Security under construction contracts and Security of Payment legislation

Overview

It is universal that contracts for significant construction projects require the Contractor to provide performance security to the Principal. The Principal’s entitlement to call on that security, however, is often a point of dispute.

For example, a Contractor may believe that the Principal will not be able to call on security where there is an unpaid adjudication award in favour of the Contractor under the applicable Security of Payment legislation.

However, a recent Supreme Court of Western Australia case (Duro Felguera Australia Pty Ltd v Samsung C&T Corporation [2016] WASC 119) confirms that the mere existence of an unpaid adjudication award in favour of a Contractor in accordance with the Construction Contracts Act2005 (WA) (Security of Payment Act) does not necessarily prevent the Principal making a call on the Contractor’s performance security.  This is consistent with the position taken by Courts in NSW and Queensland* and is likely to also be the case in the other States and Territories.

The Court further held that, where a construction contract requires the Principal to simply form a bona fide belief that it is or will be entitled to recover the relevant amount as a condition to calling the performance security, the Principal is not required to take into account an amount due to the Contractor in accordance with an unpaid adjudication award when forming that belief.

Lessons to be learned

The case is a reminder that the terms of the construction contract are critical in determining a party’s right to call on security provided to secure performance of that contract.

Should a party wish to limit the other party’s rights to make a call on security in particular circumstances, it is recommended that these limitations be expressly written into the contract.

Duro case

Duro and Samsung entered into a contract in relation to the Roy Hill iron ore mining, rail and port project in the Pilbara region of WA (Contract). The Contract required Duro to supply equipment and systems for the iron ore processing plant and port facility. The Contract sum was approximately $506m.

Duro was to provide security of $76,287,534 and Samsung could call on security if it “considers, acting bona fide, that it is or will be entitled to recover the relevant amount from (Duro) under or in respect of the Contract”.

In early 2016, Duro was awarded approximately $60m under 3 adjudications conducted under the Security of Payment Act (Determinations).

Prior to paying the amounts due under the Determinations, Samsung gave Duro notice of contractual claims totalling approximately $109m, and that it intended to access security in respect of those claims.

Duro applied for an injunction to prevent Samsung accessing security.

The Court refused the injunction and allowed Samsung to take approximately $68m of security.  For current purposes, there were two primary reasons for the Court’s decision:

  • Whilst Samsung is obliged to pay to Duro the adjudicated amounts in accordance with the Determinations unless and until those Determinations are set aside, the Security of Payment Act preserves all of Samsung’s contractual rights including its right to have recourse to the security. So long as Samsung had evidence of a bona fide belief of the entitlement, it had met the contractual requirement irrespective of whether Samsung had paid the Determinations.
  • In forming its bona fide belief as to amounts claimed to be due under the Contract, Samsung was permitted to disagree with the adjudicator’s reasons for the Determinations as to amounts that may be due under the Contract.

*See Patterson Building Group Pty Ltd v Holroyd City Council [2013] NSWSC 1484 and Fabtech Australia Pty Ltd v Laing O’Rourke Australia Construction Pty Ltd [2015] FCA 1371

If you have any queries regarding security under your construction contracts, or would like any assistance in relation to construction matters please contact:

David Palser
Partner, Construction & Infrastructure
E: dpalser@pageseager.com.au

Kathryn Speed
Partner, Construction & Infrastructure
E: kspeed@pageseager.com.au

Joe Mullavey
Associate, Construction & Infrastructure
E: jmullavey@pageseager.com.au

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