The recent decision of the Supreme Court of Western Australia in
Duro Felguera Australia Pty Ltd v Samsung C&T
Corporation comes as a reminder that a contractor who holds
security from a sub-contractor may have recourse to bank guarantees
even after an adjudication determination in favour of the
sub-contractor has been made.
This case highlights the shortcomings of adjudication pursuant
to the Construction Contracts Act 2004 (WA)
(Act), in that:
An adjudication determination does not alter the parties'
contractual rights or finally determine them;
Neither the adjudicator's construction of the contract nor
the determinations made by the adjudicator alter the proper
construction of the contract nor any facts in contest between the
An arbitrator or court may subsequently deal with the dispute
and reach a different decision.
Background - facts and findings
In this case, Duro Felguera Australia Pty Ltd
(Duro) was engaged by Samsung C&T Corporation
(Samsung) under an engineering, procurement,
construction and commissioning contract to perform works in
relation to the Roy Hill iron ore mining, rail and port project in
the Pilbara (Project). Under the contract Duro had
provided security by way of two insurance bonds each for
$38,143,767.20 (Bonds). On 18 February 2016
Samsung gave notice to Duro of its intention to call upon the
Bonds. Samsung asserted that it was owed approximately
Duro had submitted three payment claims which had been referred
to and were the subject of separate adjudication determinations
made under the Act. A determination was made on 20 January 2016
requiring Samsung to pay Duro $9,034,193.29 (excluding GST) plus
interest. A separate determination was made on 10 February 2016
requiring Samsung to pay Duro $333,119 plus E 182,690.45 and CNY
11,617,671.01 (excluding GST) plus interest. A further
determination was made on 3 March 2016 requiring Samsung to pay
Duro $49,642,958.72 (plus GST)
Clause 5.2 of the contract provided that Samsung may, at any
time, convert into money any security where it considers, acting
bona fide, that it is or will be entitled to recover the relevant
amount from Duro under or in respect of the contract.
Duro sought an interlocutory injunction restraining Samsung from
relying upon its contractual entitlement to claim on the Bonds.
Duro submitted that Samsung was not entitled to convert the Bonds
into money on the following grounds:
Demanding payment under the Bonds was disregarding, and failing
to comply with, binding determinations made under the Act; and
Samsung failed to apply the terms of the subcontract in
considering that it is or will be entitled to recover the relevant
amount from Duro (this is not discussed for the purposes of this
paper , however this ground was ultimately rejected by the Supreme
In summary, the Supreme Court held that Duro failed to make out
its case and its application for an interlocutory injunction was
Binding determinations made under the Act
The Act provides a means for adjudicating payment disputes
arising under construction contracts. Duro relied on section 38 of
the Act, which provides that an appointed adjudicator's
determination is binding on the parties. Duro submitted that given
the express provisions of the Act the parties' contractual
rights are affected by any determination, in that a binding
obligation is imposed on the parties in the context of them being
parties to the relevant contract.
The Supreme Court provided guidance on the effect of section 38
of the Act, holding that:
The effect of s 38 is that where
an applicant obtains a determination that the respondent pay it a
sum of money the respondent must pay that sum even though the
respondent may have commenced other proceedings before an
arbitrator or court which, if resolved in favour of the respondent,
may result in the applicant having to repay part of or the whole of
the adjudicated amount to the respondent
In summarising the above, the Court found that while Samsung is
obliged to pay Duro the amount due under the Determinations,
Samsung retains all of its contractual rights including its right
to have recourse to the Bonds.
A party who provides security under a contract, subject to the
terms of the contract, has very limited ability to prevent the
calling up of the security by way of an injunction. The Courts will
look to which party has accepted the risk of that occurring until
there has been a final determination of the parties'
The parties' rights under the Contract are not affected by
any determinations under the Act. In effect, the Act is aimed at
ensuring cash flow, not making determinations on the parties'
contractual rights. However such a determination can be
Warranties can be risk-shifting mechanisms when the party giving the warranty is not the party at fault for the defect.
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