Battles over recourse to security under a construction contract can take many forms and arise through a myriad of circumstances.
Despite the varying backdrops, extending the contractual rights of a party to have recourse to security is an obvious contract drafting tool designed to allocate risk to the other party. In simple terms, the broader the scope for recourse to security for a principal, the greater risk to the contractor.
The Qld Court of Appeal recently considered an appeal by a principal in respect of a decision of a judge at first instance, granting an interim injunction to the contractor preventing the principal’s recourse to $17.5m worth of security.
The background to the principal's $17.5m claim to the security concerns certification by a superintendent of the value of work taken out of the hands of the original contractor, and subsequently undertaken by an incoming contractor (which work remained incomplete).
Although the validity of the superintendent’s certificate was in dispute (for reasons not relevant here), the subject security clause described the principal’s right to recourse as extending to “any claim to payment, the principal may have ….or claims to have …under the Contract”.
Several points were raised on appeal by the principal, but the only relevant one was the alleged erroneous construction of the above security clause by the first judge.
The Court of Appeal upheld the appeal, finding the above security clause introduced a subjective assertion, such that it was sufficient that the principal merely assert that it had a claim (in good faith), thereby effecting a risk allocation to the contractor and the contractor had not challenged that the principal was not acting in good faith when notifying of its intention to have recourse.
As a result, the Court of Appeal held the security clause was misconstrued by the first judge and the interim injunction was set aside.
Recommendations
The case demonstrates that the drafting of security clauses to extend rights to recourse to security in a construction contract can be a powerful risk allocation tool that should be carefully considered and negotiated.
Who can provide specialist legal advice in SEQ?
Troy Legal provides specialist advice to owners, developers, head contractors and subcontractors in NSW & QLD in respect of construction contracts.
Contact Julian Troy, Director and Principal of Troy Legal, at julian@troylegal.com.au.
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