Security for performance

AuthorJulian Bailey
Introduction 1056
Retention 1058
(i) What is retention? 1058
(ii) Recourse to retention money 1058
(iii) Trust money and separate accounts 1059
(iv) Release of retention money 1062
(v) Alternatives to retention 1063
Guarantee 1063
(i) Generally 1063
(ii) Writing 1065
(iii) Extent and duration of guarantor’s liability 1066
(iv) Interpretation 1068
(v) Discharge of guarantor’s liability resulting from material change
or prejudice 1069
(vi) Letter of comfort 1071
(vii) Eect of arbitration agreement 1071
(viii) Subrogation 1072
Indemnity 1072
(i) Generally 1072
(ii) Purpose of indemnity 1074
(iii) Indemnity for a party’s negligence 1075
(iv) When does an indemnity bite? 1076
(v) Exclusive remedy 1076
(vi) Subrogation 1076
Insurance 1077
Deposits and escrow accounts 1077
(i) Deposit 1077
(ii) Escrow account 1078
Bonds and bank guarantees 1078
(i) Introduction 1078
(ii) Entitlement to payment 1080
(iii) On-demand bonds and bank guarantees 1081
(iv) Assertion of default 1084
(v) Proof of actual default 1086
(vi) Adjudication bonds (and similar bonds) 1089
(vii) Advance payment bond 1089
(viii) Unlawful demands for payment on liquid security instruments 1090
(ix) Interim remedies for unlawful demands 1099
(x) Step-in rights 1104
(xi) Eect of termination of the underlying contract 1104
(xii) Return of bank guarantee or performance bond 1105
(xiii) Expiration of bank guarantee or performance bond 1106
(xiv) Use of proceeds of security 1106
(xv) Surplus proceeds 1106
Charge 1107
(i) Generally 1107
(ii) Contractual charge (or lien) 1108
(iii) Floating charges and xed charges over contractors’ assets 1109
(iv) Common law lien (or pledge) 1110
(v) Equitable charges or liens 1110
(vi) Retention of title 1111
(vii) Caveats or cautions over title to real property 1114
(viii) Registration of charge 1114
(ix) Personal Property Securities Act 2009 (Cth) (Australia) 1115
(x) Exercise of power of sale 1116
Statutory lien or charge 1116
(i) Introduction 1116
(ii) New South Wales 1117
(iii) Victoria and Tasmania 1119
(iv) Queensland 1119
(v) South Australia 1124
Mortgage 1126
(i) Introduction 1126
(ii) Mortgage of real property 1126
(iii) Chattel mortgages 1127
Vesting, forfeiture and user clauses 1127
(i) Introduction 1127
(ii) Eectiveness and eect 1132
(iii) Wrongful seizure and damages 1135
Collateral warranty 1133
(i) Generally 1133
(ii) Provision of a collateral warranty 1135
(iii) Terms 1136
(iv) Other representations and warranties 1137
12.01 Construction and engineering contracts, and cognate contracts, represent a
consensus of promises. e contractor promises that it will perform certain work, and
the owner promises that it will pay the contractor for performing that work. Where a
party breaks its promise, and fails without proper excuse to do what it promised to do,
the innocent party is, in law, entitled to a remedy – usually damages.1 e adequacy of
damages as a remedy for a breach of contract will, however, depend to a large extent on
the ability of the innocent party to enforce that remedy against the party in breach. If
the party in breach is impecunious, or if the party is dicult to trace or bring an action
against, an award of damages (if obtainable at all) may prove to be an empty remedy.2
12.02 It is because of this potential inadequacy of damages as a remedy for non-ful-
lment of a promise that a party to a construction or engineering contract will often
require that the other party provides some form of security for the performance of the
latter’s contractual obligations.3 Security over project assets, or the assets of a participant
in a project, may also be taken where a third party is funding a party to the project,
and that third party requires the provision of security as a condition of the provision
of funding. Security may be requested or even required by law (in some jurisdictions)
for the performance of an owner’s or main contractor’s payment obligations.4 Further,
in some developed countries schemes of export credits or export credit risks insurance
are provided by governments or private insurers to encourage or assist trade, especially
with developing nations.5 e forms of security which may be proered and received, or
which may be conferred by operation of law, are multifarious.
1 e topic of damages is discussed in Chapter 13.
2 See generally Jones, “How the Construction Contract Can Protect ose in the Construction Industry from the
Eects of Insolvency” (1992) 8 BCL 246.
3 As a cognate matter, a construction contract may empower the contractor to require the owner to provide evi-
dence to the contractor that the owner has nancial arrangements in place to ensure that the contractor can and
will be paid the contract price in accordance with the contract: see, eg, FIDIC Red Book (2nd edition, 2017)
clause 2.4 (the contractor may terminate the contract if adequate evidence of the owner’s nancial arrangements
is not provided: clause 16.2.1(a), as to which see NH International (Caribbean) Ltd v National Insurance Property
Development Co Ltd [2015] UKPC 37). In the US a similar right may be implied by law by the operation of the
“doctrine of demands for adequate assurance”, as to which see paragraph 9.36.
4 Certain Australian statutes, discussed herein, aord the benet of security for payment to contractors or sub-
contractors who perform building or engineering work. In several North American jurisdictions, “mechanics’ lien”
or “construction lien” legislation operates so as to confer upon an unpaid contractor a lien or charge over the land
upon which it performs work: see, eg, Macklem, “Mechanics’ Lien Legislation in Canada” [1984] ICLR 199.
Agreements for the waiver of lien rights may be rendered inoperative by statute: see Reynolds, “e Common
Law Enforceability of Exculpatory Provisions in Canadian Construction Contracts: e Divination of Intent
– e Primacy of Commercial Reasonability” [2004] ICLR 402 at 405. For the position under German law, see
Schramke and Yazdani, “International Projects Under German Law – Traps for Developers and Investors” [2002]
ICLR 438. See also Speranza, “An evaluation of Australian security of payment and United States lien law” (2011)
27 BCL 169.
5 See, eg, Stolzenberg, “e Law and Practice of Export Credit in West Germany” [1983] ICLR 73; Goudsmit,
“Export Credit Risks Insurance in the Netherlands” [1983] ICLR 81; Rosell, “Non-French Companies and French
Export Buyer Credits” [1983] ICLR 83; Ortner, “Export Risk Guarantees in Austria” [1983] ICLR 91; Perolini,
“Swiss International Contractors, eir Export Risk Guarantee Coverage and Suggestions of Common Interest”
[1984] ICLR 13; Ali, “Export Credit Financing in the United Kingdom” [1984] ICLR 28; Picanol, “Export Cred-
its in Spain” [1984] ICLR 390; Bollinger, “Export Credit Cover for Construction Projects Executed by Subsidiary
and Associated Companies Abroad” [1985] ICLR 213; Vataja, “e Role of the Finnish Export Credit Limited
and the Export Guarantee Board in Project Exports” [1985] ICLR 293; Wiwen-Nilsson, “Ocial Export Credit
Arrangements in Sweden” [1985] ICLR 370; Al Saadoon, “Negotiating Construction Contracts with an Iraqi
Government Entity” [2013] ICLR 114 at 120–121. See also Export Credits Guarantee Department v Universal
Oil Products Co [1983] 1 WLR 399, and the web site of the UK’s Export Finance Department: e
Multilateral Investment Guarantee Agency – a part of the World Bank Group – provides political risk insurance
guarantees for companies engaging in World Bank projects in developing nations: see

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