Generally, where a successful adjudication applicant applies to the court for leave to enforce a determination pursuant to s43 of the Construction Contracts Act 2004 (WA) it is expected that the court will exercise its discretion and grant the leave sought.

However, the recent decision of the Western Australian Supreme Court in Hamersley Iron Pty Ltd v James [2015] WASC 10 (‘Hamersley v James‘) challenges that assumption in circumstances where:

1. A successful adjudication applicant is insolvent at the time of applying for adjudication; and
2. The respondent has an arguable case that it has a counterclaim against the applicant pursuant to s 553C Corporations Act 2001 (Cth) (‘the Act’).

 

The Decision

Hamersley Iron Pty Ltd (‘Hamersley’) and Forge Group Construction Pty Ltd (Formerly Cimeco Pty Ltd)(in liq)(receivers and managers appointed) (‘Forge’) were parties to a contract for the design and construction by Forge of fuel hubs. Hamersley instructed Forge to discontinue work on one of the hubs. Following this reduction in the scope of works, the parties were not able to agree to the final value of the contract of works.

On 17 March 2014, Forge served an adjudication application under s 26 of the Construction Contracts Act 2004 (WA).

Hamersley contended in response that, of the approximately $14.3 million Payment Claim submitted on 4 February 2014, Forge had only demonstrated completion of approximately $641,000 of the remaining scope of work. Hamersley also contended that it was entitled to set-off approximately $7.4 million under cl 47(a) of the general conditions of the contract, and under s 553C of the Act.

Hamersley asserted that the counter-claim was made up of:

• Accommodation and flight backcharges in the sum of approximately $1.3 million incurred by Hamersley in returning workers to the capital cities closest to their home when Forge terminated their employment;
• Damages under general contract law for Forge’s repudiation in dismissing its workforce. Hamersley claimed its cost of completing the remaining work under the contract, less the price it would have paid to Forge under the contract for that work.

Forge submitted that a substantial part of Hamersley’s counterclaim did not exist at the relevant date, i.e ‘at the time the liquidation took effect’. The basis of this submission was that Forge appointed administrators, and receivers and managers were also appointed by Forge’s principal secured creditor, on 11 February 2014 but Hamersley did not terminate the contract until 24 February 2014.

The court agreed that s 553C is a ‘statutory directive which operates at the time the liquidations takes effect’.  However, Forge’s argument was rejected on the following reasoning:

‘Section 553C applies to liabilities which, at the date of insolvency, may be due but not yet payable, or may be unascertained in amount, or contingent…A contingent claim can be set off under s 553C even if the contingencies giving rise to the claim arise after the winding up commences’.

Hamersley argued, and Beech J accepted, that these counter-claims raised “serious questions” for determination at a trial.

In respect of the damages under general contract law, the court considered that:

‘for the purposes of establishing a serious question to be tried…evidence that the contracts were ‘a direct result of Forge’s insolvency and were needed in order to complete the Works’ is sufficient’.

Beech J also accepted there was a serious question to tried in respect of the costs incurred in transporting workers.

Hamersley contended that if these issues were decided in Hamersley’s favour, this would result in judgment against Forge in a sum that exceeded the total of the adjudicator’s award and all other claims Forge was making against Hamersley. Beech J accepted that while Hamersley had recourse to the security furnished by Forge and recovered approximately $5.6 million, Hamersley’s counterclaim still exceeded the Adjudicated Sum by more than $2.1 million.

On that basis, Hamersley sought to dismiss Forge’s application to the Supreme Court for leave to enforce the adjudicator’s determination.  In deciding whether the application ought to be dismissed, the Beech J considered the ‘object of set-off in bankruptcy’, which is ‘to do substantial justice between the parties’ .

Applying Gye v McIntyre (1991) 171 CLR 609, it was held that:

‘Where there are genuine mutual debts, credits or other dealings, it would be unjust if the trustee in bankruptcy could insist upon having one hundred cents in the dollar upon the whole of the debt owed to the bankrupt but at the same time insist that the bankrupt’s debtor must be satisfied with a dividend of some few cents in the dollar on the whole of the debt owed by the bankrupt to him’.

To that end, the court ordered that Forge’s application for leave should be stayed until Hamersley agreed the quantum of its counterclaim with Forge, or proved its counterclaim by commencing proceedings against Forge.

Beech J  considered that dismissing the application would not afford justice to the parties as it would then be open to Hamersley to abandon its counterclaims and avoid ever having to pay the amount awarded to Forge.

Key Takeaways

The decision in Hamersley v James is a positive result for respondents such as Hamersley, who are unable to prove their counter-claim on the balance on probabilities before an adjudicator. The threshold in the court’s inquiry is a lower one, being 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.

On the other hand,  the decision should cause liquidators to think twice about whether there is any commercial utility in seeking or progressing with adjudication applications, given the risk that they might prove unenforceable. It is to be expected that this decision will be relied upon in resisting applications by insolvent contractors for leave to enforce adjudicators’ payment awards.