A principal's antidote to adjudication - recourse to security?

The availability of judicial review of an adjudicator’s determination under the Building and Construction Industry Security of Payment Act 1999 (NSW) is very limited.  Not only is it limited, because such applications are made in the Supreme Court of NSW, it is expensive and time consuming.

Patterson Building Group Pty Ltd v Holroyd City Council may provide an effective alternative for a principal (or any respondent to a payment claim) that is disappointed by an adjudicator’s determination.

The facts

In Patterson, the plaintiff builder had provided two bank guarantees to Holroyd City Council (the principal) as security for the builder’s obligations under a construction contract.  The contract relevantly provided that the principal could have recourse to the bank guarantees if the principal remained unpaid after the time for payment of an amount under the contract had passed, or if the principal claimed to be owed monies by the builder.

On 15 July 2013, an adjudicator appointed pursuant to the Act made a determination in respect of a payment claim made by the builder. The adjudicated amount of $468,360 was paid by the principal.

The claims which were the subject of the adjudication included certain variations, which the adjudicator allowed.  Also, in its adjudication response, the principal had made a claim to set off liquidated damages, but this claim was rejected by the adjudicator.

On 16 August 2013, the superintendent issued a progress certificate under the contract, stating that the superintendent had made an assessment that there was no money due to the builder by the principal.  At the same time, the superintendent issued a notice, asserting that money was due from the builder to the principal.  The money said to be owed by the builder to the principal was partly:

• in respect of the liquidated damages that had been rejected by the adjudicator, and
• to recover amounts paid in respect of variations on which the builder had succeeded before the adjudicator, but which the principal contended were not properly payable.

The builder, which disputed the notice issued by the superintendent, asked the principal to give an undertaking that it would not call on the bank guarantees.  The principal refused to provide that undertaking.  This caused the builder to commence the proceedings to restrain the principal from calling on the guarantees.

Justice White refused to grant the builder its injunction and dismissed the summons.  Critically, he held that:

1.   The contract gave an entitlement to the principal to call on the bank guarantees where it merely claimed to be owed money.

2.   The principal would only be restrained from having recourse to the security if the claim to be owed money was made fraudulently or in bad faith, or if it was unconscionable, or it was clear beyond serious argument that it had no such right to the amount claimed.

3.   The builder did not contend that the principal would be acting fraudulently, or in bad faith, or would engage in unconscionable conduct if had recourse to the security – only that it was not seriously arguable that the principal was owed money.

4.   In relation to the question whether the principal could have recourse the security to enforce a claim to be entitled to repayment of monies it had paid pursuant to the adjudicator’s determination, or to be paid amounts that had already been the subject of a decision by the adjudicator on which the principal had failed;

(i)   In accordance with section 32 of the Act, an adjudication determination is a determination on an interim basis only of an amount to be paid by the applicant to the respondent in respect of its claim for a progress payment, but otherwise the adjudication does not affect the parties’ rights under the contract, which existed in parallel to the Act.

(ii)   Having recourse to the security in accordance with the contract would not exclude, modify or restrict the operation of the Act in contravention of section 34 of the Act, as the adjudicator’s determination and the builder’s right to receive the adjudicated amount under the Act (which had happened) remained enforceable.

(iii)   On the evidence, there was a genuine dispute as to the merits of the adjudicator’s determination so that it could not be said that it was clear beyond serious argument that the principal would not be entitled to repayment in due course.

If Justice White’s decision in the Patterson case is followed, it means that where there is sufficient doubt about an adjudicator’s determination that it is seriously arguable that on a final determination of the parties’ contractual entitlements different conclusions might be reached, a principal can have recourse to security to satisfy, on an interim basis, a claim that it ought not to have been required to pay the builder the amount an adjudicator has determined to be due.

Had the contractual provision allowing recourse to the security been differently framed, so that the principal had to have an established right to payment rather than merely a claim, the result would have been different.

Conclusion

The take home message for principals is to make sure that the right to have recourse to security is enlivened on an interim basis (i.e. they only need to establish a claim to an entitlement). Conversely, contractors should be careful to ensure that the right to have recourse to security requires the principal to prove its right, otherwise the principal may well have an antidote to the sting of having to make an interim payment to the contractor on the basis of a flawed adjudication determination.

Author: David Creais