Securing contractual rights destroys mutuality and right to claim set-off

The recent WA Supreme Court decision of Hamersley Iron Pty Ltd v Forge Group Power Pty ltd (in Liquidation) (Receivers and Managers Appointed) [2017] WASC 152 illustrates the risk of relying on contractual and statutory set-offs where the counterparty has granted security to lenders in an insolvency situation.

The Court held that mutuality was destroyed, and that contractual and insolvency set-off were unavailable to a counterparty to a construction contract, where the other party secured its rights under the contract to a financier. This decision will impact the negotiation and drafting of contracts in the future, as well as how and what security is granted over rights under a contract.