In Patterson Building Group Pty Ltd v Holroyd City Council [2013] NSWSC 1484, the New South Wales Supreme Court considered whether a principal was entitled to claim on a bank guarantee for the amount it was obliged to pay under an adjudicator’s determination under the Building and Construction Industry Security of Payment Act 1999 (NSW) (the Act), if it disputed that determination.

The Court held that:

  • the relevant clause entitled the principal to have recourse to the security provided whenever it claimed to be owed monies by the contractor, as long as that claim was seriously arguable and made in good faith;
  • the principal was permitted to claim on the bank guarantee where it considered that was entitled to the return of money that it has paid as part of an adjudication process under the Act; and
  • this interpretation of the clause and the principal’s rights was not inconsistent with the structure or operation of the Act.

Contractors and principals should keep this in mind when preparing contracts, to ensure that provisions permitting claims on security are as favourable to their preferred position as possible. Further, if a principal receives an adjudication determination it is dissatisfied with, it should consider whether the contractual security may provide an option to recover that money.

Facts

Patterson Building Group (the contractor) and Holroyd City Council (the principal) were party to a contract for the construction of local government community facilities.

On 31 May 2013, the contractor made a payment claim for AUD499,802.61. On 15 July 2013, an adjudicator appointed under the Act made a determination that that AUD468,360 was payable. Consistent with the purpose of the various security for payment regimes, that determination was not final but was an interim allocation to promote the flow of money between the parties.

Subsequently, there were other disputes between the parties, including as to whether practical completion had been achieved. As a result, the principal claimed it was owed money by the contractor as a result of:

  • liquidated damages (which claim had been rejected by the arbitrator),
  • the cost to rectify outstanding defects;
  • negative variations; and
  • amounts that had been paid in respect of the adjudicator’s determination, but which the principal considered was incorrect and therefore were not properly payable.

Clause 5.2 of the contract provided that ‘Security shall be subject to recourse by a party who remains unpaid after the time for payment or where the Principal claims to be owed monies by the Contractor’. Although it did not have a present intention to do so, the principal claimed it had the right to claim on the bank guarantee for amounts in respect of its claims against the contractor.

Decision

White J determined that the principal could have recourse to the security in respect of the outstanding defects. Accordingly, it was not necessary for him to consider whether there was a corresponding entitlement in respect of the adjudicator’s determination. However, he went on to consider this issue in any event.

In doing so, White J held that clause 5.2 of the contract entitled the principal to call on the security where it claims to be owed monies by the contractor. The reference to a ‘claim’ set a low threshold: there did not need to be an established outstanding debt in existence.

This position is consistent with a long line of cases, which are to the effect that clauses drafted in this manner are, properly regarded, as a risk allocation device, which address the issue of who is to be out of pocket while a dispute under the contract is determined (see for example Redline Contracting Pty Ltd v MCC Mining (WA) Pty Ltd [2011] FCA 1337; Clough Engineering Limited v Oil and Natural Gas Corporation Limited [2008] FCAFC 136 and Fletcher Construction Australia Limited v Varnsdorf Proprietary Limited [1998] 3 VR 812). Notwithstanding, the principal will be restrained from making a call on the security if the claim is fraudulent, not made in good faith (i.e. if the amount called upon is selected capriciously), unconscionable or clearly untenable.

White J considered that, given the principal had a genuine belief that the adjudicator’s determination was incorrect, it was therefore entitled to make a claim on the security. In other words, the principal was allowed to have recourse to security to satisfy its claim that it ought not to have been required to pay the contractor the amount an adjudicator has determined to be due.

In White J’s view, this position is not inconsistent with purpose of the security for payment regime. This is because the contractor retains the right to receive the adjudicated amount. As such, the swift flow of money promoted by the Act is not affected. The fact that the principal may then recover some or all of that money was an incident of the deal that the parties had struck, and reflected the precise terms of the clause 5.2. To deny the principal the right to claim on the security would be to fail to give effect to the objective meaning of that provision. Accordingly, the clause did not constitute ‘contracting out’ of the Act, which is not permitted by reason of section 34.