Unconditional Security Clauses : How Respondents can take the sting out of an unsuccessful Adjudication Determination

On 4 December 2015 the Federal Court decision handed down the important decision of Fabtech Australia Pty Ltd v Laing O’Rourke Australia Pty Ltd [2015] FCA 1371.

The decision highlights the importance of careful drafting of the conversion of retention or security clauses in construction contracts as failure to do so may result in immediate recourse to security to override an unsuccessful adjudication decision.

Laing O’Rourke was ordered to pay its subcontractor, Fabtech, the sum of $4,019,863.73 pursuant to an adjudication determination under BCIPA (the Act). Almost immediately, Laing O’Rourke notified Fabtech of its intention to have recourse to the bank guarantees provided as security under the subcontract in the amount of $1,121,146.33. Fabtech applied to the Federal Court for an urgent injunction.

The security clause in the subcontract provided:

“The Contractor may have recourse to the Bank Guarantees or any sum retained pursuant to the preceding clause whenever the Contractor claims to be entitled to claim the payment of monies by the Subcontractor.(emphasis added)

Laing O’Rourke claimed to be entitled to the repayment of monies by Fabtech that had been awarded by the adjudicator because:

(a)      the adjudicated sum in favour of Fabtech was not due under the subcontract;

(b)      Fabtech had been overcompensated to that end; and

(c)      Laing O’Rourke was entitled to claim the payment of part of the adjudicated sum because it was entitled to set off liquidated damages for late completion.

 

Fabtech argued that recourse to conversion of the security in these circumstances would:

(a)      be inconsistent with the policy of the Act;

(b)      be contrary to s99 of the Act;

(c)      would not “preserve the cashflow” contrary to the intention of the Act as described by Keane JA (as he then was) in RJ Neller Building Pty Ltd v Ainsworth;

(d)      not be contemplated by s100 of the Act, as pursuing claims in court or arbitration under s100 of the Act was very different to making a claim on “security” almost immediately after payment “of an adjudication sum”.

 

Besanko J held that converting security does not have the effect of excluding or restricting the effect of the Act. Once payment of an adjudication sum is made-the Act ceases to have any effect on the contractual rights of the parties.

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