When entering into a construction contract, it is likely you will come across a clause for security which allows the principal (or head contractor in the case of a subcontractor) to hold security as protection in the event the contractor fails to fulfil its obligations under the contract. Commonly, you will have the option between a bank guarantee or cash retention, with cash retention, in our experience, being the most common form of security. It is important during the negotiation stages when entering into a construction contract to agree on terms of how much retention can be held by the principal, when a call for security can be made and when security will be returned at the end of the project, as adjudicating a payment claim to retrieve your money under the relevant Security of Payments Act will not help you, as established in the recent case Grocon (Belgrave St) Developer Pty Ltd v Construction Profile Pty Ltd [2020] NSWSC 409 (“Grocon v Construction Profile”).
Background
Construction Profile Pty Ltd (“Construction Profile”) was engaged by Grocon (Belgrave St) Developer Pty Ltd (“Grocon”) to construct the Telstra Exchange residential development in Manly, NSW. Construction Profile provided Grocon two bank guarantees as security, totalling close to $1 million.
Construction Profile applied for adjudication under the Building and Construction Industry Security of Payment Act 1999 (NSW) (the “NSW SOP Act”), following Grocon’s payment schedule deducting $1.65 million on account of liquidated damages for the delay in reaching practical completion. The adjudicator rejected Grocon’s claim for liquidated damages and found Construction Profile was entitled to extensions of time which extended the date for practical completion and determined $1.25 million in favour of Construction Profile.
Soon after the adjudicator’s determination, Grocon called on Construction Profile’s two bank guarantees in satisfaction of Grocon’s claim for liquidated damages. In a bid to reclaim the bank guarantees, Construction Profile issued a final payment claim for the sum of the bank guarantees.
In response to Construction Profile’s final payment claim, Grocon sought a declaration in the Supreme Court of New South Wales that the final payment claim was void as the reimbursement of the monies called under the bank guarantees was not for the performance of “construction work” or supply of “related goods or services” as defined under the NSW SOP Act.
Legal issue
Two of the questions the Court was required to determine were:
1. whether the payment claim for the bank guarantees is a claim for construction work or related goods or services is a question that can be determined by the adjudicator; and
2. whether the payment claim is a claim for construction work due to the payment claim including the value of the whole of the work undertaken, less the amount it has been paid.
Decision
The Court found in favour of Grocon and granted the declaration and an injunction restraining Construction Profile from seeking an adjudication under the NSW SOP Act in respect of the payment claim. The court determined that the payment claim submitted by Construction Profile was void and had no effect under the NSW SOP Act as it did not conform to the requirements of a payment claim under the NSW SOP Act, thus could not be determined by an adjudicator.
Key Takeaway
If you receive a payment claim that clearly lacks jurisdiction under your States’ or Territories’ Security of Payments Act, you can, based on the decision in Grocon, go straight to Court to determine whether an adjudicator has jurisdiction, rather than being dragged through the adjudication process to ultimately have the decision set aside. While this may seem a costly exercise, it could in the long run prove cost effective especially if the amount being sought in the payment claim is in the hundreds of thousands or millions.
On the other hand, if you are having trouble retrieving security monies owed to you, you may need to consider other alternative options than adjudication to get your money back. For more advice in relation to security or payment claims under a construction contract, feel free to contact Shields Legal and speak to one of our experienced construction lawyers for advice.
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