Recovering security in construction contracts: Learnings from Western Australia

Most commercial construction contracts require contractors to provide security in relation to their performance of the works, usually in the form of retention or bank guarantees. Such security is generally required to be partially released under the contract upon reaching practical completion or the issuance of the Certificate of Practical Completion. The remaining portion is released when the Final Certificate is issued after the defects liability period expires and subject to the principal or contractor up the line having recourse to it.

But what if that security is not returned in line with the contract? This can create cashflow challenges for the contractor. If a bank guarantee has been provided, this could affect the contractor’s ability to secure further bank guarantees from financial institutions for future projects.

In Queensland, if the work being carried out is ‘building work’ for the purposes of the Queensland Building and Construction Commission Act 1991 (QBCC Act), there is some protection in that the maximum amount of security that may be retained up until practical completion is 5 per cent of the contract sum. Once practical completion is reached, no more than 2.5 per cent of the contract price may be held by the principal or contractor up the line.

This of course does not apply to civil contractors who are not performing building work. In any event, it is not unheard of for principals or contractors up the line to ignore both the statutory and contractual requirements to return the security where the parties are in a dispute or if the principal or contractor up the line is not satisfied with the outcome of the dispute, leaving the parties in a deadlock.

So the question remains – if you are the contractor, how do you recover your security if it hasn’t been used or accessed?

If the site is in Queensland and retention monies are held as security, a claim can be made under the Building Industry Fairness (Security of Payment) Act 2017 (Qld) (BIF Act) (see EHome Construction Pty Ltd v GCB Constructions Pty [2020] QSC 291). In Victoria, the Supreme Court has determined that a claim for reduction in retention monies is not a claim in relation to construction work or the supply of related goods and services (see Watpac Construction v CGM [2020] VSC 637 and Punton’s Shoes Pty Ltd v Citi-Con (Vic) Pty Ltd & Anor [2020] VSC 514).

While there are no cases that directly relate to claims for the return of security in the form of bank guarantees, under the applicable legislation in those states, the adjudicator does not have jurisdiction to order the return of a bank guarantee. 

The result is that where the parties are in dispute and/or reached an impasse, unless an outcome for the return of the bank guarantee can be negotiated (requiring the contractor to have some leverage), the contractor’s only option is to apply to the court for a declaration that it is due for release and an order for that release. The cost of this can be disproportionate to the value of the security the contractor is seeking to recover.

Western Australia is now leading the way in making the process for recovering security owed under the contract much simpler with the commencement of certain provisions under the Building and Construction Industry (Security of Payment) Act 2022 (WA) (WA SOP Act).

WA SOP Act – performance security

For construction contracts entered into from 1 August 2022, a claimant may seek the release of performance security in a payment claim and subsequent adjudication (or review adjudication).

As “performance security” includes both “retention money” and “performance bonds”, a claimant may seek the release of either or both types of security.

After 1 February 2024, sections 59 – 61 of the WA SOP Act will come into force and will allow a claimant to seek to substitute a performance bond in place of retention money.

If the claim for release of performance security proceeds to adjudication, an adjudicator is authorised by the WA SOP Act to require the release of any performance security:

“that is no longer required because the obligations secured by the performance security have been performed”; and

“if it is due for release in accordance with the relevant construction contract.”

These requirements do not restrict the statutory right to seek the release of security in a payment claim but will limit an adjudicator’s power to determine the release of that security.

Any entitlement to the return of security will depend on the terms of the relevant construction contract.

The recovery of security in Western Australia is further facilitated with the establishment of a retention money trust scheme applicable to particular construction contracts under the WA SOP Act. There is a similar scheme in Queensland, but the scheme’s roll out to contracts of less than $10 million has been pushed back to 2025. This scheme also does not relate to security held as bank guarantees or performance bonds.

In Western Australia, the retention money trust scheme applies to retention money held as performance security under:

• construction contracts entered into from 1 February 2023, where the value of the contract (including variations) is over $1,000,000 (including GST)
• construction contracts entered into from 1 February 2024, where the value of the contract (including variations) is over $20,000 (including GST).

These monetary thresholds are not retrospective, meaning that the scheme will not apply to construction contracts entered into before the relevant commencement date which subsequently exceed the relevant threshold after the commencement date.

The retention money trust scheme does not apply to a construction contract:

• where a party is a government party
• with a value less than those stated above
• for home building work, unless:
  • the principal is a corporation; or
  • the work is carried out in relation to multiple dwellings or for the purposes of a residential development business of the principal; or
  • the contract is between a head contractor and a subcontractor, or between two subcontractors.
• that is a small-scale residential contract (i.e., in respect of a single dwelling, or for an associated structure of a single dwelling, or for an associated structure on common property under the Community Titles Act 2018 (WA) or the Strata Titles Act 1985 (WA)).

The retention money trust scheme requires that retention money:

• is held on trust for the benefit of each party to the construction contract in accordance with the contract terms
• be deposited into a trust account complying with the statutory requirements
• is not available to third-party creditors of the contract parties.

If the retention money is not paid into a trust account as required, the trust applies to the property of the party retaining the money up to the value of the retention money.

Retention money can be withdrawn from the trust account under the following circumstances:

• for the purpose of release of or recourse to the retention money “in accordance with the relevant construction contract”
• as agreed between the parties to the relevant construction contract
• in accordance with a determination of an adjudicator, arbitrator, court, tribunal, or expert
• payment to the party who established the trust of interest earned on the money prior to the required release date under the relevant construction contract.

To further assist contractors and subcontractors with cashflow, for construction contracts entered into from 1 February 2024, a party providing retention money as security may claim the release of retention money in substitution for a performance bond (e.g., a bank guarantee).

There will be additional requirements for a valid payment claim seeking substitution of retention money, including to include a draft of the performance bond and certain other information specified by the WA SOP Act.

The proposed substitute performance bond and the institution issuing the bond must also meet certain criteria, including that the proposed performance bond is unconditional, does not expire, and is wholly irrevocable. If the claim for substitution of performance security proceeds to adjudication, an adjudicator will be authorised by the WA SOP Act to require the respondent to substitute the performance security proposed in a payment claim.

Key takeaways

• Contractors and subcontractors performing construction work in Western Australia now have the benefit of clear rights and procedures to recover their performance security. 
• The position remains more complicated in other jurisdictions. It will be interesting to see if those other jurisdictions follow suit by enacting provisions to facilitate the recovery of all types of performance security.

If you require assistance with understanding your notification clause or assessing whether notification has been given as required, please get in touch with our team below.

Disclaimer
The information in this article is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, we do not guarantee that the information in this article is accurate at the date it is received or that it will continue to be accurate in the future.

Published by:

Kirsty Smith

Luke Moore

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