Recovering improper calls on security - key takeaways from EnerMech v Acciona judgment

The recent decision by the NSW Court of Appeal in EnerMech Pty Ltd v Acciona Infrastructure Projects Australia Pty Ltd [2024] has clarified that where a party to a construction contract has had recourse to security wrongfully, the other party or claimant can seek to recover that amount through the claims and adjudication process contained in the Building and Construction Industry Security of Payment Act 1999 (NSW) (the Act). The case highlights the considerations a party must have before seeking to have recourse to security in a construction project as well as the importance of properly preparing payment claims, payment schedules, adjudication applications and adjudication responses particularly in respect of jurisdictional issues.

Background

On 3 June 2020, EnerMech Pty Ltd, the Appellant (EnerMech) entered into a subcontract with Acciona Infrastructure Projects Australia Pty Ltd, Samsung C&T Corporation and Bouyges Construction Australia Pty Ltd (together, the Joint Venture or JV) to undertake electrical works as part of the Westconnex project in Sydney.

On 8 June 2023, EnerMech issued a payment claim numbered 29 (PC 29) to the JV for approximately $10 million. Circa $9 million of that claim by EnerMech related to amounts that had been obtained by the JV by having recourse to a bank guarantee provided by EnerMech.

The JV served its payment schedule in response to PC 29 alleging that the payment claim was not valid because it was not a claim for construction work or related goods or services. This was in the context that:

• section 8 of the Act states that a person who has undertaken to carry out construction work or supply related goods and services is entitled to a progress payment; and
• section 13(2) of the Act requires a payment claim to identify the construction work (or related goods and services) to which the progress payment relates.

The adjudicator found that PC 29 was valid (agreeing with EnerMech).

The JV commenced proceedings in the Technology and Construction List of the Supreme Court of NSW to have the adjudicator's determination quashed.

The primary judge agreed with the JV and ordered that PC 29 was invalid.

EnerMech then appealed the decision to the Court of Appeal.

The parties' positions

It was the JV's position in summary that PC 29 was:

• not for construction work or for the supply of related goods or services;
• rather, it was potentially a claim for damages for breach of contract or for an account of payments made; and
• on those bases, EnerMech's claim fell outside the operation of the Act, the Act was not engaged, and the adjudicator did not have jurisdiction to determine the claim.

It was EnerMech's position in summary that:

• its progress payment was not a claim for an amount that is recoverable under the general law by way of damages, restitution, or by way of an account;
• the Act did not prescribe, as an essential condition for a payment claim to be valid, that it had to be "for construction work" and even if there was such a condition, it was a question to be determined by the adjudicator and not the Court;
• the object of the Act is that all questions arising from the construction of the contract and provisions of the Act, as applied to the facts raised by the claim and payment schedule, are matters for the adjudicator to determine; and
• even if the adjudicator's understanding of the contract was erroneous, it cannot be challenged for jurisdictional error.

The Court of Appeal's Decision

Whether a payment claim must be "for construction work"

In relation to this question, the Court of Appeal stated:

• the Act does not require a payment claim to be made "for construction work";
• that is because a payment claim is a claim for money owing on account of construction work (or related goods or services);
• whether an amount is in fact payable will depend on the proper construction of the contract, identification of the work which has been carried out and a determination as to whether that work has already been paid for. These are matters to be determined by an adjudicator;
• the focus is on the construction contract, overlaid by a statutory entitlement to progress payments;
• in accordance with section 9 of the Act, the amount of a progress payment to which a person is entitled "in respect of a construction contract' (not "for construction work") is to be calculated in accordance with the terms of the contract (failing which, it must be undertaken pursuant to s10(1)(b) of the Act¹);

In relation to section 13(1) of the Act:

• Firstly, it does not limit the amount or nature of a payment which a party is entitled to under a construction contract. It does not purport to create an implied condition of the validity of a payment claim; and
• ·Secondly, payments should not necessarily be compartmentalised according to their character, regardless of the terms of the contract, so that some payments are permitted under a payment claim and others are not.

Jurisdiction

The Court of Appeal also had to determine EnerMech's contention that, if there was such a condition that the payment claim had to be "for construction work", compliance with this requirement was a matter for the adjudicator and not a jurisdictional fact for the Court to determine.

The Court of Appeal stated:

• by way of confirmation, that a determination by an adjudicator under the Act may only be set aside by the Court for jurisdictional error;
• it is not the Court's function to imply an essential condition to whether a payment claim is valid or not, especially in circumstances where the effect of that decision would resist the effect of an adjudication determination;
• the adjudicator's understanding of the construction contract, even if legally incorrect, cannot be challenged on a claim to enforce an adjudication certificate or on judicial review; and
• whatever conditions there were on the entitlement of a claimant arose from a correct reading of the contract and the Act, which are properly matters for the adjudicator.

Key takeaways

• For claimants, the main take-away is that they can seek to recover the proceeds of a wrongfully called upon bank guarantee or other security in a payment claim, as long as the payment claim is carefully prepared.
• For respondents, the main take-away is to consider, at the time of deciding whether or not to have recourse to security, the time and cost impacts of claimant's seeking to claw back these amounts in future payment claims.
• If respondents have valid jurisdictional arguments they want to raise about the validity of a payment claim, these should be raised in their payment schedule and adjudication response.
• An adjudicator is permitted to "get it wrong" on the facts and law, as long as the necessary pre-conditions to give them the power to adjudicate the claim under the Act are satisfied.

If you have any questions in relation to the Act, security or construction matters generally, please contact Anish Wilson or Holly Tang.

Footnote

¹ Section 10(1)(b) of the Act states that construction work is to be valued (if the contract makes no express provision on the matter) having regard to the contract prices, any other rates or prices in the contract, any variation agreed to by the parties and the estimated cost of rectifying any defects.

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.