Will an adjudication determination ordering a party to pay money prevent that party from calling on contractual security? - Construction & Planning

The recent decision¹ of Duro Felguera Australia Pty Ltd v Samsung C&T Corporation [2016] WASC 119 is important to participants in the construction industry because it clarifies the scope and operation of two important sections of the Construction Contracts Act 2004 (WA) (Act).

This decision clarifies that:

section 38, which makes an adjudicator's 'determination' binding on the parties, only applies to the amount that is ordered to be paid in a determination and not the reasons for that determination.
section 38 will not stop a party from exercising its contractual rights (for example, having recourse to contractual security) despite that it has an obligation (arising under adjudication determinations) to pay an amount of money to the party who has provided the security. The right (arising under the Act) of a contractor to be paid adjudicated amounts and the right of the principal to exercise its contractual rights exist in parallel.

section 45(3) will prohibit the admission into evidence of the adjudication determination, and the reasons for that determination, in proceedings where the disputes or other matters inquired into and dealt with in the adjudication are in issue.

BACKGROUND FACTS

Samsung C&T Corporation (Samsung) engaged Duro Felguera Australia Pty Ltd (Duro) to perform works in relation to the Roy Hill iron ore mining, rail and port project in Western Australia.

The parties' construction contract required Duro to provide a number of bonds, each for an amount of about $38 million, as security for its performance of the contract.

The contract gave Samsung the right to have recourse to those bonds. Samsung considered that it would be entitled to recover the amount sought to be converted under or in respect of the contract.

On 18 February 2016, Samsung notified Duro that it intended to have recourse to Duro's performance bonds. Samsung considered that it was entitled to recover an amount of about $110 million from Duro under the contract for the cost of rectifying defective works allegedly performed by Duro.

Between 20 January 2016 and 3 March 2016 three adjudication determinations (Determinations) were made, ordering Samsung to pay Duro amounts in various currencies. In total, Samsung was obliged to pay Duro an amount in excess of AUD 60 million.

Duro applied to the Supreme Court of Western Australia for an interlocutory injunction to restrain Samsung from taking any step to obtain payment under the bonds.

THE ARGUMENTS

Duro relied on two grounds for its contention that there was a prima facie case that Samsung was not entitled to convert the performance bonds into money. Only one of those grounds is relevant to this discussion.

Duro argued that Samsung was not entitled to exercise its contractual right to convert Duro's performance bonds into money because to do so would, contrary to section 38 of the Act, disregard binding determinations under the Act. Duro argued that it would not receive the benefit of the Determinations if Samsung was permitted, contrary to s 38 of the Act, to make demand on Duro's performance bonds.

To evidence the existence of the Determinations, Duro adduced a copy of each of the Determinations and the adjudicators' reasons for the Determinations. Samsung objected to the admissibility of the Determinations on the basis of section 45(3). That section provides that "evidence of anything said or done in an adjudication is not admissible before an arbitrator or other person or a court or other body", other than in applications to the State Administrative Tribunal for:

a declaration that an appointed adjudicator is disqualified; or
a merits review of an adjudicator's decision.

THE COURT'S DECISION

What is "anything said or done in an adjudication"?

Justice Le Miere found that the Determinations, and the reasons for the Determinations, are things "said or done" by the adjudicator in the course of the adjudication.

Having acknowledged that the prohibition in s 45(3) did not extend to all proceedings, Le Miere J considered the ambit of s 45(3). In doing so, his Honour found that the "purpose of the prohibition under s 45(3) is to prevent evidence led by the parties before the adjudicator and the findings of the adjudicator being received in evidence in proceedings before a court or arbitrator deciding the same dispute or other matter arising under the contract as those inquired into and dealt with in an adjudication, or similar issues."

Evidentiary consequences

Le Miere J found that Duro's application for an interlocutory injunction did not involve the court making an order allowing for any amount owed or paid to a party under a determination, however it did involve inquiring into matters that had been dealt with by the adjudicators in making the Determinations. In such cases, s 45(3) prohibits the admission into evidence of determinations and the adjudicators' reasons for those determinations. Accordingly the Determinations, and the adjudicators' reasons for the Determinations, were inadmissible in Duro's interlocutory injunction application.

Does section 38 of the Act preclude a party from exercising its contractual rights?

Section 38 of the Act provides that "an appointed adjudicator's determination is binding on the parties ... even though other proceedings relating to the payment dispute have been commenced". Duro submitted that a 'determination' includes the adjudicator's findings in his reasons for that determination. The question before Le Miere J therefore was: what is a 'determination' for the purposes of the Act? His Honour read sections 31(2)(b) and 36 together to conclude that a 'determination', for the purposes of s 38, was limited to "a party's liability to return any security or a party's liability to make a payment and if so the amount to be paid, and the interest payable on it and the date on or before which the amount is to be paid" and does not include the adjudicator's reasons for that determination. All that was binding under s 38, therefore, was the obligation for one party to pay another party, not the adjudicator's reasons (and findings in those reasons).

Le Miere J ultimately found that Samsung was entitled to exercise its contractual right to convert Duro's performance bonds into money despite the existence of the Determinations. In reaching that finding, Le Miere J held that the Act preserves, rather than overrides, the parties' contractual rights, and except for the provisions of part 2 of the Act (which prohibits certain provisions and implies certain provisions in construction contracts), does not alter the terms agreed by the parties.

KEY 'TAKE AWAYS'

Following this decision, it appears that determinations, and potentially the reasons for those determinations, will only be admitted into evidence in the following circumstances:

proceedings before the State Administrative Tribunal for a declaration that an appointed adjudicator is disqualified;
merits review proceedings before the State Administrative Tribunal;
proceedings where the court must, in making its order, allow for any amount that has been or is to be paid to a party under a determination;
proceedings for the enforcement of an adjudication determination;
judicial review proceedings or proceedings that otherwise challenge the validity of an adjudication determination; and
potentially, any proceedings where a court or arbitrator will not be deciding the same dispute or other matter arising under the contract (or similar issues) as those inquired into and dealt with in the relevant adjudication determination.

Regarding the binding nature of determinations, section 38 operates such that it is only the obligation to pay an amount under that determination (and not the adjudicator's reasons or findings) that is binding. That is, parties will not be bound in any subsequent proceedings or matters to adopt findings made by an adjudicator in his/her reasons², whether in relation to assessments made under the construction contract or in subsequent dispute proceedings; only the obligation to pay flowing from the Determinations is binding.

More generally, parties are reminded that the adjudication regime under the Act exists in parallel to, and does not affect, the parties' rights under their construction contract (except for prohibited and implied terms under Part 2 of the Act ('Content of construction contracts'). The fact that a principal must pay a contractor an amount ordered to be paid under an adjudication determination will, in most circumstances, not prevent the principal from exercising its contractual right to demand performance security. This position may differ in situations where an adjudicator's determination relates to a particular contractual right itself.

Footnotes

¹DECISION: DURO FELGUERA AUSTRALIA PTY LTD -v- SAMSUNG C&T CORPORATION [2016] WASC 119
²An adjudicator may make a number of findings including, for example, that the contractor is entitled to payment in respect of all of its payment claims but that the principal is also entitled to payment in respect of some or all of its counterclaims.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.


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