This article examines the different outcomes in two recent cases relating to recourse to security under construction contracts.
Perkins (WA) Pty Ltd v Weston [No 2] [2022] WASCA 111
This case related to a dispute regarding recourse to security between a Contractor and a Financier (having stepped in to replace the Principal) on a development of a property in Bunbury, WA.
The Supreme Court of Western Australia (Court of Appeal) considered, amongst other issues and contentions, whether the Financier had the right to recourse to a bond provided by the Contractor as security under the construction contract where the entitlement centred on whether the Contractor had failed to pay an amount “due otherwise than under the Contract”.
The Financier argued that it could have recourse to the bond in respect of ‘money for remediation works performed by third parties’ because the Contractor had allegedly failed to remedy defects following Practical Completion. The Financier did not quantify its claim nor did it assert that there had been a failure to pay any amount due.
The Financier’s claim was found to be insufficient. The Court interpreted “‘due otherwise than under the Contract” as requiring an identifiable and, importantly, a quantifiable amount owed that has failed to have been paid.
Click here to read a more detailed analysis of the case prepared by our HWLE Sydney team.
Lanskey Constructions Pty Ltd v WesTrac Pty Ltd [2022] WASC 90
This case related to another dispute regarding recourse to security between a Contractor and a Principal regarding a project for the construction of an industrial facility in Welshpool, WA.
The Contractor sought an urgent interlocutory injunction from the Supreme Court of Western Australia to prevent the Principal from calling on bank guarantees on account of liquidated damages (LDs) on the basis that it alleged that the parties had agreed that the Principal would not claims LDs.
The Supreme Court of Western Australia considered, amongst other issues and contentions, whether the Principal had the right to recourse to a bank guarantee provided by the Contractor as security under the construction contract where it was entitled to do so under the contract, inter alia, in order to “meet any bona fide claims that the Principal has against the Contractor arising out of, or in connection with, the Contract”.
It was held that the contract set a low threshold to have recourse to the payment, conferring a “wide discretion which is constrained only by the need that it act honestly” and that a ‘bona fide claim’ does not necessarily equate to an entitlement and requires only that a demand be made in good faith under honest and genuine belief.
The Supreme Court of Western Australia dismissed the interlocutory injunction concluding that the Contractor had not established that it had a strong prima facie case of the Principal having acted in bad faith.
Click here to read a more detailed analysis of the case prepared by our HWLE Melbourne team.
Lessons learnt
In the wake of several significant contractor insolvencies, these cases come as a timely reminder that due consideration should be given to the drafting of security clauses, as slightly different language can lead to a significantly different outcome.
Parties should ensure that the drafting reflects their intent. Whether that be that a Principal wishing to have an unrestrained right of recourse to security or a Contractor wishing for the Principal’s right to recourse to security to only be available in limited circumstances (i.e. where a debt is due and liquidated).
This article was written by Kate Morrow, Partner and Michael Harris, Senior Associate.
