Geraldton Building Co Pty Ltd v Christmas Island Resort Pty Ltd

[1994] HCATrans 79

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
              Perth         No P17 of 1994  No C17 of 1993

B e t w e e n -

GERALDTON BUILDING CO PTY LTD

Applicant

and

CHRISTMAS ISLAND RESORT PTY LTD

Respondent

Application for special leave
  to appeal

MASON CJ
DEANE J
GAUDRON J

TRANSCRIPT OF PROCEEDINGS

AT PERTH ON TUESDAY, 25 OCTOBER 1994, AT 2.29 PM

Copyright in the High Court of Australia

MR A.R. EMMETT, QC:   May it please the Court, I appear with my learned friend, MR D.M. STONE, for the applicant.  (instructed by Williams & Hughes)

MR C.J.L. PULLIN, QC:   May it please the Court, I appear with my learned friend, MR A.V. McCARTHY, for the respondent.  (instructed by Parker & Parker)

MR EMMETT:   Your Honours, the case, in our submission, raises the question of law as to whether, in construing a contract, a construction ought to be given to the contract which would avoid placing a party who is in breach under that contract in a better position than he would have been in had he not committed the breach.  The principle of law ‑ ‑ ‑

MASON CJ:   Are you putting that forward as a proposition of law?  You say that is the question.

MR EMMETT:   At one level, yes, Your Honour.

GAUDRON J:   And what construction does that lead to, if your proposition be correct?

MR EMMETT:   Your Honour, it leads to a construction that the respondent should not be permitted to rely on the bank bond in circumstances where, had it performed, it would not have been entitled to rely on the bank bond. 

GAUDRON J:   That is the construction; we read that into the relevant clause, do we?

MR EMMETT:   One needs to read the contract as a whole.  Can I indicate the different position, first, as a result of the construction put on by the courts below.  Under the contract as it stands there was certainty as to when the bank bond was to be released.  That arises from the terms of the clause, if I can ask Your Honours to look at the clause that deals with the - at page 24 of the application book - clause 14:

Within one week of the date of execution.....or upon the first progress payment.....whichever is the earlier the Construction Manager shall deliver to the Proprietor security for its due performance of this Agreement in the form of a bank guarantee -

The performance guarantee shall be reduced by the sum of $500,000 at the date of Practical Completion and then reduced to NIL at the end of the defects liability period.

So that the parties had agreed that at two points of time the performance guarantee or bond would be affected.  First, it was to be reduced and then it was to be eliminated altogether.

The contract itself provided a time for those events although it may be, as events turn out, that practical completion would not be achieved at the time specified.  If Your Honours look at page 6 of the application book “Practical Completion” is defined, and then at page 26, the “Defects Liability Period” is defined, and the agreement provides for a date whereby practical completion was to be achieved.  Now, the net result of that, so far as the contract was concerned, was that there was certainty so far as the contractor was concerned as to when he would be able to have his bank guarantee returned.  Of course, if there was a breach by him then a demand, so long as it was a demand based upon a bona fide claim, could be made, but such a demand had to be made before the bond was reduced and then before it was eliminated altogether.

The effect of the construction accorded to the contract as a whole by the courts below is that the only entitlement of the contractor to have the bond returned or the funds which might be called up repaid is that the proprietor is prepared to say that there is no entitlement on his part to damages for breach of contract by the contractor.  That follows from the order which was made by the Full Court, at page 79:

The Respondent (Defendant) must hold any proceeds of the performance bond in a separate account until such time as any entitlement of the Respondent (Defendant) to damages for breach of contract is determined and quantified -

So that, in place of a fixed entitlement to the return of the bond there is an indefinite entitlement on the part of the proprietor to maintain the bond in existence or to retain the funds which it calls up in relation to the bond.  Now, that circumstance is brought about solely by reason of the breach of contract by the proprietor ‑ ‑ ‑

GAUDRON J:   No, it is brought about by the termination of the contract prior to practical completion.

MR EMMETT:   By reason of ‑ ‑ ‑

GAUDRON J:   Or the rescission, the rescission, is it not, of the contract?

MR EMMETT:   Well, it depends on what one means by rescission ‑ ‑ ‑

GAUDRON J:   Well, whichever way, it does not matter ‑ ‑ ‑

MR EMMETT:   But, it was prospective termination by reason of the default by the proprietor, a default which would have entitled the contractor to terminate under the general law in any event.

GAUDRON J:   But, it would not matter who terminated or rescinded, would it not?

MR EMMETT:   In our submission, yes, Your Honour.  If the contractor had been guilty of a breach which brought about the termination of the contract, that is one thing.  But, where the proprietor ‑ ‑ ‑

GAUDRON J:   But, what happens to the bond in that event?

MR EMMETT:   In which event, I am sorry, if the -

GAUDRON J:   Where the proprietor has terminated?

MR EMMETT:   It may be that it remains in foot.  If the contractor is at fault he cannot be heard to complain about the consequence of his default, but what he can be heard to complain about is the consequence of the default by the proprietor.  The construction given to the contract by the courts below is that the proprietor is now in a better position than it would have been had it performed the contract.  Unless, of course, some other intervening event had occurred such that the proprietor was entitled to terminate for breach by the contractor.

The consequence is that the bond or, if it is called up, the fund of money, is kept from the contractor for an indefinite period until such time as the proprietor is prepared to say to the bank, “I no longer wish to draw down on the bond,” because the terms of the bond, which appear at page 35, line 26:

The said sum will be held by the Bank until a notification in writing has been received from you either that same is no longer required by you, or that you desire payment to be made -

Now, let it be assumed that the bond has in fact been called up by the proprietor, the effect of the declaration made by the Full Court is that that fund of money remains in the hands of the proprietor and out of the hands of the contractor and, therefore, a fund on which the contractor would have to pay interest, for an indefinite period of time, notwithstanding that in the ordinary course, the practical completion would have been achieved and in due course the 12 months defects liability period would have expired.

The proprietor is now in a position where, if at some time in the long distance future, some latent defect appears it is entitled to say, “Well, I now want to hang on to this fund even further”.

GAUDRON J:   Is that strictly correct, having regard to the declaration by the court below?

MR EMMETT:   Until any entitlement of the respondent to damages for breach of contract, any entitlement. 

GAUDRON J:   But, there have been proceedings initiated, arbitration proceedings?

MR EMMETT:   There are proceedings on foot, there have been lots of proceedings, and we perhaps need not trouble Your Honour with the detail of the other litigation between the parties arising out of the same contract.  But, let it be assumed, for example, that the contractor obtains a judgment for $4 million against the proprietor.  The proprietor says, “So what, I am still going to hang on to my bond, the $1.5 million, because I’ve still got a claim against you, and I’ll hang on to it for as long as I like until such time as the court determines whatever my entitlement is.”  The declaration is not framed upon a determination of a specific claim but just any entitlement, and that is why the proposition I put a moment ago is open, namely, that if a latent defect appears in two years time, or is alleged to appear in two years time, the proprietor is still in a position of being able to say, “I don’t want to give this fund back to you, I want to hang on to it until the court, or the arbitrator, finally resolves this claim,” and one can imagine, at least in theory, it going on and on.  Whereas the parties clearly intended, by this contract, that the bond would be brought to an end at a specific time, so that there could be ‑ ‑ ‑

DEANE J:   But, that would have been subject to any claim?

MR EMMETT:   Yes, but the claim would have to ‑ ‑ ‑

DEANE J:   That is where I have not quite followed.  I follow the point you make in terms of the wording of the declaration and order, but put that to one side and treat “claim” as pending identified claim.  I do not see the distinction that you are drawing between what would have happened but for termination, and the current situation.

MR EMMETT:   Because the claim had to be made before the date of practical completion, so far as it exceeded the reduced amount, and the claim had to be made before the end of the defects liability period, another 12 months.

DEANE J:   Well then, is the point that the claims were not made within what would have been the time?

MR EMMETT:   Indeed, and now there is no longer any limit at all to the time within which the claims have to be made against the bond.  So that the contractor is faced either with a bond outstanding indefinitely on which it, no doubt, has to pay a commitment fee to the bank, or, alternatively, has to pay interest on the fund which has been drawn down and held by the proprietor as security against unspecified claims that are yet to be determined or the entitlement to the proprietor to which are yet to be determined and quantified.  That is a position which the proprietor is in only because of its own default.  Had the contract been performed, one way or the other, practical completion would have been achieved and the defects liability period would have expired. 

It is that consequence which, in our submission, the courts below have failed to take account of.  One can get that from, first of all the judgment of the trial judge Mr Justice Anderson, at page 45 ‑ ‑ ‑

GAUDRON J:   We are, in effect, being asked to imply a term rather than to construe the contract, I think now, are we not?

MR EMMETT:   Your Honour, the House of Lords in Liverpool City Council v Irwin suggested that there are a continuum of circumstances which give rise to the finding that there is an obligation which is not express.  Whether you call it implying a term or whether it is an incident of a particular type of contract, but ‑ ‑ ‑

GAUDRON J:   Yes, but I am wondering if this is anything like the case you put at first instance?

MR EMMETT:   Certainly, Your Honour, the principle that I outlined to start off with, with which the Chief Justice seemed to take some exception, was ‑ ‑ ‑

MASON CJ:   No, I did not take any exception at all, all I wanted to know was what the principle was for which you were contending.  If you regard that as taking exception to your argument, well, I accept the criticism.

MR EMMETT:   No, I was being facetious.  I was not intending to be critical at all.  That is the proposition, though, that a contract should be construed in a way which will not give a person who is in breach of it an advantage which he would not have if he had not committed the breach.

GAUDRON J:   One can understand that if that is possible, and I still do not understand what the construction is or the implication is.  I understand, at first instance, you put your argument by reference to liquidated and unliquidated sums. You seem not to be in that area at all now.

MR EMMETT:   No, I am not intending to resile from that position, Your Honour.  That was certainly argued below that the bond related only to liquidated sums.  We do not contend that before Your Honours, but we do say that ‑ whether it is an implied term, we certainly would not put it in a Codelfa sense, but we say that the contract has to be construed such that you give a result that these parties must have contemplated.  Now, that may mean that you simply say the defaulting party was required to surrender the bond once the contract came to an end.

GAUDRON J:   But, is that a case you put at first instance?

MR EMMETT:   Yes.  The Full Court, at pages 61 and 62, summarise what Mr Justice Franklyn took the issue to be, at the bottom of the page:

Before us the appellant’s submissions, broadly stated, were that:-

1.  As a matter of construction cl 14 does not guarantee performance other than in relation to liquidated claims.

GAUDRON J:   Yes.

MR EMMETT:   And then, 2:

In any event cl 14 did not survive termination.....and the Bond is consequently not available to the respondent for any purpose.

That was argued fairly and squarely, although maybe there is a slight difference in approach.

MASON CJ:   But, there is a slight difference, is there not?  I thought that the Full Court were considering the argument on the footing that it was a proposition based on the construction of the particular contract, whereas you are trying to give it a rather different complexion.  You are suggesting that it is an Irwin‑type implied term that prevails over whatever one might glean from the words and purposes of the particular contract; indeed, an implied term that is thrust upon this class of provision.

MR EMMETT:   Yes, I think that is fair to say.

MASON CJ:   And, to that extent, the argument you are now presenting differs from the argument as it seems to have been considered by the Full Court.

MR EMMETT:   Well, with respect though, the Alghussein v Eton College argument was put fairly and squarely, certainly to the trial judge, and he deals with that in express terms, although it is clear from the judgment that reference was made to that decision in the Full Court, Their Honours in the Full Court did not deal with that question.

MASON CJ:   Perhaps because so much weight was put on the alternative argument which you have not yet advanced, which seems to have been the primary argument considered in the courts below, namely, that clause 14 should be construed as applying to liquidated claims only.  

MR EMMETT:   That was the primary thrust and that was rejected, but it is clear from what Mr Justice Franklyn noted at the bottom of page 61 and the top of 62 that the alternative case was argued, and ‑ ‑ ‑

MASON CJ:   Yes, I am not suggesting that an alternative proposition was not argued.  I am only suggesting that it was not quite put forward in the way that you are now presenting it to us.  After all, the necessity of obtaining special leave tends to, as it were, hone the mind towards general propositions of law that are dissociated from the construction of the particular contract.

MR EMMETT:   That is certainly so, and that is perhaps why we are concentrating on that second aspect because the first aspect does not raise a question of general principle, and that is why we do not want to take the Court’s time endeavouring to run that argument again, but in so far as one can persuade the Court that there is a general approach ‑ ‑ ‑

MASON CJ:   You would like to tack the other argument on.

MR EMMETT:   Yes.  I was in the process of taking Your Honours back to the trial judge - I see time is running out - in relation to ‑ ‑ ‑

DEANE J:   Mr Emmett, can I just divert you for a second, how does what is said on page 54, the paragraph commencing at line 11, fit in with what you said in answer to Justice Gaudron?

MR EMMETT:   What I did say is that we cannot put it on the basis of a Codelfa implied term.  We do not put it on the basis that we can satisfy the five requirements that Your Honours outlined in Codelfa, the business efficacy type of ‑ ‑ ‑

DEANE J:   I had not read that concession as so confined, I must say.  It was so confined, though, was it?

MR EMMETT:   That is my understanding.  I did not appear below at either levels.  Perhaps while I am on that page can I take Your Honours to what Mr Justice Kennedy said, starting at the bottom of the previous page:

I am unable to accept the contention that the respondent’s right to call on the performance bond with respect to a bona fide claim for unliquidated damages for a breach of the agreement by the construction manager prior to its termination, ceases upon termination.

Now, he is dealing with the argument that it comes to an end on termination of the contract.   If I can take ‑ ‑ ‑

GAUDRON J:   On your argument, it would have to be termination by the contractor, would it not?

MR EMMETT:   Yes, certainly so and it was, of course.  The contract was bought to an end prospectively by the contractor by reason of a default on the part of the proprietor in paying progress payments.  I see the red lights have come on, I was just going to take Your Honours to a couple more paragraphs, but I ‑ ‑ ‑

MASON CJ:   Yes.

MR EMMETT:   I was endeavouring to take Your Honours back to page 45 of the application book where the trial judge dealt with this argument, and at line 10:

There is the possibility that, after termination by the contractor, the proprietor might obdurately refuse either to prosecute any damages claim or surrender the benefit of the bond.  However, should that happen it is not to be supposed that the contractor would be without a remedy.

Although he does not quite say what the remedy is.

The bond can only ever serve as security for due performance and the proprietor has no right to the benefit of it for any other purpose.  He could not ‑

hold the bond -

without cause, or for a collateral purpose.  But there does not seem to be anything wrong in principle with the idea that he should remain entitled to the benefit of the security for as long as the contract remains unperformed and undischarged, either as to its primary or its secondary obligations.

Now that, in our submission, is totally inconsistent with clause 14 or with what the scheme of clause 14 contemplated, and what we say is that that construction is what is wrong.  That is the construction that has been given to the contract by the trial judge, bearing in mind that the issue as stated by the trial judge in the agreed statement of facts, which appears at page 39, 6.1:

the only issues for determination are whether.....

6.1  the Defendant is entitled now or in the future to make demand on the bank under the terms of the Guarantee -

and what His Honour said was, “Yes, it is, in the future, without limit, entitled to make a claim on the guarantee, notwithstanding that had the contract continued on foot there would have been a limit.  He

then, at the second half of page 45, and I will not read it, he goes on to say why it is that the construction contended for by the contractor should be rejected; at the bottom of the page:

The force of this submission is lost, I think, once it is appreciated that the proprietor is entitled to call on the bond as soon as the cause of action for damages for non‑performance arises.   That is to say, in so far as his right to call on the bond is concerned, he is neither better nor worse off in the event of an election by the contractor to terminate the contract before the date of practical completion.

But, that cannot be right when one considers the sentence I read a moment ago, at line 25 on the previous page, that that continues indefinitely, notwithstanding that, under the terms of the contract, there was an end to the obligation.  So that, in our submission, Your Honours, is the way in which the question of construction throws up what, in our submission, is a significant principle which this Court has not had occasion to consider.  I was intending to take Your Honours briefly to some of those authorities, but I seem to have overstepped my time.  They are referred to in the outline.  They culminate in a decision of the Court of Appeal of New South Wales which adopts the statement of principle by the House of Lords in Alghussein v Eton College. 

MASON CJ:   Thank you, Mr Emmett. 

MR EMMETT:   May it please Your Honours.

MASON CJ:   The Court need not trouble you, Mr Pullin.

In our view, the principal question sought to be argued in the proposed appeal, which is put forward as a question of abstract rule of law, necessarily turns on the construction of the particular contract.  As such, the case is not appropriate for the grant of special leave.  The application is therefore refused.

MR PULLIN:   I would seek an order for costs.

MASON CJ:   You do not oppose that, Mr Emmett.

MR EMMETT:  I do not wish to be heard.

MASON CJ:   The application is refused with costs.

AT 2.55 PM THE MATTER WAS ADJOURNED SINE DIE