim or a Payment Schedule were delivered out of time, conclusive conclusion dictated by contract interpretation or some other basis which can appropriately be dealt with at once, then a quick and tight timetable should be laid down. For example, this might mean the respondent delivering any further submissions or evidence additional to what it has already said in support of its submission, within say 48 hours; the claimant to respond with its submissions and evidence on that point within a further 48 hours; and reserving the right to permit a reply or not in favour of the respondent once the claimant has presented its submissions.

A ruling can then be made and if it is in favour of the respondent that will be the end of the matter. It will have to be determined that the claim fails for want of jurisdiction. If the challenge fails then a date should be fixed for the delivery of the response.

If the basis of challenge is intermingled with the merits of the case generally – for example, inadequate reasons given in the Payment Schedule for refusing all or part of the Payment Claim, contract interpretation involving factual issues, or whether or not certain extra works were variations or within the original scope of work, then it would be better to defer the challenge to jurisdiction to be dealt with in the main decision.

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Please understand that the examples which I have given are only there to make the point and may not be good examples in any particular case. In certain circumstances the position could easily be the other way around.

REPLIES

A claimant has no statutory right of reply to the response. Anything which happens after the response comes in is in the discretion of the adjudicator (s 42).

This is why the parties should be warned at the outset that the claim and response might be their only “shot” at saying or producing anything.

However, the moment an adjudicator deviates from such a strict approach, then the Rules of Natural Justice kick in with vengeance. In the decision of Construct Interiors NZ Limited v Jones (High Court, Auckland, CIV 2010 – 404 – 897, 23 August 2010) Cooper J held that if a claimant was permitted to reply to a response then it could be a breach of the Rules of Natural Justice to deprive the respondent of a reply to their reply if natural justice called for it.

It is important to note his Honour’s comments at paragraph 60:

One objection to that conclusion might be that the process might become open-ended: if an opportunity were given to comment on written submissions, would that be followed by an opportunity to comment on those comments? In my view, that would not follow. The subsection [Section 42 (1) (b)] envisages “an opportunity to comment” and that opportunity would not have to be repeated. The process would be the making of a claim, the provision of a response, followed by one further round of submissions. It would be the party responding to the claim who had the last word in that scenario. While that would not be akin to what happens in most Court processes, it is closely analogous to the system envisaged by the Act if no further submissions are sought. In such a case, the adjudicator would act simply on the adjudication claim and the response. Consequently, there can be no objection in principle to the process that I have found should be followed.

In the subsequent decision Chow Group Limited v Clearwater Constructions Ltd HC AK CIV-2011-404-3148 Venning J (19 August 2011) Venning J took the same view and made it even more clear that any further information which an adjudicator permits to be delivered after the response has been delivered has to be treated as coming within Section 42 (1) (b). This provision reads:

42. Powers of Adjudicator

(1) An adjudicator may –

… (b) request further written submissions from the parties to the adjudication, but must give the relevant parties an opportunity to comment on those submissions; and …

Accordingly, if anything is requested (or permitted to be put in) following the delivery of the response, then there must be an opportunity for comment.

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I think one can safely superimpose another position which is this: if, in all the circumstances, the response contains material which literally “cries out” for a reply if the rules of natural justice are to be observed, then clearly that must be requested or permitted under Section 42 (1) (b).

However, in that example, the word “may” in Section 42 (1) would have to be interpreted as meaning “must”. There is ample precedent for such an interpretation. See, for example, Re Shuter [1960] 1 QB 142.

Furthermore, I am sure it would be permissible for an adjudicator to require that any reply (or comment) must be “strictly in reply”. If such a requirement is made clear, then the legal meaning of those words will be:

(a) such reply evidence is to be strictly confined to evidence that responds directly to something said in the response; and

(b) the practice of attempting to bolster a claimant’s case at the last minute by slipping in evidence that could have been included in the claimant’s initial evidence is impermissible and will result in such evidence being ruled inadmissible.

See Regulation 85 of the Trade Mark Regulations 2003 which permits evidence “strictly in reply” and for decisions where that phrase has been interpreted: Merial v Virbac SA [2012] NZHC 3392 (13 December 2012) and The Scotch Whisky Association v The Mill Liquor Save Limited [2012] NZHC 3205 (30 November 2012).

I personally find that replies can be very helpful.

However, as a result of the decisions in Construct Interiors and Chow Group, all material received post the response will be or will be deemed to have been provided under Section 42 (1) (b) with the consequential opportunity to comment; and where it would be a breach of the rules of natural justice to refuse a reply to a response then the word “may” in Section 42 (1) should be interpreted as meaning “must” and Section 42 (1) (b) will apply.

Adjudicators are conscious of s 57 (5) which clearly states that an adjudicator is not entitled to be paid unless the determination is delivered within time.

It would be interesting to know (from the perspective of counsel and adjudicators) how others have dealt with this conundrum.

RULES OF NATURAL JUSTICE

It is now well established, at least in the United Kingdom, that because of the very tight time constraints in an adjudication, the Rules of Natural Justice must be tempered in order to meet the public policy requirements of the legislation. This position is comprehensively explained in the judgement of Mr Justice Coulson in The Dorchester Hotel Limited v Vivid Interiors Limited [2009] EWHC 70 (TCC) 19 January 2009, where he addressed the principles as follows:

18. It is also necessary to say something about the application of the rules of natural justice to an adjudication of this sort, since that is the basis of the claimant’s complaint in this case. I take it to be settled law that the rules of natural justice do generally apply to the adjudication process: see, for example, Discain Project Services Ltd v Opec Prime Development Ltd (2001] BLR 287; Glencot Development and Design Company Ltd v Ben

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Barratt & Sons (Constructors) Ltd [2001], BLR 207; and RSL (South West) Ltd v Stansell Ltd [2003] EWHC 1390 (TCC).

19. But these and other authorities have stressed that there are obvious limits on the application of these rules to the adjudication process. As HHJ Bowsher QC pointed out in Discain “The adjudicator is working under pressure of time and circumstance which make it extremely difficult to comply with the rules of natural justice in the manner of a court or arbitrator.” Or, as HHJ Lloyd QC put it in Balfour Beatty Construction Ltd v London Borough of Lambeth [2002] EWHC 597 (TCC), the purpose of adjudication is not to be thwarted by an overly sensitive concern for procedural niceties”.

20. Accordingly, a Court has to approach an alleged breach of the rules of natural justice in an adjudication with a certain amount of scepticism. The concepts of natural justice which are so familiar to lawyers are not always easy to reconcile with the swift and summary nature of the adjudication process, and in the event of a clash between the two, the starting point must be to give priority to the rough and ready adjudication process. It seems to me that such an approach is even more necessary in circumstances where, as here, it may be said that the breaches of natural justice have not yet occurred and, depending on what happens, may never in fact arise.

21. The best-known authority on the issue of whether a complex dispute with a good deal of supporting documentation can ever fairly be determined by the adjudication process is CIB Properties Ltd v Birse Construction Ltd [2005} 1 WLR 2252. HHJ Toulmin CMG QC held that it was for the adjudicator to decide whether or not he could fairly reach a decision within the timetable. On the facts of that case, he concluded that the adjudicator had been careful to consider how he could conduct the adjudication fairly at all stages and, by granting a number of extensions of time, the adjudicator had succeeded in doing just that. Those extensions had been agreed by the parties at the adjudicator’s urging.

In Dorchester the Referral Notice was accompanied by 37 lever arch files, which included six substantial witness statements and two experts’ reports.

The adjudication was commenced on the last day before the Christmas vacation. The respondent in the adjudication, Dorchester, sought a declaration (in terms of the White Book containing the Rules of Court) to the extent that there would be a breach of the rules of natural justice if the adjudication proceeded in accordance with the statutory timetable.

The adjudicator stated that he believed he could fairly determine the adjudication by an extended date which had earlier been agreed.

The Court refused to grant declarations sought (thereby permitting the adjudication to run its course), but stated quite clearly, “That refusal does not prevent the [respondent in the adjudication] from resisting enforcement of any decision in the future by reason of any alleged breaches of natural justice.”

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The New Zealand Courts have dealt with specific situations (see A Review of the Cases on the Construction Contracts Act 2002, as at 7 December 2012, Tómas Kennedy-Grant QC paragraphs 78 – 80) and I am sure it would be helpful for judges in New Zealand in future cases if counsel would bring to their attention relevant UK cases of the kind referred to above.

CONDUCT OF CONFERENCES

It is probably best if a final decision regarding conference is not made until after the response is delivered, but once the claim has come in and there is a reasonably good “feel” for what the case is about, then it can be helpful to form a preliminary view about the helpfulness (if at all) of a conference.

When there is to be a conference then the date, time and place must be formally notified in an approved manner. This is a good example of when agreement for emailing becomes important. If a party is not represented and is not cooperative, then it is essential that reasonable notice of the time, date and place be given in a manner expressly approved by the CCA. This should be in a way by which proof of service can be established, such as a receipt to a courier, an acknowledgment by registered mail or proven personal delivery. You have to look ahead to the possibility that that party will not turn up and may later say that they had no notice.

The parties will have been forewarned that the purpose of the conference is to enable the adjudicator to clarify certain points and that it is not an opportunity to cross question or produce new evidence, unless it is invited by the adjudicator.

If the adjudicator already knows some or all of the questions to be asked, then it is helpful to give the parties prior warning of those questions so that they might better prepare. If a question takes either or both parties by surprise, then there is no harm in giving them 24 hours in which to provide an answer following the conference, but then the other side is going to want to comment on the answer!

My personal view is that the adjudicator should not conduct a conference until he or she has read all of the written material. It is just bad form to ask questions, the answers to which are already in the material provided. A proper approach will usually mean that fewer questions are asked.

There is no reason why a party or a witness for a party cannot attend by video link or by a telephone conference link. The speaker phone on a good mobile phone can easily be heard by everyone if placed in the middle of even a large table.

SITE INSPECTIONS

Most adjudicators find that the need for a site inspection is extremely rare. This is because:

the evidence has already been covered up;

even defects which can be seen are usually well addressed by expert evidence and photographs; or

of the difficulty of arranging a convenient time when the advantage from the site visit is likely to be small.

There will be a few occasions when a site inspection will be very helpful or even essential. There should be no resistance in such circumstances.

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Also, if one party has a very strong desire for a site inspection, then the quickest way forward is probably to conduct it with strict ground rules.

The date and time must be properly notified, as for conferences. It is always necessary to have strict ground rules as to who can speak and when. It is usually best to direct that a particular representative from each side be with you for the duration of the inspection and that no one else speaks without your express prior approval. If you take photographs or measurements, then the parties should have the opportunity to do the same or check what you do.

GST

General Principles

Under section 8 of the GSTA, GST is charged on supplies made by a registered person in the course or furtherance of their taxable activity, by reference to the value of that supply.

Under section 6 (1) (a), a taxable activity is one that is carried on “continuously or regularly”.

“Supply” is defined in section 5 as including “all forms of supply”.

“Consideration” is defined in section 2:

Consideration, in relation to the supply of goods and services to any person, includes any payment made or any act or forbearance, whether or not voluntary, in respect of, in response to, or for the inducement of, the supply of any goods and services, whether by that person or by any other person; but does not include any payment made by any person as an unconditional gift to any non-profit body.

The “value of supply” is defined in section 10 (2) as the amount of the money if the consideration is money, or the open market value of the consideration if the consideration for the supply is not consideration in money.

Section 10 (18) contemplates apportionment of a payment where it only partly relates to a taxable supply.

These provisions have been the subject of a number of cases, some of which are to be found in the Inland Revenue Department Tax Information Bulletin: Volume 14, No 10 (October 2002).

Court Awards, including Arbitration Awards and Adjudication Decisions, and out Of court settlements

The appropriate focus is whether the award is payment for any supply that has been made, and not the action that gave rise to the award.

Every transaction must be analysed upon its own individual facts relating to supply and consideration.

When a payment is made under an award or out of court settlement and it is consideration for a taxable supply (or an adjustment to a consideration for a taxable supply) this will be taxable.

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If the payment is made for compensation or damages, it is not taxable. Sometimes a different result can arise from the same facts, but depending upon the claim which is made and the remedy approved. For example, an award for general damages for loss resulting from receiving goods of lesser quality than was promised is not subject to GST. However, if the claimant brought a claim (arising out of the same facts) pursuant to section 43 (2) or the Fair Trading Act on the basis of lack of merchantable quality, and a refund is ordered then there will need to be a GST adjustment if the tax on the full price has already been paid.

The short point is that, where damages are awarded for a loss, the nexus of the payment (for GST purposes) is with the loss, rather than the supply that gave rise to the damages claim and there is therefore no GST on the amount awarded.

Quantum Merit

Awards of quantum merit are made where something of value has been provided by one party in the absence of formal contractual relations. If an award is made for quantum merit, then the payment awarded will be consideration for a supply.

Where restitution is received by a party that made a supply (in the course or furtherance of a taxable activity) the payment will be consideration for a supply and therefore be subject to GST. (Seton Contracting Limited v Attorney-General [1982] 2 NZLR 368.)

Payment Awarded for Continuing Wrong

If an award is made under section 16 A of the Judicature Act 1908 and, for example, rewards the owners of land against a local authority, a sum based on the amount they could reasonably expect if the council had agreed to pay for the use of the land, then the payment is damages and not consideration for any supply.

Awards in Respect of Loss

As was stated in the decision of the High Court of Australia in Haines v Bendall (1991) 172 CLR 60, 63 (and approved by Cooke P in Gardiner v Metcalf [1994] 2 NZLR 8 (Court of Appeal)):

The settled principle governing the assessment of compensatory damages, whether in actions of tort or contract, is that the injured party should receive compensation in the sum which, so far as money can do, will put that party in the same position as he or she would have been in if the contract had been performed or the tort had not been committed …

Compensatory damages, being awarded for loss, are not subject to GST. GST is imposed as a tax on goods and services supplied rather than on payments received.

It is the legal nature of a transaction, not its economic effect, that determines liability to tax. (Marac Life Assurance Limited v CIR [1986] 1 NZLR 694 at 706.)

The payment cannot be consideration for a supply if it is not reciprocal to the supply of something by the other party. In relation to court and arbitration awards, and adjudication determinations, where a payment is for loss or damage it will not be consideration for a supply and there will be no element of reciprocity between the parties in regards to the payment; rather, the payment is to compensate one party for the loss caused by the wrongful act of the other.

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GST on Costs

It is necessary to consider the different situations in which this issue arises.

Costs of lawyers and experts.

Costs of adjudicator.

Costs where the receiving party (who has paid the costs) has or will recover the GST compared with a home owner who may not be able to do so.

In Adcock & Devir v Marlborough District Council (2011) 25 NZTC 20 – 029, Judge McElrea discussed the situations where GST could be included in costs awards in the Environment or District Courts.

It is important to avoid over-recovery. He referred to the decision of Winkelmann J in Suttie v Bridgcorp Limited HC Auckland CIV-2006-404-3667, 8 December 2006. Her Honour said, in that decision, that a party who is GST registered and who has deducted its legal costs as an input for GST purposes as they were incurred, would be over-recovering if it received back all of its costs paid.

That is certainly the view which I have adopted over many years and I think the position can be summarised as follows:

Costs of lawyers and experts should not include the GST if the person receiving the costs (ie who has incurred them) will have or be able to recover the GST.

It may not matter if GST is included provided there is no windfall or double-recovery to either side.

However, where the party receiving costs is not registered for GST (for example, a home owner in a building dispute) then the GST should be included in the costs recoverable because that is part of the cost which the home owner has incurred and cannot recover from elsewhere.

GST on Damages

The normal rule is that damages do not attract GST.

Examples would be damages for delay, regardless of whether they are liquidated damages or general damages.

However, where the damages have been assessed on the basis of taxable supply, then GST must be recovered as well.

For example, damages reflecting the cost of incomplete work or remedial work.

GST on Interest

There is no GST on interest.

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CONCLUDING COMMENTS

It is essential to approach an adjudication with confidence in the procedure you intend to adopt. Most adjudications which “go off the rails” do so not because of a misunderstanding of the technical evidence or because of not understanding the legal submissions, but because the wrong or an inefficient procedure has been adopted.

Getting the procedure right will not be sufficient to get the answer right on the merits, but it should provide good protection against the adjudication turning into a nightmare.

Derek S Firth