The recent decision in Kronstruct Pty Ltd v UAG Toorak Pty Ltd [2026] VSC 213 highlights the continuing importance of carefully drafted security provisions in construction contracts, while also arriving at a time of significant legislative reform to Victoria’s security of payment regime.

In Kronstruct, M Osborne J granted an interlocutory injunction restraining the principal from calling on a bank guarantee and retention monies provided by the contractor to secure performance under the construction contract. The dispute arose after the parties entered into a side deed and a deed of undertaking and guarantee dealing with unpaid subcontractor claims. The principal alleged Kronstruct breached the deeds, which in turn was a breach of the construction contract and sought recourse to security.  

The Court rejected the principal’s position. Critically, M Osborne J held that a breach of the deed of undertaking and guarantee was not, without more, a breach of the underlying construction contract itself. Because the contractual right to call on security depended upon a contractual breach, the principal lacked a “seriously arguable basis” for recourse to the security. The Court also found that the alleged losses included amounts that had already been paid to subcontractors and described aspects of the principal’s claim as “irrational and misconceived”.  

The decision is significant for two reasons.

First, it reinforces the orthodox position that courts may restrain recourse to security where there is no contractual entitlement to call on the security, notwithstanding broadly drafted recourse clauses. Parties seeking recourse must establish a bona fide basis.

Secondly, the case sits alongside the major 2026 amendments to the Building and Construction Industry Security of Payment Act 2002 (Vic), which now create a statutory regime for the release of performance security. The amended Act introduces new provisions, including ss 17A–17H, establishing:

• statutory entitlements to release of performance security;
• performance security claims and schedules;
• adjudication pathways for disputed claims; and
• notice requirements before recourse to security.

The reforms substantially alter the previous landscape, where disputes concerning bank guarantees and retention were largely determined by contract and equitable principles. Contractors now have a direct statutory pathway to seek release of performance security, while principals face new procedural constraints before calling on security.  

Kronstruct therefore represents something of a transitional decision. Although the dispute was resolved through traditional contractual and interlocutory injunction principles, future disputes are likely to engage the new statutory performance security regime under SOPA Victoria. The interaction between contractual recourse clauses and the new statutory protections will almost certainly become a significant area of construction litigation over the coming years.