Recourse and Return of Security

Construction contracts generally provide for security for the performance of obligations under the construction contract by the builder or subcontractor undertaking the building works. A party may have access to the security where the contract allows for that to occur, which is usually in the event of a breach.

It is advisable that, rather than cash retention, security is provided in the form of either a security bond or bank guarantee, where a financial institution unconditionally agrees to pay, on demand, to the beneficiary an amount alleged to be owed under the contract.

In the event of a dispute between the parties, it is a common occurrence that a company will apply to the Court for injunctive relief to restrain the beneficiary from calling on the security.

Generally, the court will not prevent a party from having recourse to security except in the following circumstances:

• the beneficiary is acting unconscionably or fraudulently;
• the contract contains a restriction on the beneficiary’s right to call on the security;
• there is a genuine dispute over whether the beneficiary is entitled to the money from the contractor or subcontractor; and
• the ‘balance of convenience’ is to leave the security intact until the dispute is resolved.

If you are involved in a building and construction dispute, call us today for a free consultation and we can determine whether either there is a risk that your security could be called upon, or conversely, whether you are entitled to recourse against a security yourself.