Recourse has the question of quantification loaded within it

Executive Summary

Perkins (WA) Pty Ltd v Weston [No 2] [2022] WASCA 111 was a dispute between a Contractor and a Financier (having stepped in to replace the Principal). The key issue considered by Quinlan CJ, Beech JA and Tottle J was whether the Financier had the right to recourse to a bond provided by the Contractor as security under the building contract. This entitlement centred on whether the Contractor had failed to pay an amount ‘due otherwise than under the Contract’.

Introduction

Perkins (WA) Pty Ltd v Weston [No 2] [2022] WASCA 111 was an appeal concerning a dispute between Perkins (WA) Pty Ltd (the Contractor) and Manda Capital Holdings Pty Ltd as trustee of the Holman Street Bunbury Unit Trust (the Financier).This article focuses on:

1. The Contractor’s second ground of appeal that the trial judge erred in finding that the Contractor had failed to pay an amount ‘due otherwise than under the Contract’ – what does ‘due’ mean?; and
2. Consequently, did the Financier have the right to recourse to a bond provided by the Contractor (Bond) as security under the building contract (the Building Contract)?

Quinlan CJ, Beech JA and Tottle J understood the primary judgment to have concluded that the Financier was entitled to immediate recourse to the Bond. The decision was overturned as the Court found:

• The Contractor was not entitled to the release of the Bond; and
• Accordingly, the Financier was entitled to hold the Bond; but
• The Financier had no immediate right of recourse to the Bond because it had not quantified a claim for an identified amount of money that the Contractor had failed to pay under the Building Contract.

This decision provides an explanation of the contractual phrase, ‘due otherwise than under the Contract’. It requires an amount of money to have been identified (and demanded) before a party can be said to have failed to pay it, in other words, that such an amount is ‘due’. In the current scenario, the Financier’s right to have recourse to security does not crystallise until an identifiable and unpaid quantum has been determined.

Background

The contractual matrix was complex and involved:

• the Building Contract between Austpro Management Services Group Pty Ltd (Principal) and the Contractor, under which the Contractor had provided the Bond. The Financier had taken possession of the development and assumed the Principal’s rights and entitlements under the Building Contract because the Principal had defaulted;
• the Loan Agreement between the Principal and the Financier, under which the Principal granted a mortgage over the development site to the Financier; and
• the Tripartite Agreement between the Principal, the Contractor and the Financier, governing, among other matters, the way in which various rights under the Building Contract could be exercised, including the Contractor’s consent to the Principal granting the Bond in favour of the Financier, over the Principal’s right, title and interest in, to and under the Building Contract.

Relevantly, clause 42.11 of the Building Contract provided that:

‘Where a party fails to pay to the other party an amount due and payable under the Contract within the time provide by the Contract or a party fails to pay the other party any money due otherwise than under the Contract, the other party may have recourse to security under the Contract…’

The key issue for determination by the Court was whether clause 42.11 was enlivened.

The Original Decision – Weston v Perkins (WA) Pty Ltd [2021]

The original decision effectively found that the phrase ‘due otherwise than under the Contract’ means that an amount is ‘due’ as soon as the relevant claim is made by the Principal.

This included in scenarios where the rectification procedure was not being followed and a Contractor was not informed of the estimated defect rectification cost and was not in a position to pay the amount claimed.¹ In effect, once the notice for rectification was sent to the Contractor, the Principal’s right of recourse to the Security crystallised.

The Appeal – Perkins (WA) Pty Ltd v Weston [No 2] [2022]

The original decision was appealed on the basis that Allanson J (Trial Judge) erred in:

1. Finding that the Principal was liable for the cost of defects or omissions in work at Practical Completion;
2. Finding that the Principal had failed to pay an amount ‘due otherwise than under the Contract’ as no such amount under clause 42.11 of the Building Contract was ‘due’; and
3. Failing to address whether the Building Contract had been terminated. It was argued that rather, the Trial Judge should have found that the Building Contract was validly terminated and the Financier did not have a right to the Security as of termination and therefore should return the Security to the Contractor.

The combined judgement of Quinlan CJ, Beech JA and Tottle J did not consider the first ground of appeal and also dismissed the third ground of appeal.

The second ground was upheld. The Trial Judge was found to have erred in providing that the Financier was not required to identify an amount that the Contractor had failed to pay as a condition precedent to having recourse to security. Amongst other contentions, the Financier had maintained that it could have recourse to the Bond in respect of ‘money for remediation works performed by third parties’ because the Contractor had failed to remedy defects following Practical Completion in accordance with the obligation to do so under the Building Contract. Importantly, in its submissions, 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 therefore found to be insufficient when the Court ultimately reinforced that ‘recourse has got the question of quantification loaded within it.’ ²

The third ground was dismissed on the understanding that the termination of a contract did not exhaust the broad contractual purpose of the Bond and the Bond was still serving its contractual purpose.³

Clause 5.1 of the Building Contract provided that:

‘Security, retention moneys and performance undertakings are for the purpose of ensuring the due and proper performance of the Building Contract.’

It was found that if there is a failure in the due and proper performance of the Building Contract, the Bond should remain held by those with the right to it (ie. the Bond was to be held by the Financier, standing in the shoes of the Principal, unless the Contractor was entitled to the return of it). In this case, the Financier was entitled to continue to hold the Bond and the Bond would only be released when its contractual purpose had been exhausted.

Take away points

1. The words ‘due otherwise than under the Contract’ requires both an identifiable and quantifiable amount owed, that has failed to have been paid. An attempt to claim security implicated by this phrase should fail if there is no identified amount that the provider of the security has failed to pay.
2. Failing express words to the contrary, the early termination of a contract does not automatically trigger the release of security. Security providers (most usually the Contractor) may seek to include this event as a trigger or incorporate protections to have return of security upon termination in order to avoid security being retained in the event of disputes. In general, Courts will look to the purpose of the security and whether the contractual purpose of the security has been exhausted before allowing its release.

Careful consideration should be given to the drafting of security clauses if a party wishes to have an unrestrained right of recourse to security or a prompt release of security.

HWL Ebsworth Lawyers has expertise in drafting and reviewing construction contracts to protect important business considerations and would welcome the opportunity to assist you. HWL Ebsworth Lawyers have further expertise in security and protections under construction contracts. Please contact Theo Kalyvas of our Construction and Infrastructure team to discuss any aspects of the above.

¹ Weston v Perkins (WA) Pty Ltd [2021] WASC 84, [77].
² Perkins (WA) Pty Ltd v Weston [no 2] [2022] WASCA 111, [38]
³ Ibid, [34]