On 16 January 2015, Justice Beech, of the Supreme Court of Western Australia, handed down his decision in the matters of Hamersley HMS Pty Ltd v Davis [2015] WASC 14 and Hamersley Iron Pty Ltd v James [2015] WASC 10 (the Hamersley Decisions). In both matters, Hamersley sought to set aside determinations made by an adjudicator pursuant to the Construction Contracts Act 2004 (WA) (CCA) and Forge Group Construction Pty Ltd (In Liq) (Receivers and Managers Appointed) (Forge) sought leave to enforce the determinations. Ultimately, his Honour dismissed Hamersley’s applications but stayed Forge’s enforcement applications to allow Hamersley’s counterclaims to be determined.

Key Take Aways

An adjudicator considering an application under the CCA in circumstances where the contractor is insolvent must apply s 553C of the Corporations Act 2001 (Cth) (s553C) in reaching its determination. As a result, adjudicators will still be asked to determine what is due from the principal to the insolvent contractor, but this liability may be set off by the amount owed to the principal with only the balance being payable. A principal attempting to rely on this right of set off against an insolvent contractor as a defence to paying the payment claim must properly substantiate its claim and demonstrate that money is owed to them. A single line in a statutory declaration will be insufficient.

Importantly, the court refused to grant leave under section 43 of the CCA for Forge to enforce the awards until after Hamersley’s counterclaims were heard. This will be significant for principals on the receiving end of CCA applications bought by administrators on behalf of insolvent contractors. Provided that there is evidence of a counterclaim that should be set off, until the counterclaim is heard, the insolvent contractor may not be able to enforce an adjudicator’s determination.

Ultimately, these decisions allow for outstanding payments owed to an insolvent contractor to be set off against amounts owed to the principal in a CCA context if the principal can show that the money is rightfully due to them. Such an approach is akin to the initial intent of the legislation and may avoid the legislation be used as leverage against principals in these circumstances.

Key facts

These decisions concerned two contracts between Hamersley and Forge. The first was for the design and construction of fuel hubs at Hamersley’s West Angeles and Brockman sites (WAB Contract). The second was for the design, manufacture, supply, testing, installation, construction and commissioning of mine buildings at Hamersley’s Hope Downs 4 Mine (HD4 Contract).

In early 2014, Forge submitted a progress claim for $14,335,778.07 in respect of the WAB Contract. Hamersley certified only part of this claim as the works were unfinished.

At roughly the same time Forge also submitted a progress claim for $2,138,733.05 in respect of the HD4 Contract. Hamersley certified the full amount of this claim.

Soon after the claims were submitted, administrators and receivers were appointed to Forge. Despite having certified that money was owing to Forge, Hamersley called on security held in respect of both contracts on the basis that there would ultimately be a liability due to Hammersley given the costs to complete the projects, liquidated damages for late completion and other charges.

Forge lodged applications for adjudication under the CCA. Hamersley contented (among other things) that if Hamersley’s set off rights under the provisions of the WAB and HD4 Contracts and under s553C are taken into account, the position was that a net liability flowed from Forge to Hamersley. Hamersley requested that this be taken into account by the adjudicators.

While the outcome of the adjudications turned on different facts, neither adjudicator duly considered the effect of Hamersley’s set off right under s553 when determining Hamersley’s liability to Forge. Forge sought to have the determinations enforced in the Supreme Court.

Can s553C of the Corporations Act be considered by and Adjudicator?

The Hamersley Decisions make it clear that an adjudicator in a CCA application must consider the effect, if any, that s553C set-off has on any amount claimed by an insolvent contractor. Specifically on this point Justice Beech stated:

in my view, in determining under the Act whether any party to the Payment Dispute was liable to make a payment and if so the amount to be paid, the adjudicator was obliged to apply s553C. In doing so, the adjudicator was required to take an account of what was due from one party to the other in respect of their mutual dealings and only the balance of that account would be payable to the company... the task of an adjudicator in applying s 553C is to take the account of what is due from each party to the other based on the material put before him in the adjudication.

Applying established principles, Beech J accepted Hamersley’s contention that a contingent and partly unliquidated counterclaim is a mutual dealing for the purposes of s553C.

Can enforcement be prevented?

Accepting that whether Hamersley’s alleged counterclaims would result in a net liability owing to it were serious questions to be tried, Justice Beech found that:

to grant leave to enforce the determination in these circumstances would defeat the purpose and object of s 553C. A grant of leave to enforce would mean that Forge would receive from Hamersley the full amount of the Adjudicated Sum, whereas Hamersley would be left to prove in the liquidation of Forge in respect of its counterclaim. Moreover, in circumstances where Forge as contractor is insolvent, and in liquidation, the object of the Construction Contracts Act - keeping the money flowing in the contracting chain by enforcing timely payment and sidelining protracted and complex disputes - does not demand the grant of leave to enforce the adjudication determination.

This means a principal will be able to prevent enforcement of an award under the CCA where it has a set off claim against an insolvent contractor and will not have to fear becoming an unsecured creditor because of an adjudication determination being decided in isolation.

The Hamersley Decision may cause external administrators to pause before bringing adjudication applications on behalf of insolvent contractors where a principal has also alleged an unliquidated counterclaim and may provide greater leverage to principals when dealing with claims by insolvent contractors.

Conclusion

In the current economic climate, principals will be encouraged by the Hamersley Decisions. The Hamersley Decisions calibrate the ‘pay now argue later’ nature of the CCA and will counter against the regime being used to gain a quick result without regard to the broader ramifications of a contractor’s insolvency for a project.

The decision allows principals facing a legislative regime that is heavily contractor friendly to avoid becoming unsecured creditors when one of its contractors goes insolvent.