Services

Contract trumps adjudication determination: Security under contract may still be cashed - 26 April 2016

The recent decision of the Supreme Court of Western Australia in Duro Felguera Australia Pty Ltd v Samsung C&T Corporation comes as a reminder that a contractor who holds security from a sub-contractor may have recourse to bank guarantees even after an adjudication determination in favour of the sub-contractor has been made.

This case highlights the shortcomings of adjudication pursuant to the Construction Contracts Act 2004 (WA) (Act), in that:

  • An adjudication determination does not alter the parties’ contractual rights or finally determine them;
  • Neither the adjudicator’s construction of the contract nor the determinations made by the adjudicator alter the proper construction of the contract nor any facts in contest between the parties; and
  • An arbitrator or court may subsequently deal with the dispute and reach a different decision.

Background - facts and findings

In this case, Duro Felguera Australia Pty Ltd (Duro) was engaged by Samsung C&T Corporation (Samsung) under an engineering, procurement, construction and commissioning contract to perform works in relation to the Roy Hill iron ore mining, rail and port project in the Pilbara (Project).  Under the contract Duro had provided security by way of two insurance bonds each for $38,143,767.20 (Bonds). On 18 February 2016 Samsung gave notice to Duro of its intention to call upon the Bonds. Samsung asserted that it was owed approximately $110,000,000.

Duro had submitted three payment claims which had been referred to and were the subject of separate adjudication determinations made under the Act.  A determination was made on 20 January 2016 requiring Samsung to pay Duro $9,034,193.29 (excluding GST) plus interest. A separate determination was made on 10 February 2016 requiring Samsung to pay Duro $333,119 plus E 182,690.45 and CNY 11,617,671.01 (excluding GST) plus interest. A further determination was made on 3 March 2016 requiring Samsung to pay Duro $49,642,958.72 (plus GST) (Determinations).

Clause 5.2 of the contract provided that Samsung may, at any time, convert into money any security where 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.

Duro sought an interlocutory injunction restraining Samsung from relying upon its contractual entitlement to claim on the Bonds.  Duro submitted that Samsung was not entitled to convert the Bonds into money on the following grounds:

  • Demanding payment under the Bonds was disregarding, and failing to comply with, binding determinations made under the Act; and
  • Samsung failed to apply the terms of the subcontract in considering that it is or will be entitled to recover the relevant amount from Duro (this is not discussed for the purposes of this paper , however this ground was ultimately rejected by the Supreme Court).

In summary, the Supreme Court held that Duro failed to make out its case and its application for an interlocutory injunction was dismissed.

Binding determinations made under the Act

The Act provides a means for adjudicating payment disputes arising under construction contracts.  Duro relied on section 38 of the Act, which provides that an appointed adjudicator’s determination is binding on the parties.  Duro submitted that given the express provisions of the Act the parties’ contractual rights are affected by any determination, in that a binding obligation is imposed on the parties in the context of them being parties to the relevant contract.

The Supreme Court provided guidance on the effect of section 38 of the Act, holding that:

The effect of s 38 is that where an applicant obtains a determination that the respondent pay it a sum of money the respondent must pay that sum even though the respondent may have commenced other proceedings before an arbitrator or court which, if resolved in favour of the respondent, may result in the applicant having to repay part of or the whole of the adjudicated amount to the respondent

In summarising the above, the Court found that while Samsung is obliged to pay Duro the amount due under the Determinations, Samsung retains all of its contractual rights including its right to have recourse to the Bonds.

Take Away

A party who provides security under a contract, subject to the terms of the contract, has very limited ability to prevent the calling up of the security by way of an injunction.  The Courts will look to which party has accepted the risk of that occurring until there has been a final determination of the parties’ rights.

The parties’ rights under the Contract are not affected by any determinations under the Act.  In effect, the Act is aimed at ensuring cash flow, not making determinations on the parties’ contractual rights. However such a determination can be enforced.  

For more information or discussion, please contact HopgoodGanim Lawyers' Construction team.  

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