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Note: In connection with a subcontract to assist in building a new Darwin prison facility, Honeywell Ltd. (Subcontractor/Applicant) was required to provide a guarantee in favor of Lend Lease Building Contractors Pty Ltd. (Contractor/Beneficiary). When disputes arose over the guarantee and payment, Subcontractor/Applicant sued Contractor/beneficiary for non-payment under Subsection 30 of the Construction Contracts (Security of Payments) Act (the "Act”).

Subcontractor had provided the bank guarantee, but it had expired and Subcontractor failed to provide a replacement bank guarantee within seven days of the expiration as obligated under clause 6.1(b) of the Subcontract. Contractor relied on clause 6.1 of the Subcontract to contend that Subcontractor was not entitled to the payment it claimed because Subcontractor had breached its obligation to provide required guarantees under clauses 6.1(a) and 6.1(c)(i) of the Subcontract.

The Adjudicator concluded that Subcontractor was “entitled to payment … only after provision of the replacement bank guarantee in the sum of USD 734,693.20.” Contractor brought an action seeking to quash the Adjudicator’s decision because the Adjudicator made a finding that Contractor was liable to pay USD 734,693.20 to Subcontractor, when he had no jurisdiction to determine such amount. Contractor alleged that, under Clause 6.1(c)(iii), it had the right to “retain any progress payment under the aggregate amount retained … [equal to] the amount of the Bank Guarantee(s) which the Subcontractor has failed to provide.”

On appeal, the Supreme Court of the Northern Territory, Kelly, J. dismissed Contractor’s claim and ruled that the Adjudicator had validly decided not to dismiss Subcontractor’s claim pursuant to Subsection 33(1)(a) and made “a bona fide attempt to do what was required of it under Subsection 33(1)(b), namely to determine whether [Contractor] was liable to pay money to [Subcontractor] under that payment claim and then to determine how much was payable and when it should be paid.”

Subsection 48(3) of the Act provides that “a decision or determination of an adjudicator on an adjudication cannot be appealed or reviewed” except as provided by subsection (1). Contractor contended that the adjudicator’s decision was appealable because the Adjudicator had failed to determine a necessary jurisdictional fact before exercising its power to adjudicate under Subsection 33.

Excerpt from Opinion of Text of Contract regarding Guarantees:

Clause 6.1 of the Subcontract provides that:

6.1 Bank Guarantees

(a) On the date of the Subcontract the Subcontractor shall provide Bank Guarantees to the Builder totalling the percentage stated in Schedule 1 of the Subcontract Sum.

(b) If either:

(i) the Subcontract Sum is increased by more than the amount stated in Schedule 1 above the sum for which security was last provided;

(ii) the Builder has recourse to the Bank Guarantees; or

(i) the Bank Guarantees cease to be enforceable,

then within 7 days after any such event the Subcontractor shall provide a further Bank Guarantee so that the total of the Bank Guarantees then held by the Builder is not less than the percentage stated in Schedule 1 of the then adjusted Subcontract Sum.

(c) If the Subcontractor is in breach of any of its obligations under clause 6.1:

(i) the Subcontractor shall have no entitlement whatsoever to payment under or in connection with the Subcontract or the Works until 7 days after such breach is remedied;

(ii) the Builder may nevertheless in its absolute discretion make a payment; and

(iii) the Builder may, in addition to its other rights under the Subcontract, retain any progress payment under the aggregate amount retained under this clause 6.1(c)(iii) equals the amount of the Bank Guarantee(s) which the Subcontractor has failed to provide.

[GJL]

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The views expressed in this Case Summary are those of the Institute of International Banking Law and Practice and not necessarily those of the ICC or Coastline Solutions.