Can an adjudication determination be enforced by an insolvent company? - Insolvency/Bankruptcy

A recent decision by Justice Beech of the Western Australian Supreme Court in Hamersley Iron Pty Ltd v James [2015] WASC 10¹ has considered the issue of whether an adjudication determination made under the Construction Contracts Act 2004 (WA) (the Construction Contracts Act) can be enforced by an insolvent company.

SUMMARY

A court hearing an application by a successful party (made under section 43 of the Construction Contracts Act) for leave to enforce a determination will have good reason to refuse leave when:

the successful adjudication applicant is insolvent, and in liquidation, at the time that it applies for adjudication of the relevant payment dispute; and
an adjudication respondent is able to establish that it has an arguable counterclaim against the applicant that exceeds the amount of the adjudicated sum.

BACKGROUND

In February 2014, Forge Group Construction Pty Ltd (Forge) hit the headlines when it went into voluntary administration. At this time, Forge had a construction contract with Hamersley Iron Pty Ltd (Hamersley). Shortly after the appointment of Forge's administrator, Hamersley had recourse to $5.6M of Forge's contract security and terminated this contract. Forge applied for adjudication (under the Construction Contracts Act) of a payment claim (for an amount of $14.3M) that it had submitted to Hamersley prior to the appointment of Forge's administrator. Hamersley defended the adjudication application on the basis that, after accounting for the recovery of Forge's contractual security, it was entitled to a set-off against Forge (for an amount of $7.4M).

Forge was successful (in the sum of $705.8K) in its adjudication application against Hamersley. Hamersley had defended the adjudication application on the basis that it had a counterclaim against Forge but the adjudicator held that Hamersley had failed to satisfy him, on the balance of probabilities, that the amount of its counterclaim exceeded the amount claimed by Forge.

FORGE'S APPLICATION FOR LEAVE TO ENFORCE THE DETERMINATION

Forge applied to the Supreme Court, under section 43 of the Construction Contracts Act, for leave to enforce the adjudicator's determination (determination). Hamersley objected to the enforcement on the basis that it had a counterclaim against Forge that exceeded the amount awarded to Forge in the determination and that it was entitled to set this off against any monies that it owed to Forge under section 553C of the Corporations Act 2001 (Cth) (the Corporations Act).

The starting point adopted by His Honour was that, in normal circumstances, the existence of a counterclaim against the party wanting to enforce an adjudication determination will not be a basis for the court to refuse leave to enforce under section 43 of the Construction Contracts Act. However, due to the insolvency of Forge, Justice Beech went on to consider the relationship between the purpose of the Construction Contracts Act and the Corporations Act.

Justice Beech considered that the purpose and object of section 553C of the Corporations Act required the Court to do 'substantial justice' between the parties. In contrast to the finding made by the adjudicator, Justice Beech was satisfied that Hamersley's evidence in relation to its counterclaim established that it had an arguable case against Forge.² His Honour, applying the High Court authority of Gye v McIntyre³ (which considered an equivalent section of the Bankruptcy Act 1966 (Cth)), held that it would be unfair for the liquidators of Forge to recover the full amount of Hamersley's debts to Forge in circumstances where, at the same time, Hamersley was left to prove in the liquidation of Forge in respect of the debts owed by Forge to Hamersley due to the counterclaim.

Justice Beech was of the view that, in the circumstances of the case before him, the primary purpose of the Construction Contracts Act (maintaining the flow of money in the contracting chain) did not demand the grant of leave to enforce Forge's favourable determination.

Ultimately, Justice Beech considered that, given that Hamersley had demonstrated an arguable case of the existence of a counterclaim against Forge, Forge's application for leave should be stayed (rather than dismissed) until Hamersley had either:

agreed (with Forge) the quantum of its counterclaim; or
commenced legal proceedings against Forge and thereby proved its counterclaim.

WHY IS THIS DECISION IMPORTANT?

This decision is important because it is the first time in WA where an application for leave to enforce an adjudication determination has been unsuccessful. Generally, where a successful adjudication applicant applies for leave to enforce its determination it can expect that the court will exercise its discretion and grant leave. However, where (as here) a successful adjudication applicant is clearly insolvent at the time that it applies for adjudication, and the adjudication respondent has an arguable case that it has a counterclaim against the applicant, the respondent will have a valid basis upon which to ask the court to refuse to grant leave under section 43 of the Construction Contracts Act.

Before applying for adjudication of a payment dispute under the Construction Contracts Act, insolvent parties will, now, need to think carefully about the risk of obtaining an unenforceable determination and the risk of the adjudication respondent bringing subsequent proceedings in order to establish the existence of a counterclaim.

This decision gives hope to parties who are concerned about the solvency of a counterparty to a construction contract. Importantly, the enquiry that will be made by a court hearing the insolvent company's application for leave to enforce under section 43 (namely, whether the respondent has an arguable case, giving rise to a serious question to be tried, that it has a counterclaim against the insolvent company) is of a lower threshold than the enquiry made by the adjudicator (such enquiry being on the balance of probabilities) in considering whether the respondent is liable to make a payment to the insolvent company in respect of the payment dispute the subject of the applicant's adjudication application. This is particularly important for respondents, as was the case for Hamersley, who are unable to prove their counterclaim on the balance of probabilities before the adjudicator.

Footnotes

¹ The proceedings the subject of this decision were heard together with the proceedings the subject of the decision of Justice Beech in Hamersley HMS Pty Ltd v Davis [2015] WASC 14. That decision related to a different adjudication.

² One of the reasons why His Honour arrived at a different conclusion to that of the adjudicator is because the standard of proof to be established by Hamersley in the adjudication was higher than the standard required to be established during the hearing of Forge's leave application.

³ (1991) 171 CLR 609 at pages 618 – 619.

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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