Going, going – gone! Courts confirm that once your security has been cashed, you face an uphill battle getting it back

On 11 January this year we published an update regarding unconditional security clauses following the decision in Fabtech Australia Pty Ltd v Laing O’Rourke Australia [2015] FCA 1371 (Fabtech).

Last week, the Supreme Court of Western Australia handed down a decision which reinforces the importance of careful drafting of security clauses. The terms of the contract will be vitally important where there has been an adjudication determination in favour of the party seeking to restrain the call on security.

In Duro Felguera Australia Pty Ltd v Samsung [2016] WASC 119, the Supreme Court of Western Australia confirmed that where security has been provided as a risk allocation device (not simply to secure performance) in construction contracts, it is very difficult to obtain an injunction to restrain the other party from having recourse to that security.

Facts

Duro and Samsung entered into a contract which relevantly provided that Samsung may, at any time, convert security where Samsung “considers, acting bona fide, that is it or will be entitled to recover the relevant amount” from Duro. In February 2016 Samsung gave notice of its intention to have recourse to the security. Previously Duro had submitted three payment claims under the Construction Contracts Act 2005  (analogous to BCIPA) and was successful in obtaining adjudication determinations against Samsung. Duro applied to the Court for an interlocutory injunction restraining the conversion of security on several grounds, including that demanding payment under the security would disregard the adjudication determinations.

Decision

In making his decision, the presiding judge (Le Miere J) referred to Fabtech and Patterson Building Group Pty Ltd v Holroyd City Council [2013] NSWSC 1484 where the court refused to grant an injunction and held that an adjudication determination does not affect the parties’ rights under the contract and that having recourse to security in accordance with the contract does not exclude or restrict the operation of security of payment legislation.

His Honour held that unless or until the adjudication determinations are set aside, Samsung was obliged to pay Duro the adjudicated amounts. However this did not alter Samsung’s contractual rights, including its right to have recourse to the security.

Security as risk allocation

In construing the contract, His Honour said that the relevant security clause determined which party took the risk of being ‘out of pocket’ pending the final determination of the parties’ rights. Based on the evidence provided by Samsung, his Honour considered that Samsung honestly and genuinely believed that it was or would be entitled to recover the relevant amount from Duro.

Duro submitted that if Samsung was not prevented from having recourse to the security, it would suffer serious reputational damage which no amount of damages could compensate. This argument was rejected and His Honour held that the risk of hardship and reputational damage were assumed by Duro when it agreed to the terms of the contract.

What does this mean for you?

This decision confirms the contractors and subcontractors will face an uphill battle when seeking an injunction to prevent recourse to security where security is provided as a means of risk allocation. Contractors and principals should be aware of this in negotiating their construction contracts. The decision also confirms the position in Fabtech that an adjudication determination has no effect on a party’s rights and liabilities under contract. It is clear that a party’s best means of protecting its security lies in ensuring appropriate amendments are made at the time of contract drafting for example (at least in the case of a contractor):

  • ensuring the inclusion of a notice period prior to conversion of security (e.g. 5 business days); and
  • ensuring recourse to security can only be in relation to amounts due and payable under the contract (not just amounts claimed to be due).

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