“OUT-OF-POCKET” Security, Out Of Control? 1
TINA FUNGE **
Email [email protected]
It is time to interrogate the logic behind the habitual allocation of the risk of being out-of-pocket pending the resolution of a dispute to a contractor, which has been standard practice in the construction industry for decades. Why is it that an owner of a project is perceived to be the vulnerable party in need of protection by way of security for this risk? Contractors are also exposed to financial risks in an industry where disputes are rife, and losses are common. This paper explores relevant case law and risk theory to provide an opinion on the effectiveness and fairness of this risk allocation device.
In Australia clients commonly seek security from a contractor in the form of bank guarantees, insurance bonds or cash retention. It is provided for a number of different purposes, for example, to secure an advance payment made by the client, to secure payment made in respect of unfixed plant and equipment and to secure the contractor's performance. 2 Increasingly, in Australia however, security is also being used to allocate the risk of who should be out of pocket pending the resolution of a dispute (what I have termed “out-of-pocket” security). “Out-of-pocket” security has become a contractual coffer for clients to use as leverage in the negotiation of disputes, when projects become distressed or when relationships have soured. The systematic amendment of standard form contracts is making it easier for clients to make a call, 3 and there has been a consequent increase in the number of high profile cases where contractors have attempted to restrain calls. 4 A client has
* This article was awarded highly commended by the Society of Construction Law Australia in July 2019 as part of the Brooking Prize.
** Tina Funge is a construction lawyer and compliance professional who has worked in the industry for over 20 years.
1 These are the author's views, not her employer's or other organisations.
2 General Conditions of Contract (AS 2124–1992), clause 5.
3 Sharkey, J, et al, Standard Forms of Contract in the Australian Construction Industry (Research Paper, University of Melbourne, June 2014), 46–49.
4 Barrett, J, Rio Tinto's Andrew Harding defends AUS$100 million bond call in Supreme Court examination (1 October 2015) Australian Financial Review http://www.afr.com/business/mining/rio-tintos-andrew-harding-defends-100m-bond-call-in-supreme-court-examination-20151001-gjz022 (last accessed 26 November 2019).
Pt 1] “Out-of-Pocket” Security, Out of Control?