John Holland Pty Ltd v Roads and Traffic Authority of New South Wales [2007] NSWCA 140
In 2007 the New South Wales Court of Appeal, deciding the appeal on a basis favourable to the contractor, held that, under the contract before it, the principal could properly retain the contractor's performance security as security for its claim to recover adjudicated amounts it had paid under the Building and Construction Industry Security of Payment Act 1999 (NSW). Giles JA, with whom Tobias and McColl JJA agreed, also held that retaining the security in that way did not offend the Act's prohibition on contracting out.
What the court decided
John Holland Pty Ltd contracted with the Roads and Traffic Authority of New South Wales (the RTA) to build a roadway and associated bridgeworks, and gave security for its performance [1]. The contract, made on 8 September 2003, adopted RTA conditions based on NPWC3 (1981) [5]. Clause 5.1 said that security was provided to ensure due and proper performance of the contract and to satisfy the contractor's obligations under it [6]. Clause 5.7 allowed the principal, after practical completion, to reduce the security by an amount that in its opinion was just and equitable, but not below half of the security and retention moneys then held [6]. John Holland provided two unconditional undertakings from an insurance company, each for $1,943,465 [12].
In the course of the works, adjudicators' determinations under the Act required the RTA to pay John Holland amounts well in excess of the security, and the amounts were paid [1]. One further adjudicated sum, the Detonator Dump monies, may not have been paid, but Giles JA treated that as not affecting the answer [22], [30]. Practical completion was certified on 28 November 2005 [13]. In February 2006 John Holland again asked for the return of one of the two securities under clause 5.7 [14]. The RTA declined, saying that any reduction was discretionary and pointing to substantial existing disputes between the parties [15]. In John Holland's proceedings the RTA cross-claimed for $5,819,095.55 in restitution of adjudicated amounts it had paid [16], [21]. It contended that under the contract John Holland had been overpaid, and that the RTA was entitled to restitution under section 32 of the Act or otherwise [23], [25], [27].
McDougall J, answering a separate question, held that the RTA was entitled to retain both securities, and John Holland's summons for the return of half the security was dismissed [2], [3]. On appeal Giles JA gave the reasons, and Tobias and McColl JJA agreed with him [65], [66].
John Holland argued that the RTA had exercised the clause 5.7 power for an improper purpose [31]. On its argument, holding the security for recovery of the adjudicated amounts fell outside clause 5.1, because any entitlement to that recovery arose under section 32 of the Act, so that the obligation it would satisfy was statutory and not contractual [32]. Giles JA observed that the disputes behind the RTA's decision might have gone beyond those in the cross-summons, but decided the appeal on the basis, favourable to John Holland, that the cross-summons recovery was the only reason for holding the security [33], [36]. He was content to assume that McDougall J was right to treat the clause 5.7 discretion as constrained by the purposes in clause 5.1 [38], [39].
Even so, Giles JA concluded that the RTA's purpose was not outside those purposes, and that the security could properly be retained for the cross-summons recovery [39]. The Act gave an entitlement to interim payments on account, while the parties' contractual rights were preserved, so the RTA could still contend under the contract that John Holland had been overpaid [44], [45], [46]. A Final Payment Schedule issued by the Superintendent might show an amount due from John Holland to the RTA, which John Holland would then be contractually obliged to pay under clause 42.7.4 [47], [48]. That obligation was "certainly within" the contractor's obligations under the contract in clause 5.1, and the security could be held to satisfy it [49]. Clauses 42.7.4(b) and 46 reinforced that view [49].
John Holland's key submission was that, because the RTA's right of recovery came from section 32, any obligation of John Holland to repay the adjudicated amounts was not an obligation under the contract [52]. Giles JA rejected that submission as "untenable" [53]. In his view, a restitution order under section 32 would itself carry into effect the contractual rights of the RTA and the matching obligations of John Holland [52]. The right to hold security for a payment obligation was not lost when the obligation passed into judgment, and in any event the final certification under the contract, if it showed money owing from John Holland, would create a contractual obligation to which the security could be applied [53].
Giles JA also rejected a submission, which apparently had not been put to McDougall J, that John Holland was entitled on practical completion to the return of half the security [54], [55]. He said that nothing in the contract supported that entitlement, and that it could not stand with the clause 5.7 discretion or with clauses 42.7.4 and 46 [55].
John Holland further argued that, if the contract permitted the security to be retained, the relevant clauses were void under section 34(2)(a) of the Act, although it had some difficulty identifying which clauses it said were void [56], [57]. It relied on an observation of Ipp JA in an earlier Court of Appeal decision, in which Ipp JA held that a payment made on condition that the contractor provide a bank guarantee was not payment that ended a suspension of work [59].
Giles JA said the decision did not assist John Holland, and noted that Ipp JA had not been concerned with voidness under section 34 [61]. There the payment was apparently sterilised, while here the security had been given long before the adjudicated amounts were paid and for performance of the contract generally, and those amounts improved John Holland's cash flow [61]. He said it was not correct that retaining security "undoes" an adjudicator's determination, which brought an interim payment subject to a different position being established under the contract or in proceedings [62]. The Act had operated by requiring the RTA to pay the adjudicated amounts, and retaining security to meet an obligation to pay money on the final determination had no effect contrary to that operation [63].
Giles JA did not need to decide whether, had the purpose been improper, the RTA could decide again or would have had to return half the security [31]. Nor did he decide whether every claim or dispute had to be finally resolved before a Final Payment Schedule could issue [50], [51]. The appeal was dismissed with costs, as Giles JA proposed and the other judges agreed [64], [65], [66].
Why it matters
On a basis favourable to the contractor, the Court of Appeal held that, under the contract before it, the principal could retain performance security to answer its contractual claim that adjudicated amounts paid under the Act should be repaid, because those amounts were interim and the contract's final payment mechanism could still produce a debt from contractor to principal. It also held that retaining the security did not offend section 34 of the Act. The result turned on this contract's security, final payment and recovery clauses, and another contract's terms may operate differently.
The decision applied the Act as it then stood. Readers should check the current Act and later authority before relying on it.
Numbers in square brackets are paragraph numbers of the judgment. This note summarises a decided case for education and is not legal advice. See how the notes are written.