American Re-insurance Company v Thomas Gervay

Case •

[2005] NSWSC 802

•

12 August 2005

No judgment structure available for this case.
CITATION:

American Re-insurance Company v Thomas Gervay [2005] NSWSC 802
This decision has been amended. Please see the end of the judgment for a list of the amendments.
HEARING DATE(S): 1/08/05
 
JUDGMENT DATE : 


12 August 2005

JURISDICTION:

Equity Division
Commercial and Construction List
JUDGMENT OF:

Einstein J

DECISION:

Verdict to be entered for plaintiff.
CATCHWORDS:

Commercial Law - Contract Performance Bonds - Proper construction - Commercial purpose of certification procedure - Whether Surety under any obligation to satisfy itself as to the existence of circumstances justifying demand for payment made under the Performance Bonds
CASES CITED:

Ankar Pty Limited v National Westminster Finance (Australia) Limited (1987) 162 CLR 549
Antaios Compania Naviera SA v Salen Rederierna AB [1985] AC 191
Australian Broadcasting Commission v Australasian Performing Right Association Ltd (1973) 129 CLR 99
BI (Australia) Pty Limited v. Cigna Insurance Australia Limited, (1990) 11 BCL 64
Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337
Edward Engineering Limited v Barclay's Bank International Limited [1978] 1 Lloyd's Rep 166
Gold Coast Limited v. Caja De Ahorros Del Mediterraneo [2002] 1 Lloyd's Rep 617
Hide & Skin Trading v Oceanic Meat (1990) 20 NSWLR 310
I.E. Contractors Ltd v Lloyd's Bank Plc [1990] 2 Lord's Reports 496
International Fina Services AG v Katrina Shipping Ltd ("The Fina Samco") [1995] 2 Lloyd's Rep 344
Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896
Lakatoi Universal & Walker [2000] NSWSC 113
L Schuler AG v Wickman Machine Tool Sales Ltd [1974] AC 235
Maggbury Pty Limited v Hafele Australia Pty Limited (2001) 76 ALJR 246
Optus Vision Pty Ltd v Australian Rugby Football League Ltd [2004] NSWCA 61
Owen v Barclay's Bank [1978] 1 Lloyd's Law Reports 166
Peppers Hotel Management Pty Ltd v Hotel Capital Partners Ltd [2004] NSWCA 114
Prenn v Simmonds [1971] WLR 1381
Royal Botanic Gardens and Domain Trust v South Sydney City Council (2002) 186 ALR 289
Upper Hunter County District Council v Australian Chilling and Freezing Co Ltd (1968) 118 CLR 429
Vodafone Pacific Ltd v Mobile Innovations Ltd [2004] NSWCA 15
Wood Hall Limited v. The Pipeline Authority (1979) 141 CLR 443.
PARTIES:

American Re-insurance Company (Plaintiff)
Thomas Gervay (Defendant)

FILE NUMBER(S):

SC 50036/05
COUNSEL:

R McHugh (Plaintiff)
M Orlov (Defendant)
SOLICITORS:

Corrs Chambers Westgarth (Plaintiff)
Gray & Perkins (Defendant)

LOWER COURT JURISDICTION:

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION
COMMERCIAL LIST

Einstein J

Friday 12 August 2005

50036/05 American Re-Insurance Company v Thomas Gervay

JUDGMENT

The plaintiff

1 The plaintiff, American Reinsurance Company carries on the business of issuing, amongst other forms of finance, contract performance bonds.

The Deed of Indemnity and Guarantee

2 The proceedings concern the validity of demands made under two such performance bonds which were in identical form

3 A Deed of Indemnity and Guarantee dated 16 May 2002 ["the Deed "] was entered into between the plaintiff [as “Surety”], Austin Australia Pty Ltd (in Liquidation) [as " Contractor"] and the defendant, Mr Thomas Gervay [as “Guarantor”].

4 Pursuant to the above described Deed, the Surety agreed to consider applications by, amongst others, the Contractor to issue bonds (as defined in the Deed).

No issue as to the facts

5 There being no issue as to the facts it is convenient to immediately set them out.

Provision of the Bonds

6 On 13 March 2003 the Surety provided the Contractor with two Bonds

      APFB–A51-5 and APFB–A51-6 requested by the Contractor in favour of Chelmsford Green Pty Ltd (now known as Chelmsford Green Development Pty Ltd)["Chelmsford"] in a total amount of $856,140.20.

Demand to Surety for and payment under the Bonds

7 On or around 29 June 2004 the Surety received a demand for payment under Bond APFB-A51-5 relating to the failure of the Contractor to perform its obligations under a contract with Chelmsford

8 On or around 1 July 2004 the Surety paid that demand.

9 On or around 6 September 2004 the Surety received a demand for payment under Bond APFB-A51-6 relating to the failure of the Contractor to perform its obligations under a contract with Chelmsford.

10 On or around 9 September 2004 the Surety paid that demand.

Demands served on the Contractor

11 On 18 August 2004, the Surety served a demand in respect of Bond APFB-A51-5 on the Contractor seeking, inter alia, that the Contractor pay to the Surety the sum of $642,105.15.

12 On 29 October 2004, the Surety served a demand in respect of Bond APFB-A51-6 and for costs and expenses incurred in connection with both of the Bonds on the Contractor seeking that the Contractor pay to the Surety the sum of $222,550.01.

Demands served on the defendant

13 On or around 20 August 2004, the Surety served a demand on the defendant in respect of Bond APFB-A51-5 by leaving a copy of the demand at the defendant’s last known residential address at 9 Mitchell Street, Greenwich, New South Wales.

14 On or around 1 November 2004, the Surety served a demand on the defendant in respect of Bond APFB-A51-6 and for costs and expenses incurred in connection with both of the Bonds by personally serving a copy of the demand at the defendant’s last known residential address at 9 Mitchell Street, Greenwich, New South Wales and by facsimile to his solicitor, Mr Skelton of Acuiti Legal.

The material provisions of the Deed of Indemnity and Guarantee

15 The Deed provided inter alia:


          “ Background

          A The Contractor and the Guarantor have requested the Surety to consider form time to time applications by the Contractor and/or the Guarantor to issue Bonds and, if the Surety shall in its absolute discretion think fit, to grant any one or more of such applications.

          B The Surety has agreed to that request on the condition that the Contractor and the Guarantor enter into this deed (among its other requirements).

          Operative provisions

          1 Indemnity and payment of Loss by Contractor

          Unconditional indemnity

          1.1 The Contractor:
              1.1.1 unconditionally and irrevocably indemnifies the Surety against all Loss; and
              1.1.2 must upon demand immediately pay the Surety any Loss…


          Loss includes all payments made and expenses incurred

          1.4 The Contractor agrees that Loss includes (without limiting the definition):

              1.4.1 any payment made on a claim under a Bond which the Surety makes in the belief that it is obligated to make the payment notwithstanding that it may not be so obligated;

              1.4.2 any money paid and actual or contingent liabilities incurred in taking any action (including, without limitation, performing attempting to perform or procuring the performance of any obligation of the Contractor owed to a beneficiary of a Bond) which the Surety at any time considers appropriate to satisfy, reduce or limit any actual or contingent liability it has under a Bond; and
              1.4.3 any cost or expense incurred by the Surety in investigating, considering, defending, appealing, arbitrating, mediating or paying any claim under a Bond….


          2 Guarantor’s guarantee of Contractor’s obligations

          Unconditional guarantee

          2.1 The Guarantor unconditionally and irrevocably guarantees to the Surety the punctual performance by the Contractor of its obligations under this deed. The Guarantor must upon demand immediately pay to the Surety any Guaranteed Money owing by the Contractor under this deed which is not paid on its due date.

          Unconditional indemnity

          2.2 The Guarantor unconditionally and irrevocably indemnifies the Surety against all losses, damages, costs, charges, liabilities and expenses which the Surety may at any time suffer or incur directly or indirectly because:
              2.2.1 it does not for any reason recover from the Contractor any Guaranteed Money or any money which would be Guaranteed Money but for:
                  (a) the fact that any agreement between the Surety and the Contractor or another person is void, voidable or wholly or partially unenforceable; or
                  (b) any release of the Contractor;


              2.2.2 the Surety has to disgorge any money paid to or received by it and credited against Guaranteed Money; or

              2.2.3 the Contractor or a Guarantor fails to pay any Guaranteed Money when payable.

              The Guarantor must upon demand immediately pay the Surety any amount of loss, damage, costs, charge, liability or expense so indemnified….


          8 Definitions

          Definitions

          8.1 In this deed the following definitions apply:
              …
              Guaranteed Money means any money owing (including, without limitation, damages) by the Contractor to the Surety under of in connection with this deed.
              Loss means the aggregate at any time of all payments made and liabilities incurred by the Surety under or in connection with a Bond including, without limitation:

              (a) payments by the Surety of claims under a Bond;

              (b) payments by the Surety in settlement of any dispute in relation to its obligations under a Bond;

              (c) payments made or actual or contingent liabilities incurred by the Surety with the intention of limiting its potential liability under a Bond; and

              (d) costs and expenses paid, and actual contingent liabilities of any nature incurred, in connection with any claim under a Bond,
              but excluding any amount paid or payable to a reinsurer or co-surety.”

The material provisions of the Performance Bonds

16 Each of the Performance Bonds was in the following terms:

          “1. At the request of the Contractor (called the “Contractor”) in Item 1 of the Schedule (called the “Schedule”), and in consideration of the Obligee in Item 2 of the Schedule accepting this performance bond (called the “Bond”) in respect of the performance of the Contractor of its obligations under the contract described in Item 3 of the Schedule (called the “Contract”), entered into between the Obligee and the Contractor,
              American Re-Insurance Company (called the “Surety”) undertakes, subject to the terms and conditions below, to pay any sum or sums demanded by the Obligee in accordance with Clause 2 hereof, which in aggregate notwithstanding how many such demands are made, do not exceed the amount in Items 4 of the Schedule (called the “Bond Amount”).

          2. The Obligee’s demand (called the “Demand”) must be in writing signed by the Obligee or its representative in Item 5 of the Schedule and delivered in a letter addressed to the Surety at its address by hand or by facsimile transmission to the registered office of the Surety at its address or by facsimile number as shown in Item 6 of the Schedule. The Demand must include a certificate under the Obligee’s common seal to the effect that:


              i. The Contractor has defaulted under the Contract and the default has not been remedied; and

              ii. The default is not because of circumstances of the kind described in Item 7 of the Schedule; and

              iii. The Obligee has, not less that seven (7) working days before the demand on the Surety, given the Contractor written notice that it intends to call on this Bond in respect of that default; and

              iv. The Obligee has delivered by hand or by facsimile transmission a copy of the Demand to the registered office of the Contractor at its address or facsimile number as shown in Item 1 of the Schedule at the same time as delivering it to the Surety.


          3. The Surety agrees to pay the Obligee upon receipt of the Demand any sum or sums demanded by the Obligee in accordance with Clauses 1 and 2 hereof notwithstanding any notice given by the Contractor not to pay.

          4. This Bond commences on the date in Item 8 of the Schedule. The Surety’s liability under this Bond automatically and absolutely ceases on its expiry except in respect of Demands made by the Obligee in accordance with this Bond and received by the Surety not later than the expire of the Bond. No demand may be made after the Bond’s expiry.

          5. The Surety may at any time pay the Obligee the Bond Amount less any previous payments under this Bond or any lesser amount specified by the Obligee. The Surety’s liability under this Bond automatically and absolutely ceases upon such payment.

          6. The law of the jurisdiction in Item 10 of the Schedule apply to this Bond.

          7. This Bond is not negotiable, transferable, assignable or chargeable and shall be returned to the Surety immediately upon its expiry.”

The principles of construction

17 The court is dealing with a commercial document. In endeavouring to discern the parties intent and in construing the meaning of the words used, the Court will strive to give the document a commercial, reasonable and rational operation: Australian Broadcasting Commission v Australasian Performing Right AssociationLtd (1973) 129 CLR 99 at 109; Hide & Skin Trading v Oceanic Meat (1990) 20 NSWLR 310.

18 The court strives in dealing with a commercial contract to discern the objective intent of the business relationship or other parameters of a contract in order to give effect to that which the parties may be seen to have bargained for. But always it is to the words of the document that the court must attend looking in that regard to the whole of the document to discern the parties’ intent.

19 Where mechanical provisions intended to operate over an extended period of time are concerned the court endeavours to follow the mechanics and provisions expressed in the contract in the endeavour to follow, always by looking at the manner in which the matter is expressed, how the parties saw the contract as a working guide to the way forward.

20 Most recently, the High Court has observed in Royal Botanic Gardens and Domain Trust v South Sydney City Council (2002) 186 ALR 289 at 292-293 that:


          “In Codelfa , Mason J (with whose judgment Stephen J and Wilson J agreed) referred to authorities which indicated that, even in respect of agreements under seal, it is appropriate to have regard to more than internal linguistic considerations and to consider the circumstances with reference to which the words in question were used and, from those circumstances, to discern the objective which the parties had in view. In particular, an appreciation of the commercial purpose of a contract:
              "presupposes knowledge of the genesis of the transaction, the background, the context, the market in which the parties are operating".

          Such statements exemplify the point made by Brennan J in his judgment in Codelfa :
              “The meaning of a written contract may be illuminated by evidence of facts to which the writing refers, for the symbols of language convey meaning according to the circumstances in which they are used.””

21 To similar effect is the observation of Gleeson CJ, Gummow and Hayne JJ in Maggbury Pty Limited v Hafele Australia Pty Limited (2001) 76 ALJR 246 at 248 (para 11), quoting with approval Lord Hoffmann in Investors Compensation SchemeLtd v West Bromwich Building Society [1998] 1 WLR 896 at 912-913 to the effect that interpretation of a written contract involves the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of contracting.

22 In Investors Compensation Scheme at 912 – 913, it was said that:


          “The background knowledge which a reasonable person in the position of the parties will be regarded as having, for the purposes of the construction of contracts, includes absolutely anything which would have affected the way in which the language of the document would have been understood by a reasonable man with the proviso that it should have been reasonably available to the parties”.

          “There is of course no doubt but that the court is entitled to inquire beyond the language and to "see what the circumstances were with reference to which the words were used, and the object appearing from those circumstances, which the person using them had in view": Prenn v Simmonds [1971] WLR 1381 at 1384 per Lord Wilberforce : Lakatoi Universal & Walker [2000] NSWSC 113 at par [1039].”

23 Clearly primacy must be given to the actual words used in a written contract. McColl JA in her judgement in Peppers Hotel Management Pty Ltd v Hotel Capital Partners Ltd [2004] NSWCA 114 at [66] enunciated the following principles:


          “[69] If the words used [in a written contract] are unambiguous the court must give effect to them, notwithstanding that the result may appear capricious or unreasonable, and notwithstanding that it may be guessed or suspected that the parties intended something different. The court has no power to remake or amend a contract for the purpose of avoiding a result which is considered to be inconvenient or unjust. On the other hand, if the language is open to two constructions, that will be preferred which will avoid consequences which appear to be capricious, unreasonable, inconvenient or unjust, ‘even though the construction adopted is not the most obvious, or the most grammatically accurate’: Australian Broadcasting Commission v Australasian Performing Right Association Ltd (1973) 129 CLR 99 at 109–110 per Gibbs J (as he then was). However, in construing written contracts it should be presumed that the parties did not intend their terms to operate unreasonably. The more unreasonable the result a party’s construction would produce, the more unlikely it is that the parties would have intended it. If the parties did intend an unreasonable result, it is essential that that intention be made “abundantly clear”: L Schuler AG v Wickman Machine Tool Sales Ltd [1974] AC 235 at 251 per Lord Reid.

          [70] Dealing with the circumstances where there are internal inconsistencies in a contract, Gibbs J said “it will be permissible to depart from the ordinary meaning of the words of one provision so far as is necessary to avoid an inconsistency between that provision and the rest of the instrument.”: Australian Broadcasting Commission v Australasian Performing Right Association Ltd (1973) 129 CLR 99 at 109.

          [71] Gibbs J’s statement in Australian Broadcasting Commission v Australasian Performing Right Association Ltd (1973) 129 CLR 99 at 109 that “the court should construe commercial contracts "fairly and broadly, without being too astute or subtle in finding defects", finds reflection in the statement in International Fina Services AG v Katrina Shipping Ltd (“The Fina Samco”) [1995] 2 Lloyd’s Rep 344 at 350 per Neill LJ (with whom Roch and Auld LL.J agreed) that the primary focus is the agreement itself which “must speak for itself, but … must do so in situ and not be transported to a laboratory for microscopic analysis”.

          [72] Consistently with this approach, it has been held that if detailed semantic and syntactical analysis of a written contract lead to a conclusion that flouts business commonsense the contract must be made to yield to business commonsense: Antaios Compania Naviera SA v Salen Rederierna AB [1985] AC 191 at 201 per Lord Diplock; applied by Gleeson CJ, Gummow and Hayne JJ in Maggbury Pty Ltd v Hafele Australia Pty Ltd , above, at 198 [43]. In Maggbury, after referring to Lord Diplock’s observations, Gleeson CJ, Gummow and Hayne JJ added: “what in respect of a particular contract comprises ‘business commonsense’, as an apparently objectively ascertained matter, may itself be a topic upon which minds may differ and in respect of which an imputed consensus is impossible”.”

24 In Optus Vision Pty Ltd v Australian Rugby Football League Ltd [2004] NSWCA 61 Santow JA [with whom Meagher JA and Stein AJA agreed] at [22] referred to the observations of the High Court in Royal Botanic Gardens and Domain Trust v South Sydney City Council (2002) 186 ALR 289 at 292–3 adding at [23]:

              “To this I would add the observation of Lord Steyn, writing extra-judicially on “The Intractable Problem of the Interpretation of Legal Texts” (2003) SLR 1 at 7. After pointing to the shift from literal to purposive interpretation, he adds the caveat that it would be an oversimplification to say that there has been a homogenous shift towards a purposive interpretation of all legal texts. Nonetheless he says: “ In a network of contracts governing a construction project, parties ought generally to be able to rely on the obvious meaning of the interlocking texts”.

25 Hence I take it as axiomatic that:

· the Court endeavours to give primacy to unambiguous words used in a written contract, this matter generally being approached in the manner outlined by McColl JA in Peppers Hotel Management supra;

· the proper approach seeks the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably been available to the parties in the situation in which they were at the time of the contract” (Maggbury Pty Ltd v Hafele Australia Pty Ltd (2001) 210 CLR 181 at 188 citing Lord Hoffmann, Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896 at 912; [1998] 1 All ER 98 at 114; Peppers Hotel Management Pty Ltd supra at [66 et seq];

· commercial contracts should be construed so as to be given a sensible commercial operation: Upper Hunter County District Council v Australian Chilling and Freezing Co Ltd (1968) 118 CLR 429 at 437; Australian Broadcasting Commission v Australasian Performing Right Association Ltd (1973) 129 CLR 99 at 109; Hide and Skin Trading v Oceanic Meat Traders Ltd (1990) 20 NSWLR 310 at 313-4; Vodafone Pacific Ltd v Mobile Innovations Ltd [2004] NSWCA 15 per Giles JA at [64].

The Surety’s claim

26 It is unnecessary to repeat the record. The short position is that the Surety propounds a cause of action pursuant to clause 2 of the Deed.

The defendant’s submissions

27 The defendant contends that it was a condition precedent to the validity of a demand made under the Bonds that it include a certificate complying strictly with the requirements of clause 2 of the bond.

28 The critical issue raised by the defendant turns on the meaning of the words “to the effect that” in the sentence reading “The Demand must include a certificate… to the effect that…”

29 The defendant contends that there is an important distinction between a “certificate … to the effect that” and a “certificate … that”. The contention is that the former expression focuses attention on the substance and content of the certificate, whereas the latter expression focuses attention exclusively on the form of the certificate.

30 On the defendant’s case, the requirement that the demand be accompanied by a certificate “to the effect that’ the circumstances referred to in subparagraphs (i) – (iv) of clause 2 had arisen, required the certificate to include sufficient particulars of each of those circumstances to enable the Surety to determine whether it had an obligation to pay on the demand. This it is said, called for the exercise of judgment on the part of the Surety as to whether a liability to pay had arisen. Hence on the defendant’s case, the Surety was required to satisfy itself on the basis of the contents of the certificate, that circumstances existed justifying the making of a demand.

31 The defendant contended inter alia as follows:

· drawing an the analogy with a contract of insurance [cf Ankar Pty Limited v National Westminster Finance (Australia) Limited (1987) 162 CLR 549 at 560], a demand for payment based on a ‘bare’ certificate (i.e. one which did no more than reproduce or substantially reproduce the contents of subclauses 2(i) – (iv)) would be analogous to the insured making a claim on the insurer expressed in terms of the insuring clause (e.g. “physical damage has occurred to the property insured”) without providing any particulars as to the existence of circumstances giving rise to the claimed right of indemnity;

· there is no doubt that a ‘bare’ certificate would suffice if clause 2 had stated that “the demand must include a certificate under the Obligee’s common seal that ...”, instead of “to the effect that”. Provided that the demand (in effect the certificate) was in proper form and was served in accordance with clause 2, [the Surety] would be obliged to pay on the demand;

· the Australian Oxford Dictionary defines the meaning of “to the effect that” as “the general substance or gist being”. “Gist” is defined as “the substance or essence of a matter”. The related expression “to that effect” is defined as “having that result or implication”. The Macquarie Dictionary gives one of the meanings of “effect” as “the result intended; purport or intent; tenor or significance” and gives the example, “he wrote to that effect”.

· It is also useful to consider the meaning of other words referred to in these definitions. It is apparent from the dictionary meanings that they are capable of being used interchangeably. Thus, the meaning of “import” is given as “to convey as a meaning or implication, as words, statements, actions” and “meaning; implication; purport”. “Mean” and “meaning” is defined as “of words, things, etc to have as he signification; signify”. “Purport” is defined as “to convey to the mind as the meaning or thing intended; express; imply” and “tenor, import or meaning”. “Signification” is defined as “meaning; import; sense”. “Tenor” is defined as “the course of thought or meaning which runs through something written or spoken; purport; drift”;

· the common thread linking these various expressions is that when used in the context of the effect of words or statements, they refer to the substance or meaning conveyed by the words or statements. In the context of clause 2, the words “to the effect that” refer to the meaning conveyed by the certificate, rather than to its form;

· the deliberate choice of the words “to the effect that” in preference to “that” suggests strongly that the parties intended that the certificate should do more than merely reproduce or substantially reproduce the contents of subclauses 2(i) to (iv);

· if the parties had intended that [the Surety] should not be concerned with the question whether circumstances justifying the making of a demand for payment had arisen, it is difficult to understand why they did not simply provide that the demand should include a certificate stating the matters in subclauses 2(i) to (iv);

· this construction is commercially sensible. It gives effect to the commercial purpose of the contractor providing the bond as security for the performance of its obligations under the contract and it gives effect to the evident intention of the parties that recourse to the security should be available only when circumstances described in subclauses 2(i) to (iv) had arisen;

· it may be accepted that such an arrangement would make recourse to the security more difficult from the obligee’s point of view than if some alternative arrangement had been adopted, in that the obligee had to ensure that the certificate adequately particularised the circumstances justifying the making of the demand. It may be accepted also that such an arrangement would place a greater burden on the surety than would be the case if some alternative arrangement had been adopted, in that the surety had to be satisfied on the basis of the matters stated in the certificate that circumstances justifying the making of a demand existed. This does not make it commercially improbable that the parties should agree to such an arrangement. The parties were free to make whatever bargain they wished in relation to the provision of security;

· there is no general principle of law or commerce that requires that the surety under a performance bond should not, under any circumstances, be concerned with the question whether the party whose performance is secured by the provision of the bond, has performed its contractual obligations [cf Edward Engineering Limited v Barclay’s Bank International Limited [1978] 1 Lloyd’s Rep 166 at 172.]. The question in each case must be one of construction of the terms of the bond.

The rebuttable presumption

32 In I.E. Contractors Ltd v Lloyd's Bank Plc [1990] 2 Lord’s Reports 496 [at 500] Lord Justice Staughton made the point that there is a bias or presumption in favour of the construction which holds a performance bond to be conditioned upon documents rather than facts. However that presumption is not irrebuttable if the meaning is plain. In what follows I proceed accordingly.

Certificate Procedures under Performance Bonds

33 The defendant's contentions clearly fly in the face of the well-established position that the commercial purpose of a certificate procedure under a performance bond is to avoid any inquiry or exercise of judgment by the bond issuer as to the underlying circumstances.

Decision

34 In what follows the Court accepts as of substance and substantially adopts, the Surety's submissions.

35 There is no occasion to be found in the terms of the subject performance Bonds [nor from the terms of the Deed] to warrant any departure from that well-established position which may shortly be summarised as follows:

· The nature and commercial purpose of a performance bond are incompatible with any limitation on the issuer’s obligation to pay upon demand. See, e.g., Wood Hall Limited v. The Pipeline Authority (1979) 141 CLR 443.

· The only issue is whether the certificate complies on its face with the terms of the bond; the issuer need not be concerned with the underlying dispute. See, e.g. Gold Coast Limited v. Caja De Ahorros Del Mediterraneo [2002] 1 Lloyd’s Rep 617 at 622.

· A performance bond is, thus, conditioned upon the regularity of documents rather than on any underlying state of affairs.

36 There is no warrant presently shown for importing a condition that payment is to be made only in the event of a breach of the construction contract between Chelmsford and the Contractor. See BI (Australia) Pty Limited v. Cigna Insurance Australia Limited, (1990) 11 BCL 64; Giles J., BC9001822, 24 October 1990. Nor in the present circumstances is there any scope to imply a term that Chelmsford provide particulars beyond those stipulated on the face of the Bonds.

37 Upon the proper construction of clause 2 of the Bonds, once the Surety had satisfied itself that the demand was in proper form, there was no occasion for any further exercise of judgment as to whether circumstances existed justifying the making of a demand. Provided a certificate included with a demand reproduced (or substantially reproduced) the contents of subparagraphs (i) – (iv) of clause 2, the certificate (and hence the demand) would be in proper form. Provided that the demand was in proper form the Surety was obliged to pay on the demand.

38 The proper construction of clause 2 is to construe the words “must include a certificate … to the effect that” as equivalent in meaning to a requirement that the demand “must include a certificate … that”.

39 Contrary to the defendant’s contentions, the “rationale … for permitting any departure in the certificate from the language of those subclauses” had nothing to do with an inquiry as to the underlying default. The words “to the effect that” did not require that the certificate particularise the “substance or gist of the matters that had to be certified” in the sense of the substance of the “circumstances justifying the making of a demand for payment”.

40 Rather, the rationale for the phrase, “to the effect that”, was to relieve Chelmsford of the obligation to use the exact words of clause 2 in the demands. The phrase, “to the effect that”, meant that a demand would be in proper form if it contained a certificate conveying the substance of the matters in each of subclauses (i) to (iv) — even if the language used differed from that of clause 2. The question whether the certificate satisfied clause 2 was a matter going to the regularity of the demand: all the Surety had to do was to check that Chelmsford had certified the substance of those matters, not that it had given particulars showing that its certification was well-founded or justified in the circumstances.

41 The purpose of clause 2 of the Bonds was to relieve the Surety not only of any obligation, but also of any right, to satisfy itself as to the existence of circumstances justifying the demand, In that regard it is pertinent to note the following matters:

· Clause 2 of each Bond (required Chelmsford to certify four matters before payment must be made. As the Surety has submitted, the very notion of certification is to put the determination of that issue in the hands of the certifier, Chelmsford.

· The only matter of which the Surety had to satisfy itself was whether the certificate complied with clause 2 of the Bond, not whether Chelmsford had acted on circumstances justifying the making of the demand. Again, and as the Surety has submitted, it seems implicit in the defendant’s submission that if Chelmsford had provided the “particulars” for which the defendant contends but the Surety had not been “satisfied” by them, then the Surety should not — indeed, could not — pay on the demands.

· The very fact that, by clause 3 of each Bond, Austin could not notify the Surety not to pay on the demands — even if circumstances existed which showed that contrary to the certificates the demands were unjustified — makes plain that the Surety was not to be concerned with the “existence of circumstances justifying the demand”.

· It is significant that there was no requirement under clause 2 of the Bonds for Chelmsford, as Obligee, to certify that it had suffered any loss — still less, to certify the quantum of loss. The only matters of substance which Chelmsford was required to certify were (i) the fact of the contractor’s “default” and (ii) that the default was not because of circumstances beyond the contractor’s control. Yet, if the purpose of the certificate was to require the Surety to satisfy itself that circumstances existed which justified the demand, an essential aspect of that inquiry would be the question whether the “default” had occasioned loss justifying the amount demanded. But, to the contrary, clause 3 required the Surety “to pay [Chelmsford] upon receipt of the Demand any sum or sums demanded by the Obligee in accordance with Clauses 1 and 2 hereof”. The quantum of the sum demanded was irrelevant to the question whether the demand was “in accordance with” clauses 1 and 2, because those clauses made no reference to quantum at all.

· No doubt, the certificate procedure provided a measure of protection to the Contractor. It prevented Chelmsford from calling on the Bonds unless Chelmsford was prepared to certify to the effect of the matters set out in clause 2. In the event that a certificate was false, the Contractor might have remedies against Chelmsford for issuing it. But once Chelmsford issued a certificate which complied with clause 2, that was the end of the matter so far as the Surety was concerned.

42 It may be pertinent to note that exceptions to the general rule are to be found where for example the documents are forged or the request for payment is made fraudulently in circumstances where there is no right to payment, or where a Surety has acted otherwise than in good faith: cf Owen v Barclay's Bank [1978] 1 Lloyd's Law Reports 166 at 171; Gold Coast v Caja de Ahorros [2002] 1 Lloyd's Law Reports 617 at 622 per Simon Brown L.J.

43 For those reasons the defendants submissions are rejected

Short minute of order

44 The parties are to bring in short minutes of order at which time submissions as to costs will be taken.


      I certify that paragraphs 1 - 44
      are a true copy of the reasons
      for judgment herein of
      the Hon. Justice Einstein
      given on 12 August 2005

      ___________________
      Susan Piggott
      Associate
      12 August 2005


23/08/2005 - Previous Header Sheet incorrect as to decision recorded in judgment - Paragraph(s) not applicable
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Cases Cited

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Statutory Material Cited

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