Advanced Constructions Pty Ltd v Lainson Holdings Pty Ltd

[2019] NSWSC 1484

Supreme Court

New South Wales

Medium Neutral Citation:	Advanced Constructions Pty Ltd v Lainson Holdings Pty Ltd [2019] NSWSC 1484
Hearing dates:	22 July 2019
Date of orders:	22 July 2019
Decision date:	22 July 2019
Jurisdiction:	Equity - Technology and Construction List
Before:	Rein J
Decision:	1. The Defendant is restrained from calling upon either of the Bank Guarantees and they are to be delivered up forthwith to the Plaintiff. 2. A declaration that the Plaintiff was entitled as at 20 March 2019 to return of any security given by the Plaintiff to the Defendant, including any instruments replacing that security. 3. The Defendant to pay the Plaintiff’s costs of the proceedings.
Catchwords:	CONTRACTS – Termination – Consequences of termination – Where the plaintiff seeks return of two bank guarantees given to the defendant pursuant to a contract related to a building project since abandoned – Where, on the plaintiff’s case, the contract between the parties had been validly terminated for insolvency and, although the contract did not explicitly require return of the bank guarantees, the defendant can demonstrate no right to retain them – Defendant disputes that the contract was validly terminated due to the plaintiff’s alleged non-compliance with notice provisions – Where, in any case, the contract has clearly been frustrated and cannot be performed due to the land having been sold, with the consequence that the bank guarantees should be returned.
Legislation Cited:	Nil
Cases Cited:	Brisbane City Council v Group Projects Pty Ltd (1979) 145 CLR 143 Codelfa Construction Pty Ltd v State Rail Authority (NSW) (1982) 149 CLR 337 Davis Contractors Ltd v Fareham Urban District Council [1956] AC 696 Eddy Lau Constructions Pty Ltd v Transdevelopment Enterprise Pty Ltd [2004] NSWSC 273 J. Lauritzen AS v Wijsmuller BV [1990] 1 Lloyd’s Rep 1 Joseph Constantine SS Line Ltd v Imperial Smelting Corporation Ltd [1942] AC 154
Texts Cited:	J. W. Carter, Contract Law in Australia (LexisNexis Butterworths, 7th ed, 2018) John Dorter and John Sharkey, Building and Construction Contracts in Australia (Thomson Reuters, loose-leaf, 2019)
Category:	Principal judgment
Parties:	Advanced Constructions Pty Ltd (Plaintiff) Lainson Holdings Pty Ltd (Defendant)
Representation:	Counsel: Mr I. G. Roberts SC (Plaintiff) Mr J. Adamopoulos (Plaintiff)
File Number(s):	2018/390417
Publication restriction:	Nil

EX TEMPORE Judgment

1. The background to this matter is as follows.

2. Advanced Constructions Pty Ltd (“Advanced”), the plaintiff, for whom Mr I. G. Roberts SC with Mr J. Adamopoulos appear, is a builder. On 17 May 2017 Advanced entered into a construction contract (the “Contract”, which includes the “Formal Instrument of Agreement” and the “General Conditions”) with Lainson Holdings Pty Limited ("Lainson") pursuant to which Advanced agreed to construct a building at a site in Cronulla owned by Lainson. It was a term of the Contract that Advanced provide two bank guarantees (the “Bank Guarantees”) in favour of Lainson, each of $706,250, as security for Advanced's performance under the Contract. Advanced provided the Bank Guarantees as required.    

3. During the course of construction, Lainson and its financier, PT Ltd (“PT”), entered into the Contractor Tripartite Deed – Cronulla (the “Tripartite Agreement”) with Advanced: see the Court Book p. 101 (the “CB”, also referred to as “Exhibits A1 and A2” – all CB page references are to Exhibit A2 unless specified otherwise). The Tripartite Agreement modified the Contract and required Advanced to give notice of default by Lainson to PT.

4. PT appointed receivers and managers in respect of Lainson's property on 5 December 2018. On 14 December 2018 the receivers notified Advanced (CB 219) that they would not adopt the Contract, that they had taken possession of the site and that the receivers understood that Lainson was not able to perform the Contract (see CB 161). Advanced was given access to the site for the purpose of retrieving its plant and equipment.

5. On 19 February 2019 Duffy Kennedy Pty Ltd applied to this Court to wind up Lainson. The hearing has been delayed several times. I understand it has been fixed for hearing on 7 August 2019.

6. On 11 March 2019 Advanced wrote to PT, through its solicitors, enquiring whether PT intended to remedy breaches of the Contract and on the Tripartite Agreement (see CB 220). The response was that PT did not intend to do so (see CB 224).

7. On 20 March 2019 Advanced gave notice to Lainson and a superintendent appointed under the Contract that it had terminated the Contract on the basis of insolvency provisions set out in cl 39.11 of the General Conditions. Advanced relied on three sub-cls of 39.11, namely (d)(iii)-(iv) and (vii), which are as follows:

“If:

[…]

d) in relation to a party being a corporation:

[…]

(iii) a controller or administrator is appointed;

(iv) an application is made to the court for its winding up and not stayed within 14 days;

[…]

(vii) a mortgagee of any of its property takes possession of that property,

then, where the other party is:   

[…]

B) the Contractor, the Contractor may, without giving notice to show cause, exercise the right under subclause 39.9."

8. It is noted in 39.11 that:

“The rights and remedies given by this subclause are additional to any other rights and remedies. They may be exercised notwithstanding that there has been no breach of Contract.”

9. Sub-cl 39.9 gives the right to the contractor to terminate the Contract. There are two other provisions which I should mention in the General Conditions, which are of relevance. The first is cl 40, headed “Termination by frustration”:

“If the Contract is frustrated:

(a)    the Superintendent shall issue a progress certificate for WUC carried out to the date of frustration, evidencing the amount which would have been payable had the Contract not been frustrated and had the Contractor been entitled to and made a progress claim on the date of frustration:

(b)    the Principal shall pay the Contractor:

(i) the amount due to the Contractor evidenced by all unpaid certificates;

(ii) the cost of materials and equipment reasonably ordered by the Contractor for WUC and which the Contractor is liable to accept, but only if they will become the Principal's property upon payment; and

(iii) the costs reasonably incurred:

(A) removing temporary works and construction plant;

(B) returning to their place of engagement the Contractor, subcontractors and their respective employees engaged in WUC at the date of frustration; and

(C) by the Contractor in expectation of completing WUC and not included in any other payment; and

(c)    each party shall promptly release and return all security provided by the other.”

10. Also relevant is cl 5 of the General Conditions, of which 5.1 and 5.2 are in the following terms:

“5.1    Provision

Security shall be provided in accordance with Item 13 or 14. All delivered security, other than cash or retention moneys, shall be transferred in escrow.

5.2    Recourse

Security shall be subject to recourse by a party who remains unpaid after the time for payment where at least 5 days have elapsed since that party notified the other party of intention to have recourse."

11. Reference should also be made to cl 4.1 of the Formal Instrument of Agreement (which forms part of the Contract, together with the General Conditions) titled Bank Guarantee (CB 2):

“4.1 Bank Guarantee

The Principal will ensure that the Bank Guarantee referred to in item 13 of Annexure Part A AS4000-1997:

(a) Is held by its Solicitor as an escrow, pending any right or entitlement to claim upon that Bank Guarantee which may arise pursuant to the terms of the Contract; and

(b) Hereby authorises its Solicitor (or any other Solicitor authorised to hold the Bank Guarantee pursuant to subclause (a) hereof), to release the Bank Guarantee to the Contractor upon the insolvency of the Principal, termination of the Contract by the Contractor as a result of the Principal’s default, or upon practical completion, pursuant to the terms of the Contract.”

12. Advanced relies on these provisions and claims that it has validly terminated the Contract and is entitled to return of the Bank Guarantees.

13. In the alternative, Advanced asserts that the Contract has been frustrated and relies on that as a separate basis for the return of the Bank Guarantees.

14. After this litigation was commenced by Advanced, Advanced agreed to replace what were then the existing Bank Guarantees with two new guarantees on two separate occasions because the previously provided guarantees were due to expire. That step was taken to preserve claims of Lainson that Lainson was entitled to retain the Bank Guarantees. It was for this reason that today Advanced needed to file a Further Amended Summons and a Further Amended Technology and Construction List Statement to refer to the most recently provided Bank Guarantees (which are due to expire in August).

15. Lainson, on 18 April 2019, filed a response to Advanced’s Technology and Construction List Statement raising various issues, to which I will return. Advanced filed a reply to that, raising the frustration of contract point. Orders were made for the filing of evidence by the parties, with which the Plaintiff complied but Lainson failed to file any evidence. Further orders were made for the filing of evidence by Lainson but, notwithstanding a number of opportunities to do so, Lainson has filed no evidence. It should also be noted that in these proceedings not only has Lainson not put on any evidence in support of its claim, as required by the orders made by this Court, but neither the lender nor the receivers have ventured forth to resist Advanced’s demand for the return of the Bank Guarantees.

16. On 21 June 2019, a solicitor on behalf of Lainson appeared at a directions hearing and indicated that he had filed a Notice of Ceasing to Act and was no longer acting for the company. His Honour Hammerschlag J ordered that notice be given of this hearing date, after it was fixed, to the director of Lainson, which order was complied with. Today Mr Charles Lainson, a director and shareholder of Lainson, sought, initially, to appear on behalf of the company and to file a Notice of Motion for an adjournment of the proceedings but, after the matter was ventilated for some time, he decided that he would not proceed with the application for leave to appear on behalf of the company and to have the proceedings adjourned.

17. The only evidence that is contained in the CB is the evidence, therefore, of the Plaintiff.

18. One issue which was ventilated in Lainson’s List Response was the question of whether or not the right to terminate could be exercised by Advanced without it having to wait for 28 days to expire. Lainson's argument appeared to be that the constraints imposed in cl 39.9 of the General Conditions had to be met if Advanced wanted to rely on cl 39.11. I do not think this is correct. It is clear by the terms of cl 39.11 that insolvency is to be treated quite differently from other reasons for terminating and the right to terminate for insolvency is not subject to the requirement for notice to show cause imposed by cl 39.7 and 39.9. There was no requirement, therefore, to wait 28 days. Notice was given by the Plaintiff to the Defendant and its solicitors, and to the receivers on behalf of the lender (see CB 220 to 234).

19. There is another issue which arises from the List Response which is to be found at C7 of the List Response filed and found at CB 17-18, which refers to particulars in relation to cl 5.2 of the General Conditions and a reference to what is described as a pending claim of $1.13 million approximately. These particulars acknowledge (see C7 sub-para (d)) that the terms of the Contract dealing with claims for which recourse could be had to the Bank Guarantees are dealt with in 5.2 of the General Conditions. There is no evidence that any notice was given by Lainson to the Plaintiff in relation to recourse as required by cl 5.2. Furthermore, no evidence has been filed on behalf of Lainson in support of what is alleged in the List Response. It would have been necessary, if this was to be promoted as a reason to resist the return of the Bank Guarantees, for Lainson to provide all the relevant documentation in support of its claim and also for evidence of notice having been given. Nothing has been provided. Accordingly, Lainson has not supported its claim to resist the return of the Bank Guarantees.

20. Advanced has established that it has validly terminated the Contract. The next question is whether that leads to the conclusion that the Bank Guarantees must be returned. It appears that the Contract does not expressly provide that the Bank Guarantees are to be returned following valid termination by Advanced for insolvency (in contrast to where the Contract has been terminated by frustration: see cl 40(c)) but Advanced contends that it is implicit from the terms of the Contract that they ought to be returned and calls in aid of that contention two matters. First, Mr Roberts refers to Eddy Lau Constructions Pty Ltd v Transdevelopment Enterprise Pty Ltd [2004] NSWSC 273 at [94] where Barrett J (as his Honour then was) held that, whilst there was no express provision in the Contract as a source of right to have the Bank Guarantees returned, no basis had been advanced by the parties seeking to retain the Bank Guarantees. That is the position here. Mr Roberts also refers to cl 4.1 of the Formal Instrument of Agreement which I have earlier set out at [11] above, and submits that those terms support the conclusion that if the conditions required for recourse have not been met under the Contract the Bank Guarantees should be returned. I accept that the parties must be taken to have accepted that valid termination of the Contract would require return of the Bank Guarantees unless the right to call upon the Bank Guarantees had already accrued.

21. In any event, I am satisfied that the Contract has been terminated by frustration. It is not possible for the Contract to be performed and has not been possible since the date that the receivers sold the site on which the building was to be constructed. It was sold to Jingle Pty Ltd on 4 April 2019 (see CB 244). Even if the Contract had been not terminated validly by Advanced as at that date, the Contract could no longer be performed and was frustrated. In DavisContractors Ltd v Fareham Urban District Council [1956] AC 696, Lord Radcliffe at 729 described “frustration” thus:

“Frustration occurs whenever the law recognizes that without default of either party a contractual obligation has become incapable of being performed because the circumstances in which performance is called for would render it a thing radically different from that which was undertaken by the contract... It was not this that I promised to do.”

This was adopted by Stephen J (as his Honour then was) in Brisbane City Council v Group ProjectsPty Ltd (1979) 145 CLR 143, 161, with whom Murphy J agreed, and by the majority in Codelfa Construction Pty Ltd v State Rail Authority (NSW) (1982) 149 CLR 337, 357 per Mason J (as his Honour then was), with whom Stephen and Aicken JJ agreed at 345 and 376-80 respectively): and see J. W. Carter, Contract Law in Australia (LexisNexis Butterworths, 7th ed, 2018) at [33-43] – [33-48] and John Dorter and John Sharkey, Building and Construction Contracts in Australia (Thomson Reuters, loose-leaf, 2019) at [1.790].

22. I recognise there might have arisen a question as to whether the fact that the site was sold due to Lainson’s financial position should be regarded as a situation of “without default”, but there are several answers to such a contention:

1. The argument that the frustration was self–induced would need to be specifically pleaded and proven (see Joseph Constantine SS Line Ltd v Imperial Smelting Corporation Ltd [1942] AC 154). It has not been raised by Lainson.

2. It is not Lainson who asserts frustration but Advanced and Advanced has not induced the sale of Lainson’s site. There is authority that the “without fault” requirement refers to the fault of the party asserting frustration: see J.Lauritzen AS v Wijsmuller BV [1990] 1 Lloyd’s Rep 1, 8 per Bingham LJ (with whom it would appear Dillon LJ agreed):

“The essence of frustration is that it should not be due to the act or election of the party seeking to rely on it (Hirji Mulji, sup., at p.303; p.530; Joseph Constantine Steamship Ltd. sup., at p.728). A frustrating event must be some outside event or extraneous change of situation (Paal Wilson & Co. A/S v. Partenreederi Hannah Blumenthal (The Hannah Blumenthal), [1983] 1 Lloyd’s Rep. 103 at p.112; [1983] 1 A.C. 854 at p.909).

23. In these circumstances, either basis is sufficient for the Plaintiff to succeed for the return of the Bank Guarantees and I make orders in accordance with paras 1, 2, 3, 5 and 6 of the Further Amended Summons.

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Decision last updated: 29 October 2019