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By: HHG Legal Group
West Perth, Australia

In construction contracts, payment rights often conflict and compete with each other for priority.  Never is this truer than in the context of a contractor’s insolvency or an adjudication application under security of payment legislation.

This was the case in Hamersley Iron Pty Ltd v James [2015] WASC 10.

In that case, Hamersley had instructed a construction contractor, Forge Group Construction Pty Ltd, to design and construct fuel hubs.  Forge started work on the hubs but was placed into liquidation without having ever finished the job.  In the meantime, Forge applied for adjudication of its payment claims, which Hamersley had disputed, and the adjudicator awarded Forge just over $700,000 under its contract with Hamersley.

Forge’s liquidators then applied to the WA Supreme Court for leave to enforce the adjudicator’s award against Hamersley.  Hamersley applied to quash the adjudicator’s decision on technical grounds and the Court dismissed that application.  However, Hamersley’s alternative argument that Forge’s liquidators should not be allowed to enforce the adjudication award was a little more successful.  Whilst the Court declined to go as far as Hamersley had requested by dismissing the application for leave to enforce the award, the Court did stay (i.e. put a hold on) Forge’s leave application pending determination of Hamersley’s counterclaims against Forge.

This is interesting because it is well accepted that a principal’s counterclaims cannot prevent enforcement of an adjudicator’s award, given the “pay-now-argue-later” policy which underscores security of payment legislation.  Whilst Beech J in Hamersley expressly acknowledged that security of payment legislation is to be interpreted and applied consistently with this policy, His Honour went on to say that ultimately, this policy is about keeping the money flowing down the contractual chain without allowing payments to be held up by protracted disputes.  Since insolvency will remove a contractor from the “contractual chain” altogether, Beech J said that allowing a contractor to enforce an adjudication award no longer has the same policy justification once the contractor becomes insolvent.

According to Beech J, what really mattered in the case of contractor insolvency was the policy underlying section 553C of the Corporations Act 2001.  That section basically applies where a corporation becomes insolvent and is either owed money by, or has a claim against, another contracting party.

In these circumstances, section 553C requires the insolvent company’s liquidator to work out how much each party owes to the other, set the two amounts off against each other, and then either pay or claim the balance to or from the other party.

Beech J held that the purpose of this section 553C was to protect people who trade with insolvent companies without being aware of the insolvency from becoming liable to pay 100% of their own debts to that company but, because of the insolvency, only being paid a percentage of the company’s debts to them.

In Hamersley’s case, Hamersley argued, and Beech J accepted, that it had claims against Forge which raised “serious questions” for determination at a trial.  These questions, Hamersley argued, if decided in Hamersley’s favour, would result in Hamersley getting judgment against Forge which would exceed the adjudicator’s award plus all the other claims that Forge was making against Hamersley.

According to Beech J, who accepted these arguments, if Forge were to be allowed to recover the amount awarded by the adjudicator against Hamersley now and if Hamersley were then to get judgment on its counterclaims against Forge, this could give rise to the very situation that section 553C was designed to prevent: that is, Forge getting all of its money from Hamersley and Hamersley getting only some, or perhaps even none, of its money back from Forge.

To make sure the policy of section 553C was not thwarted in this way, Beech J was not prepared to allow Forge to enforce its adjudication award right away.  However, His Honour was not prepared to dismiss Forge’s application for leave to enforce it either because that would open the way for Hamersley to abandon its counterclaims and avoid ever having to pay the amount awarded to Forge.  Instead, then, Beech J decided to stay Forge’s application for leave to enforce the adjudicator’s award pending determination of Hamersley’s appeal.  This means that Forge’s leave application remains on foot and presumably, if Hamersley does not now prosecute its claims against Forge in a timely way, Forge can ask the Court to relist its leave application for further hearing.

We consider Beech J’s decision to have been well-reasoned and unlikely to be overturned on appeal.  Principals can and should rely on this decision in resisting applications by insolvent contractors for leave to enforce adjudicators’ payment awards.  Meanwhile, liquidators of insolvent contractors should think twice about whether there is commercial value in seeking or progressing adjudication applications rather than investing limited resources in more effective and determinative processes for resolving payment disputes.

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