Hansen Yuncken Pty Ltd v Parliament Square Hobart Landowner Pty
[2021] TASFC 11
•27 August 2021
[2021] TASFC 11
| COURT: | SUPREME COURT OF TASMANIA (FULL COURT) |
| CITATION: | Hansen Yuncken Pty Ltd v Parliament Square Hobart Landowner Pty |
| Ltd [2021] TASFC 11 | |
| PARTIES: | HANSEN YUNCKEN PTY LTD |
| v | |
| PARLIAMENT SQUARE HOBART LANDOWNER PTY | |
| LTD WOLFERSTAN VERNEY AND PARTNERS PTY LTD | |
| PARLIAMENT SQUARE HOBART LANDOWNER PTY | |
| LTD | |
| v | |
| HANSEN YUNCKEN PTY LTD | |
| FILE NOS: | 571/2021 |
| 903/2021 | |
| JUDGMENT | |
| APPEALED FROM: | Hansen Yuncken Pty Ltd v Parliament Square Hobart Landowner Pty Ltd [2021] TASSC 7 |
| DELIVERED ON: | 27 August 2021 |
| DELIVERED AT: | Hobart |
| HEARING DATE: | 1 June 2021 |
| JUDGMENT OF: | Wood J, Geason J, Martin AJ |
| CATCHWORDS: |
Contracts – Contracts – Building, engineering and related contracts – The contract – Construction of particular contracts and implied conditions – Security and retention funds – Whether the principal can have recourse to a bond which is constituted by an unconditional bank guarantee without notice to the builder – Certification of liquidated damages by sub-independent certifier – Whether valid – Whether builder required to pay damages so certified on a provisional basis.
Building and Construction Industry Security of Payment Act 2009 (Tas).
Wood Hall Limited v The Pipeline Authority (1979) 141 CLR 443; Reed Construction Services Pty Ltd v
Kheng Seng (Australia) Pty Ltd (1999) 15 BCL 158; Clough Engineering Ltd v Oil and Natural Gas
Corporation Ltd [2008] FCAFC 136, 249 ALR 458; JKC Australia LNG Pty Ltd v CH2M Hill Companies Ltd
(No 2) [2020] WASCA 112, referred to.
Aust Dig Contract Law [254]
REPRESENTATION:
Appeal 571/2021
Counsel:
Appellant: S B McElwaine SC, A Rollnik Respondent: J Twigg QC, K J Naish Second Respondent: D Deller
Solicitors:
Appellant: Crawford Legal Respondent: Arnold Bloch Leibler Second Respondent: Colin Biggers and Paisley Lawyers
Appeal 903/2021
Counsel:
Appellant:
Respondent:J Twigg QC, K J Naish S B McElwaine SC, A Rollnik
Solicitors:
Appellant:
Respondent:Arnold Bloch Leibler Crawford Legal
| Judgment Number: Number of paragraphs: | [2021] TASFC 11 |
| 113 |
Serial No 11/2021
File Nos 571/2021
903/2021
HANSEN YUNCKEN PTY LTD v PARLIAMENT SQUARE
HOBART LANDOWNER PTY LTD and
WOLFERSTAN VERNEY AND PARTNERS PTY LTD
PARLIAMENT SQUARE HOBART LANDOWNDER PTY LTD v
HANSEN YUNCKEN PTY LTD
| REASONS FOR JUDGMENT | FULL COURT WOOD J GEASON J MARTIN AJ 27 August 2021 |
| Orders of the Court: |
1 Appeal 571/2021 is dismissed.
2 Appeal 903/2021 is dismissed.
Serial No 11/2021
File Nos 571/2021
903/2021
HANSEN YUNCKEN PTY LTD v PARLIAMENT SQUARE
HOBART LANDOWNER PTY LTD and
WOLFERSTAN VERNEY AND PARTNERS PTY LTD
PARLIAMENT SQUARE HOBART LANDOWNDER PTY LTD v
HANSEN YUNCKEN PTY LTD
| REASONS FOR JUDGMENT | FULL COURT WOOD J 27 August 2021 |
1 I agree with the reasons for judgment of Martin AJ and the conclusion that both appeals
should be dismissed.
2 No 11/2021
File Nos 571/2021
903/2021
HANSEN YUNCKEN PTY LTD v PARLIAMENT SQUARE
HOBART LANDOWNER PTY LTD and
WOLFERSTAN VERNEY AND PARTNERS PTY LTD
PARLIAMENT SQUARE HOBART LANDOWNDER PTY LTD v
HANSEN YUNCKEN PTY LTD
| REASONS FOR JUDGMENT | FULL COURT GEASON J 27 August 2021 |
2 I have read Martin AJ's reasons. I agree with them and do not wish to add anything. I join in
the proposed orders.
3 No 11/2021
File Nos 571/2021
903/2021
HANSEN YUNCKEN PTY LTD v PARLIAMENT SQUARE
HOBART LANDOWNER PTY LTD and
WOLFERSTAN VERNEY AND PARTNERS PTY LTD
PARLIAMENT SQUARE HOBART LANDOWNDER PTY LTD v
HANSEN YUNCKEN PTY LTD
| REASONS FOR JUDGMENT | FULL COURT MARTIN AJ 27 August 2021 |
| Introduction |
3 In 2014 Hansen Yuncken Pty Ltd (the plaintiff) entered into a contract with Parliament Square Hobart Landowner Pty Ltd (the first defendant) for the construction of a stage of the Parliament Square development in Hobart. The contract provided for the appointment of a sub- independent certifier, a role filled by Wolferstan Verney and Partners Pty Ltd (the second defendant).
4 Disputes arose between the plaintiff and first defendant, and between the plaintiff and second defendant. Those disputes culminated in proceedings being issued by the plaintiff on 13 July 2020. The plaintiff sought a declaration that the first defendant was not entitled to have recourse to or to draw down on a Defects Bond, and an injunction restraining the first defendant from drawing down the Bond. In respect of the second defendant, the plaintiff sought a declaration that a Determination as to liquidated damages made by the second defendant in its role as a certifier was void.
5 The first defendant opposed the relief sought by the plaintiff and filed a counterclaim seeking an order for payment of $3.3 million (liquidated damages) pursuant to the contract. The second defendant maintained that its Determination was valid.
6 Brett J decided to conduct an early hearing with respect to three issues which his Honour regarded as "central to the overall dispute between the parties" [13]:
"(a) The first defendant's right to call upon the defects bond. (b) Whether the second defendant certified the payment of liquidated damages in accordance with the contract. (c) Whether cl 76.8(g)(ii) of the contract requires the plaintiff to pay the sum certified by the second defendant, notwithstanding any dispute in relation to such certification, including any dispute within the plaintiff's Type 1 notice of dispute dated 6 July 2020, or in the plaintiff's reply and defence to the counterclaim."
7 In reasons delivered on 3 March 2021, the learned trial judge found that the plaintiff had failed to make out its case. After hearing submissions from the parties, on 13 April 2021 his Honour made the following orders:
"1 The plaintiff's claim against both defendants is dismissed. 2 The interlocutory injunction made on 31st July 2020 is dissolved. 3
The plaintiff will pay the costs of each defendant in respect of the proceedings to date, including determination of the separate issues, as agreed between the parties or failing agreement to be taxed.
4 No 11/2021
4 from today (13 April 2021).
The operation of orders 1, 2 and 3 will be stayed for a period of six weeks interlocutory injunction will remain in force for that period, in order to provide an opportunity for the plaintiff's interlocutory application, filed on 16 March 2021, to be determined by the Full Court or a single judge.
5 The Court directs that the Registrar list the said interlocutory application before the Full Court or a single judge as soon as reasonably practicable, but in any event, before the expiration of the said six week period.
6 The proceedings on the first defendant's counterclaim will be adjourned for directions hearing before his Honour Justice Brett on a date to be fixed, not before the resolution of the plaintiff's interlocutory application."
7 The parties are to attend mediation pursuant to Alternative Dispute Resolution Act 2001 before a mediator agreed by the parties.
8 On 16 March 2021 the plaintiff filed a notice of appeal. The notice identified two questions decided by the trial judge as follows:
"(a) that upon the proper constructions of the contract between the Appellant [the plaintiff] and the First Respondent [the first defendant], the [first defendant] is entitled to have recourse to the Defects Bond without notice to the [plaintiff] in the event of a bona fide dispute which dispute can relate to matters which arise prior to Stage Practical Completion, including those referred to in the demand for payment made by the [first defendant] in its correspondence of 3 July 2020; and
(b) that the issue of a payment claim by the [plaintiff] under clause 42B of the contract is not a necessary pre-condition to certification of liquidated damages under clause 76.8(g) of the contract (and to the consequent payment of liquidated damages by the [plaintiff]) and that in consequence the [second defendant] validly certified the payment of liquidated damages in accordance with the contract."
9 The plaintiff's grounds of appeal are as follows:
"1 At [32] his Honour rejected [the plaintiff's] argument that resort to the Defects Bond is limited to the circumstances prescribed by clause 76.1 of the contract and at [33] rejected the argument of the [first defendant] that the provisions of clauses 6.1 - 6.5 of the contract applied to the Defects Bond. Having proceeded in that way, his Honour then erroneously determined at [33] and [35] that the [first defendant] may have recourse to the Defects Bond without there being a contractual right to do so in the circumstances; 2 Upon a proper construction of the contract, and having determined at [33] that the Defects Bond is separately treated from the Performance Bond and that in consequence clauses 6.1 - 6.5 of the contract do not apply to it, his Honour ought to have concluded that the only contractual right of the [first defendant] to have recourse to the Defects Bond is pursuant to clause 76.1 of the contract; 3 At [47 - 48] his Honour wrongly construed clause 76.8(g) of the contract as not erecting a necessary condition precedent to the power of the [second defendant] to certify liquidated damages; namely, the submission of and determination of a payment claim in accordance with clause 42B of the contract; 4 At [51], having wrongly construed clause 76.8(g) of the contract, (as described at paragraph 3 above), his Honour did not determine the question of whether [the plaintiff] is required to pay the sum certified by the [second defendant] notwithstanding a dispute about the [second defendant's] power to do so (given the question fell away on his Honour's findings at [47 - 48])."
10 The plaintiff seeks the following orders and declarations:
"1 That the appeal be allowed; 5 No 11/2021
2 That pursuant to rule 559, the separate questions be answered as follows:
(a)
(first question) what is the [first defendant's] right to call upon the security provided by the [the plaintiff] under the Construction Contract – Stage 1A dated 5 December 2014 (Contract)
Answer: the [first defendant], has no right to call upon the security.
(b) (second question) whether the [second defendant] (the Sub-IC) certified the payment of liquidated damages in accordance with the Contract. Answer: the [second defendant], the Sub-IC, did not certify the payment of liquidated damages in accordance with the Contract.
(c) (third question) whether clause 76.8(g)(ii) of the Contract requires the [plaintiff] to pay the sum certified by the [second defendant] notwithstanding any dispute in relation to such certification (including any dispute within the [plaintiff's] Type 1 Notice of Dispute dated 6 July 2020 (Type 1 Notice of Dispute) or in the [plaintiff's] Reply and Defence to Counterclaim (Defence to Counterclaim)). Answer: the [plaintiff]is not required by clause 76.8(g)(ii) of the Contract to pay the sum certified by the [second defendant] given the dispute as to the [second defendant's] jurisdiction to do so in the circumstances.
3 That the [first defendant] and [second defendant] pay the costs of this appeal and the costs of the determination of the separate questions before the primary Judge."
11 The first defendant has also appealed in respect of the orders made by the learned trial judge on 13 April 2021. In a notice filed on 23 April 2021, the first defendant appealed against his Honour's determination that he ought not enter judgment on the counterclaim, and against the order that the proceedings on the counterclaim be adjourned for a directions hearing. The grounds of the first defendant's appeal are as follows:
"1 Upon the trial of separate issues in the proceeding his Honour found (the
findings) in his reasons delivered on 3 March 2021 that:
(a) the Second Defendant (in the proceeding) did certify the payment of liquidated damages in accordance with the (relevant) contract (at [50]); (b) clause 76.8(g)(ii) (of the relevant contract) makes it clear that the contract envisages that liquidated damages will be actually paid by the contractor [the Respondent] upon certification by the sub- independent certifier, albeit on a provisional basis and without a final determination of any dispute relating to it (at [49]); and (c) clause 76.8(g)(ii) of the contract does require the plaintiff [the Respondent] to pay the sum certified by the second defendant, notwithstanding the existence of a Type 1 dispute in that regard (at [51]). His Honour, having so found on 3 March 2021, ruled that the 'question raised on the defence to the counterclaim [had] not been fully resolved by my [3 March 2021] determination' (transcript 30:20-22) and his Honour could not enter judgment on the Appellant's (the First Defendant's) counterclaim as '[t]he estoppel claim,…, requires determination before the counterclaim can be resolved' (transcript 30:25-6) (ruling).
His Honour's ruling is wrong in law because:
A it is inconsistent with his Honour's findings set out in paragraphs 1(a) to (c)
above;B the findings finally and fully dispose of all issues in the counterclaim; and C paragraphs 11(b) to 53 of the Respondent's defence to counterclaim: 6 No 11/2021
(i) upon the findings set out in paragraphs 1(a) to (c) above, are subject to the operation of clause 76.8(g)(ii) of the relevant contract; and
(ii) do not raise an arguable defence to the counterclaim."
12 The first defendant seeks that order 6 made on 13 April 2021 be set aside and that judgment on the counterclaim be entered in favour of the first defendant.
13 For the reasons that follow, in my view both appeals should be dismissed.
| Background |
14 The background and essential features of the contract were helpfully summarised by the trial judge in Hansen Yuncken Pty Ltd v Parliament Square Hobart Landowner Pty Ltd [2021] TASSC 7 at [1]-[13]:
"1 This case concerns disputes which have arisen between the parties to the contractual arrangements in respect of the construction of a stage of the Parliament Square development, in particular that related to the construction and fitting out of the Salamanca building and a building linking the Salamanca building to Parliament House. The plaintiff is the head construction contractor, and the first defendant is the principal. It has that role as trustee for the entity which owns or, at least, controls the land.
2 The construction contract (the contract) was entered into by the plaintiff and the first defendant on 5 December 2014. It was amended by deed dated 15 December 2016. The contract provides for the plaintiff to undertake and complete two categories of work, project works which relate to the construction of the building, and fit-out works which involve the completion of its interior. Provision is made for the contract sum to be paid by way of progress payments, and for variation of the sum in respect of any changes to the schedule of works. Timeframes are established for the performance of the works. Provision is made for payments to the plaintiff in respect of delay in certain circumstances, and the payment of liquidated damages by the plaintiff to the first defendant in the event of delay to the completion of the project not otherwise excused or authorised under the contract.
3 The contract provides for various matters such as payment claims, variations to the works and to timing, and compensation for delay to be assessed and determined by an entity known as the sub-independent certifier. By definition, this role is filled by the second defendant. The sub-independent certifier is engaged and paid by the principal but is required 'to act honestly reasonably and impartially as an independent certifier to the principal and the contractor for the purposes of any decision, function or task' within its responsibility. By virtue of relevant provisions in the contract, the plaintiff and the first defendant entered into a deed with the second defendant in a form provided by a schedule to the contract, which confirmed the sub-independent certifier's functions and the requirement of independence. This is known as the sub- independent certifier deed.
4 Completion of the works is an event described in the contract as stage practical completion. The achievement of stage practical completion is a matter determined by the second defendant. It takes place when the second defendant issues a certificate to that effect. At that point, possession of the site is handed back to the first defendant and the contract moves into a phase described as the defects liability period. This period is fixed at 12 months but may be extended in certain circumstances. During that time, the plaintiff is required to remedy defects and omissions in the works identified either in the certificate of stage practical completion, or otherwise during the defects liability period.
5 As is usual in such contracts, the plaintiff is required to provide security in respect of the performance of its obligations under the contract. Up to the date of stage practical completion, security is to be provided by a combination of bank guarantee in the amount of 5% of the contract sum and an insurance bond in the amount of 2.5% of the contract sum. These are termed 'performance bonds'. At stage practical completion, the performance bonds are to be exchanged for a bank guarantee
7 No 11/2021
in the amount of 2.5% of the contract sum, known as the 'defects bond'. The form of the bank guarantee and insurance bond constituting these securities is set out in a schedule to the contract. That form in each case makes it clear that it is an unconditional and irrevocable promise by the relevant bank to pay on demand any sum demanded by the first defendant during its currency.
6 In accordance with these requirements, prior to the commencement of the works, the plaintiff provided the performance bonds to the first defendant. The bank guarantee component was comprised of two separate guarantees, each for 2.5% of the contract sum. The certificate of stage practical completion was issued by the second defendant on 20 September 2017. Between stage practical completion and 3 November 2017, the first defendant returned the insurance bond and one bank guarantee to the plaintiff, but retained the remaining bank guarantee in the sum of 2.5% of the contract sum which it agreed to hold as the defects bond during the defects liability period. It seems that the parties had agreed that this would, in practical terms, amount to the exchange of the bonds required under the contract. The defects liability period is still extant, and the first defendant still holds the defects bond.
7 Over the course of the works, disputes have arisen between the parties in respect of amounts to which each claims to be entitled under the terms of the contract. These include payments and adjustments associated with alleged variations of the work and claims relating to alleged delay in the completion of the works, and for extensions of time in that regard. On 26 July 2019, the plaintiff made an adjudication application pursuant to the Building and Construction Industry Security of Payment Act 2009 in respect of some of the matters in dispute. On 9 September 2019, the adjudicator determined that the plaintiff was entitled to the sum of $5,310,429.54 in respect of the issues raised in that adjudication. On 18 October 2019, the first defendant commenced proceedings in this Court seeking relief which included quashing the adjudication. On 3 July 2020, Estcourt J rejected the first defendant's application.
8 On 23 June 2020, while those proceedings were pending, the first defendant requested the second defendant to certify that the plaintiff was liable to pay liquidated damages for delay in achieving stage practical completion. The asserted delay had been a longstanding issue between the parties, but there had not previously been certification, or a request for certification, of liquidated damages arising from this issue. The contract provided for the sub-independent certifier to assess and certify liquidated damages. On 29 June 2020, the second defendant certified that liquidated damages in the sum of $3,330,000 were payable by the plaintiff. The calculation of those damages was in respect of a delay of 222 days, from 10 February 2017, the day assessed by the second defendant to be the completion date under the contract, and 20 September 2017, the date of actual stage practical completion. The certificate purportedly gave rise to a negative progress payment, which is a matter which I will discuss later in these reasons.
9 On 3 July 2020, the same day on which Estcourt J rejected the first defendant's bid to quash the adjudication, the first defendant, by way of correspondence from its project manager, demanded payment from the plaintiff in respect of four matters which had been the subject of dispute between the parties, as already discussed. These were:
(a) The payment of $3,330,000 by way of liquidated damages, as already described. (b) The payment of $578,033.53 alleged as overpayments arising from variations to the work. (c) The payment of $93,240 as liquidated damages arising from a shortfall in the minimum lettable area achieved on completion of the contract. (d) The payment of $723,655.47 being asserted over-payments in respect of fit out works. 10 In each case, the correspondence demanded payment by 10 July 2020.
8 No 11/2021
11 There was then a course of correspondence between the parties which eventually led to the commencement of this action. In that correspondence, the plaintiff denied liability for the monies demanded by the first defendant and demanded that the first defendant provide an undertaking that it would not have recourse to the defects bond in order to satisfy the demands made by it. The first defendant refused to provide that undertaking.
12 On 13 July 2020, the plaintiff commenced this action and sought the
following relief:
(a) A declaration that the first defendant has no present entitlement to have recourse to or draw down the defects bond, and an injunction restraining it from doing so in order to satisfy any of the claims set out above. (b) Declarations that the second defendant did not have power to make the determination in respect of liquidated damages, and declaring the determination void.
13 Subsequent to the commencement of the action, I granted an interlocutory injunction preventing the first defendant from having recourse to the defects bond. The interlocutory injunction was granted purely as a practical measure, and did not involve any determination of the merit of the plaintiff's case. The practical circumstances involved the Court offering, and the parties accepting, an early hearing in respect of certain defined issues which are central to the overall dispute between the parties. Those issues are the subject of an order by me pursuant to r 559 of the Supreme Court Rules 2000, that they be heard and determined before each other issue in the action. The specific issues are:
(a) The first defendant's right to call upon the defects bond. (b)
Whether the second defendant certified the payment of liquidated damages in accordance with the contract.
(c)
Whether cl 76.8(g)(ii) of the contract requires the plaintiff to pay the sum certified by the second defendant, notwithstanding any dispute in relation to such certification, including any dispute within the plaintiff's Type 1 notice of dispute dated 6 July 2020, or in the plaintiff's reply and defence to the counterclaim."
The contract
15 It is common ground that at the heart of the resolution of the issues is construction of the contract. The broad principles to be applied in construing contracts are not in dispute and were conveniently summarised by the trial judge:
"There is no controversy concerning the general principles to be applied with respect to the construction of the contract. Once again, the case of JKC Australia LNG Pty Ltd v CH2M Hill Companies Ltd [No 2], contains a convenient summary, drawing upon principles restated by the High Court in Electricity Generation Corporation v Woodside Energy Ltd [2014] HCA 7, 251 CLR 640 [35] and Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd [2015] HCA 37, 256 CLR 104 [46]-[52]. The pertinent part of that summary is as follows:
'1 The rights and liabilities of parties under a provision of a contract are determined objectively by reference to its text, context (the entire text of the contract) and purpose.
2 In determining the meaning of the terms of a commercial contract it is necessary to ask what a reasonable business person would have understood the terms to mean. That enquiry will require consideration of the language used by the parties in the contract, the circumstances addressed by the contract and the commercial purposes or objects to be secured by the contract.
9 No 11/2021
3 The court approaches the task of giving a commercial contract an interpretation on the assumption that the parties intended to produce a commercial result - one which makes commercial sense. (This has been said to require that the construction to be placed on the relevant provision be consistent with the commercial object of the agreement.) Thus a commercial contract should be construed so as to avoid it making commercial nonsense or working commercial inconvenience.'"
16 The plaintiff's general construction obligations are set out in clause 36 of the contract. As to security to be provided by the contractor in respect of its obligations, prior to completion of the constructions works (signalled by the second defendant issuing a certificate of "Stage Practical Completion"), security is provided by a Performance Bond. The contract provides that Performance Bond "means" a bank guarantee in the amount of 5% of the contract sum, plus an insurance bond in the amount of 2.5% of the contract sum.
17 Following the issue of a certificate of Stage Practical Completion, the insurance bond is returned to the plaintiff and the bank guarantee of 5% is "exchanged" for a Defects Bond. The contract provides that Defects Bond "means" a bank guarantee in the amount of 2.5% of the contract sum. Following Stage Practical Completion the first defendant returned the insurance bond, but retained the bank guarantee as the Defects Bond to be held during the Defects Liability Period.
18 The security requirements of the contract are found in Part C which is headed "Contractor's Project Obligations". Part C commences with clause 6:
"6 Security 6.1 Performance Bonds
(a) The Contractor must deliver to the Principal prior to Financial Close the Performance Bonds in favour of the Principal and the National Australia Bank Ltd ('Beneficiaries'). 6.2 Not used 6.3 New Performance Bond on rating downgrade or loss of licence
(a) If an institution providing a Performance Bond ceases to have a Minimum Credit Rating, the Contractor must, within 20 Business Days, provide a replacement Performance Bond that is issued by a complying institution and that otherwise complies with the same requirements as the Performance Bond which it replaces. (b) If: (i) An institution providing a Performance Bond ceases to have a Minimum Credit Rating;
(ii) At that time none of the four major Australian trading banks have the Minimum Credit Rating; and
(iii) The provider has a rating which is less than the second highest rated major Australian trading bank at that time.
Then (iv)
the Contractor must provide a replacement Performance Bond that is issued by an institution which has a rating that is not less than the higher of:
(A) the second highest rated major Australian trading
bank at that time; and(B) BBB/Baa2 Within 20 Business Days.
6.4 Call on Performance Bond 10 No 11/2021
(a)
The Principal may draw down on any Performance Bond at any time without notice if:
(i)
the Principal has a bona fide Claim against the Contractor under or in connection with the Contract;
(ii) an Insolvency Event affects the Contractor; (iii)
the Principal is entitled to terminate this Deed due to a default by the Contractor; or
(iv)
the Contractor has failed to replace any Performance Bond when required under this Deed.
(b) If the Principal draws down on a Performance Bond:
(i) the proceeds received are not held on trust for the Contractor; (ii)
the Beneficiaries are not obliged to pay any interest on that amount;
(iii)
the Principal must provide details of all expenditure of the proceeds to the Contractor;
(iv) the Principal may hold the proceeds:
(A)
if this Deed is not terminated, for the period of time and in the amounts as though they were Performance Bonds;
(B) if this Deed is terminated:
(aa) in accordance with clauses 76A, 77 or 77A;
but(ab)
in the case of termination for Contractor default, until all liabilities of the Contractor to the Principal and the Beneficiaries in connection with this Deed have been discharged.
6.5 No right to restrain The Contractor may not take steps to injunct or otherwise restrain:
(a)
the issuer of a Performance Bond from paying the Principal the proceeds of the Performance Bond;
(b) the Principal from drawing down on a Performance Bond; or (c)
the Principal from using the proceeds received from drawing down on a Performance Bond,
subject to the Principal having acted in accordance with clause 6.4. 6.6 Defects Bonds
(a)
The Performance Bond that consists of the insurance bond of 2.5% of the Contract Sum will be returned to the Contractor within 5 Business Days of the issue the Certificate of Stage Practical Completion.
(b)
The Performance Bond that consists of the Bank Guarantee of 5% of the Contract Sum will be exchanged for the Defects Bond within 5 Business Days of the Contractor's compliance with clause 36.4(g).
(c)
Subject to paragraph (c) below, the Defects Bond will be returned within 5 Business Days of the issue of a certificate under clause 68.4.
(d)
If the Defects Liability Period is extended more than 12 months in relation to any works to make good an omission or defect in the Works, at the expiry of the original Defects Liability Period the Contractor may replace the Defects Bond with a Bank Guarantee for the value of the cost of rectifying those works that are subject to the extended Defects Liability Period (that value as determined by the Sub-Independent Certifier)."
11 No 11/2021
19 Clause 6 is of critical importance to the resolution of the contested issues. The following points are of significance:
• Two types of security are identified in s 6. A Performance Bond (applying during construction), and a Defects Bond (applying after completion of construction and during the Defects Liability Period). • Clause 6.4 provides that the first defendant "may" draw down on any Performance Bond, "at any time without notice", if the first defendant possesses a "bona fide Claim"[1] against the first defendant. • The proceeds drawn down are "not" held on trust for the plaintiff and, although the first defendant must provide to the plaintiff details of all expenditure of the proceeds, it is not obliged to pay interest on the proceeds. • Clause 6.4(b), (c) and (e) impose specific obligations on the first defendant following a draw down on a Performance Bond. • Clause 6.5 provides that the plaintiff is not permitted to take steps "to injunct or otherwise restrain" the issuer of the Performance Bond from paying the plaintiff the proceeds of the Bond, or to restrain the first defendant from drawing down on a Performance Bond. • These restraints on the plaintiff in clause 6.5 are expressly subject to the first defendant "having acted in accordance with clause 6.4". • After the issue of a Stage Practical Completion certificate, and after the plaintiff complies with clause 36.4(g) by delivering appropriate warranties, the insurance bond portion of the Performance Bond is returned to the plaintiff, and the bank guarantee portion of 5% is "exchanged" for the Defects Bond which consists of a bank guarantee of 2.5%.[2] • In the context of detailed provisions within clause 6 concerned with the circumstance in which the first defendant "may" draw down on a Performance Bond, and restraining the plaintiff from preventing such a draw down, clause 6.6 deals with the Defects Bond without any reference to the circumstances in which the first defendant is entitled to call upon the Defects Bond. [1] "Claim" is defined as meaning "any allegation, debt, cause of action, liability, claim, proceedings, suit or demand of
[2] Possession of the site passes to the first defendant after the certificate of Stage Practical Completion is issued.
20 The contract provides for a Defects Liability Period which "means" each of the following
periods:
"(a) in relation to the Works, the period of 12 months commencing on the Date of Stage Practical Completion; and
(b) in relation to any works to make good an omission or defect in the Works, the
period of 12 months commencing on the date of rectification of that omission or
defect."
21 Clause 6.6(c) provides that subject to the Defects Liability Period being extended, the Defects Bond will be returned within 5 business days of the issue of a certificate under clause 68.4. In essence, clause 68.4 provides for the issue of a certificate, within one month after the expiry of each Defects Liability Period "under the Development Agreement"[3], stating that in the opinion of the
12 No 11/2021
[3] Development Agreement is defined as meaning the agreement between the Minister and the first defendant dated
independent certifier, all known defects in or omissions from the Works[4] "under the Development
Agreement", which relate to the Defects Liability Period, have been rectified.[4] Works is defined as meaning the Project Works and the Fitout Works.
22 As to the rectification of defects, throughout the construction and Defects Liability Period, clause 68 provides for the first defendant to give notice of defects in or omissions from the Works at any time before the end of the Defects Liability Period, and specifies that the plaintiff must make good the defects or omissions as soon as practicable, or in any event, within 7 business days of becoming aware of the defect or omission. In addition, the plaintiff must rectify any defects or omissions identified in the Certificate of Stage Practical Completion.
23 Clause 68.1 is as follows:
"68 Defects or omissions 68.1 Contractor to remedy defects or omissions
(a) The Principal may at any time , and from time to time , before the end of the Defects Liability Period give notice in writing to the Contractor specifying defects in or omissions from the Works. (b) Subject to this clause 68.1, the Contractor must, during and following the carrying out of the Works, make good any defects in or omissions from the Works that it becomes aware of and, subject to clause 68.2(b), must do so as soon as practicable, but in any event within 7 Business Days (or such longer period determined in writing by the Independent Certifier under the Development Agreement having regard to the nature of the defect or omission) , after becoming aware of the defect or omission. (c) As soon as possible after the Date of Stage Practical Completion , the contractor must rectify any defects in or omissions from the Works notified prior to or as set out in the Certificate of Stage Practical Completion. (d) The Contractor must, during the Defects Liability Period, make good any defects in or omissions from the Works that it becomes aware of at its cost and, subject to clause 68.2(b), must do so as soon as practicable, but in any event within 7 Business Days (or such longer period determined in writing by the Independent Certifier under the Development Agreement having regard to the nature of the defect or omission), after:
(i) becoming aware of the defect or omission; or (ii) the Principal notifying the Contractor of the defect or omission. (e) The Contractor must, when carrying out any works to rectify any defects in or omissions from the Works, comply with its obligations under this Deed in relation to carrying out of any Works."
24 Clause 68.2 deals with any defect or omission in a building occupied by the Crown or the Crown's agent or in respect of Fitout Works. As discussed earlier, clause 68.4 concerns certification that defects or omissions relating to the Defects Liability Period have been rectified. If the Certifier determines that defects or omissions have not been rectified, clause 68.4 provides for rectification and procedure to be followed in the event of a dispute.
25 Clause 68.5 provides that if the plaintiff fails to properly make good on known defects or omissions, the first defendant may carry out rectification works for which the plaintiff must pay or reimburse the first defendant.
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26 Clause 69 concerns the issue of a "final certificate" after the issue of a certificate under clause 68.4 and after the delivery by the plaintiff to the first defendant of a deed of release.
27 Clause 70 concerns the duty of the plaintiff to carry out the Works in a manner which does not result in the first defendant suffering any loss or damage to Crown property. Other clauses that follow concern insurance and the plaintiff's indemnity to the first defendant.
28 In this context, clauses 75 and 76 deal with the consequences of a "Default Event". The plaintiff relies on these clauses as identifying the only basis upon which the first defendant is entitled to have recourse to the Defects Bond.
| 29 | The definition of Default Event is as follows: "Default Event means each of the following events: | |||||||||
|
30 Clause 75 concerns the first defendant giving notice to the plaintiff of a Default Event and the obligation of the plaintiff to remedy the Default Event:
"75 Default Event 75.1 Occurrence of Default Event If a Default Event occurs, the Principal may give the Contractor a notice in accordance with this clause 75.1 (Default Notice). A Default Notice must:
(a) state that it is a Default Notice under this clause 75.1; and (b) specify the Default Event. 75.2 Remedy Period
(a) Subject to clause 75.2(b) and clause 75.3, upon receipt of a Default Notice the Contractor must remedy (to the extent that it is capable of being remedied) the Default Event specified in the Default Notice within the Remedy Period. (b) Despite any other provision in this Deed:
(i) no Remedy Period applies in respect of a Financial Default;
(ii) no Remedy Period applies in respect of an Insolvency Event;
(iii) no Remedy Period applies in relation to a Construction Activity Default in respect of which the Principal elects to give a Construction Activity Default Notice; and
(iv) no Remedy Period applies in respect of a Default Event that is not capable of being remedied."
31 Clause 75.3 is concerned with an extension to the remedy period.
32 Clause 76 provides for remedies available to the first defendant in respect of Default Events, including recourse to the Defect Bond:
"76 Principal's remedies for Default Events 14 No 11/2021
76.1 Remedies
If a Default Event has occurred and the Default Event is:
(a)
capable of being remedied and is not remedied by the Contractor to the Principal's satisfaction (which may include the payment of compensation) within the Remedy Period;
(b)
a Financial Default and is not remedied by the Contractor within three Business Days of receipt of the Default Notice specifying the Financial Default;
(c) an Insolvency Event; or
(d) not capable of being remedied, other Project Document or at Law) do any, or a combination of any of, the following :
(e)
subject to clause 6, have recourse to any or all of the Performance Bonds and the Defects Bonds for the purpose of paying to the Principal any Performance Bond Secured Amounts;
(f) not used;
(g) in respect of a Material Default only, terminate this Deed;
(h) not used;(i) if the Default Event occurs prior to the date the Final Certificate is given, exercise the Principal's step-in and step-out Rights as set out in clause 76.5;
(j) not used; and
(k) exercise or enforce its Rights under clause 76.2
76.2 Rights and liabilities of parties following termination by Principal
(a) If the Principal terminates this Deed pursuant to clause 76.1(g) , the Principal may (in addition to any other Rights under this Deed, any other Project Document or at Law) do any or a combination of any of the following: (i) have recourse to any or all of the Performance Bonds an [sic] Defects Bonds for the purpose of paying to the Principal any Performance Bond Secured Amounts;
(ii) not used;
(iii) not used;
(iv) require the Contractor to:
(A) cease Works immediately; (B)
assign or novate to the Principal or its nominee any contract (including any subcontract, supply agreement or consultancy agreement) entered into by the Contractor for the purposes of the performance of the Works;
(C) secure the Site and make the Works safe (D)
deliver to the Principal all Design Documentation in such form (including software) and organised to the satisfaction of the Principal's Representative; and
(E)
make available all materials, equipment, machinery and supplies located on the Site for use by the Principal and its nominees in the completion of the Works.
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(b) Subject to clause 76.3(b)(ii), no compensation of any kind is payable by the Principal to the Contractor in respect of the termination of this Deed pursuant to clause 76.1(g)." (My emphasis.)
33 The "Remedy Period" within which a Default Event must be remedied is defined as meaning 15 business days from and including the date of service of the default notice, and any extended period granted under clause 75.3. If an extension is granted, the plaintiff is required to provide to the first defendant a remedy plan which is defined as including the time required to cure the Default Event and a work plan setting out each task to be undertaken.
34 It is contended by the plaintiff that the first defendant may only have recourse to the Defects Bond if clause 76 is engaged, and such engagement can occur only if notice of a Default Event has been given in accordance with clause 75.
Recourse to the Defects Bond – reasoning of the trial judge
35 The trial judge noted the definition of "bank guarantee" as meaning an "irrevocable, unconditional guarantee", and that the form in Schedule 4 is consistent with the definition. The guarantee provided that the bank "unconditionally undertakes to pay on demand any sum or sums which may from time to time be demanded" by the first defendant. Further, it provided that upon notice in writing from the first defendant of a desire for payment of the whole or part of the maximum sum guaranteed, "it is unconditionally agreed that such payment or payments will be made to [the first defendant] forthwith without reference to the [plaintiff] and notwithstanding any notice given by the [plaintiff] to [the bank] not to pay the same".
36 After considering clauses 6.1–6.5 in connection with Performance Bonds, the trial judge correctly concluded that the Performance Bond is intended to "allocate risk". Having observed that in contrast to the Performance Bond, there were no provisions in clause 6 dealing with the circumstances in which the first defendant might draw down on the Defects Bond, his Honour said at [22]:
"However, the Defects Bond itself is in the same form as the Performance Bond, that is an irrevocable and unconditional promise by the bank to pay monies under the bond to the first defendant upon demand, and notwithstanding any objection from the plaintiff."
37 The trial judge noted the argument for the plaintiff that the differential treatment of the Performance and Defects Bonds in clause 6, and the exchange of one for the other at the time of practical completion, led to an interpretation that the Defects Bond "is intended simply to operate as security for the performance by the plaintiff of its obligations during the Defects Liability Period". After referring to clauses 75 and 76, his Honour addressed the plaintiff's contention that the only right of the first defendant to drawn down on the Defects Bond arises from these provisions, and the first defendant was only entitled to recourse to the Defects Bond if it followed the steps in those clauses, including serving a Defect Notice on the plaintiff.
38 The trial judge found that the reasoning underpinning the plaintiff's contention involves a "negative stipulation" that the first defendant could not have recourse to the bond other than in accordance with the provisions in clauses 75 and 76. In his Honour's view, having regard to the bank guarantee, [27]:
"The unconditional and irrevocable nature of the bond it not consistent with the right to have recourse to the Defects Bond being limited to the express provision contained in clause 76.1(e). The bond is 'as good as cash' and this in turn suggests that the Defects Bond is intended to have an operation outside that specified in clause 76.1(e)."
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39 Referring to the plaintiff's submission that the primary, if not exclusive, function of the Defects Bond is to operate as security for the performance by the plaintiff of his obligations during the Defects Liability Period, his Honour found that this purpose is "inconsistent with access to the bond by the first defendant being limited to the circumstances prescribed by clause 76.1." His Honour's reasons continued [28]:
"This is because it is extremely unlikely that clause 76 is intended to regulate or, indeed, have anything to do with, the relationship of the parties during that period, other than in a general way applicable to the contract as a whole. It certainly is unlikely to apply to the rectification of defects and omissions identified before or during that period."
40 The trial judge observed that the operation of clause 76.1 is triggered by a Default Event. His Honour noted that although the definition included a failure by the contractor to comply with any provision of the contract, which words could include defects in construction, the remainder of the definition referred to matters which have "little, if anything, to do with the day to day operation of the Defects Liability Period", and "do not include within their scope, a defect or omission which is the trigger for the contractor's obligation to perform remedial work during [that] period" [29]. His Honour was there having regard to the definitions of Material Default, Financial Default and Construction Activity Default. None of those matters relate to defects or omissions in construction.
41 The trial judge determined that clause 68 provides a "discrete process" for the rectification of "defects in or omissions from the works". His Honour then concluded that it is "abundantly clear" that the remedies prescribed by clause 76 "are intended to have little, if anything, to do with the operation of the Defects Liability Period". His Honour's reasons continued [30]:
"[30] … Firstly, it is not at all clear that the trigger for the contractor's liability under cl 68, 'defects in or omissions from the works' falls squarely within the definition of default event. It may do so, but it can also be envisaged that such a defect or omission may not necessarily constitute 'a failure by the contractor to comply with any provision of this deed'. It certainly does not fall under the definition of a material, financial or construction activity default. Further, resort to cls 75 and 76 is both unnecessary and inconsistent with the rights of the first defendant under cl 68. The requirement under that clause is for rectification within 7 days and, in some cases, 24 hours. It is clearly not intended that resort be had to a default notice and a 15 business day remedy period, which in effect extends to three weeks or longer, under cl 75. The rectification of defects is regulated by cl 68. There is nothing in that clause that explains or affects the operation of the defects bond.
[31] There is no question that the defects bond can be resorted to under the express provisions of cl 76.1(e). However, that clause is intended to make all relevant and outstanding security available for recourse by the first defendant in the specific circumstances referred to in that provision. It does not give rise to a negative stipulation or, as Mr McElwaine framed it, the only express provision for recourse to the defects bond. In my view, cl 76.1 is of little relevance to the construction of the contract with respect to the operation of the defects bond generally.
[32] Accordingly, I reject Mr McElwaine's submission that resort to the defects bond is limited to the circumstances prescribed by cl 76.1. If that were the case, then the defects bond would have no work to do with respect to the operation of the defects liability period, in particular under cl 68, even simply as security for the performance of the contractor's obligations during that period. This cannot have been the intention of the parties."
42 The trial judge then explained his ultimate conclusions [33] – [36]:
"[33] On the other hand, I do not accept Mr Twigg's submission that the express provisions of cl 6.1 to cl 6.5 apply to the defects bond. In my view, the separate definition of performance bond and defects bond, and the express provisions of cl 6.6,
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which deal exclusively with the defects bonds, evince a clear intention of the parties to treat the defects bond separately to the performance bond. It is difficult to explain why the drafter of the contract would not have made express provision for the operation of the defects bonds, given the choice to do so in respect of the performance bond, but this does not mean that the intention of the parties cannot be discerned from the terms of the contract as a whole. In my view, the critical matter informing the intention of the parties with respect to the defects bonds arises from the definition of defects bond, and, in particular, the formulation of the bank guarantee by which it is constituted under that definition. I reiterate the discussion from Fletcher Constructions relating to this question, which is set out above. Given the prescribed form of the defects bond, it is clear that it was intended to have the risk allocation function referred to in the cases already discussed. In particular, I conclude that it was intended to be available to the first defendant in the event of a bona fide dispute arising during the defects liability period. The purpose of such recourse is to ensure that the first defendant is not out of pocket pending the resolution of such a bona fide dispute. In accordance with judicial observations in the cases discussed above, this is consistent with an intention that the first defendant may have recourse to the bond, in the event of such a dispute, without reference to the plaintiff, and without demonstrating to anyone, including the Court, the merits of the dispute. This interpretation sits comfortably with the provisions of cl 68, including those which permit the first defendant, in certain circumstances, to undertake the work and recover the cost from the contractor.
[34] A further question is whether for a dispute to be a bona fide one, justifying recourse to the bond, it must legitimately arise only in respect of the operation of the defects liability period, or whether it can extend to the type of dispute which had its genesis well before the date of stage practical completion, as reflected in the demands made by the first defendant's correspondence to the plaintiff, as discussed above. This includes, of course, the claim for liquidated damages.
[35] In my view, it is clear that a bona fide dispute and consequent recourse to the defects bond, may include subject-matter of this nature. Despite the inadequacies of the drafting of the contract, it is clear enough that the intended risk allocation continues in respect of any bona fide dispute arising under the contract at any time. The important distinction between the performance bond and the defects bond is the lesser quantum of security provided by the latter. This is consistent with a prediction by the parties that, during the defects liability period, the type of dispute which may trigger recourse to the bond is likely to give rise to a need for a lesser quantum of security. I do not think that there is an intention to make any other distinction. It is certainly not the case that this prediction is intended to restrict the risk allocation role of the defects bond. This is consistent with the express inclusion of a defects bond in the monies available to satisfy a liability arising pursuant to cl 76.1. It is also relevant that the calculation of liquidated damages, which arises pursuant to cl 76.8, can realistically only be undertaken after the date of stage practical completion. There is nothing in the contract, when read as a whole, to suggest that the parties intended to exclude a dispute about this matter from security recourse under the defects bond. However, the money available to give effect to the risk allocation is simply reduced after stage practical completion.
[36] Accordingly, I am satisfied that the first defendant is entitled to have recourse to the defects bond without notice to the plaintiff, in the event of a bona fide dispute. That dispute can relate to matters which arise prior to stage practical completion, including those referred to in the demand for payment made in the first defendant's correspondence dated 3 July 2020."
Plaintiff's submissions
43 In summary, the written submissions of the plaintiff advance the following contentions:
•
"The contract draws a plain textual and contextual distinction between the Performance Bond and the Defects Bond".
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• It is significant that within clause 6 are express provisions dealing with drawing down on the Performance Bond, and prohibiting the plaintiff from restraining the draw down, but similar entitlements on the first defendant and similar restraints on the plaintiff are not expressed in clause 6.6 with respect to the Defects Bond. • Default Events are defined widely as including a failure to comply with a provision in the contract. The only right possessed by the first defendant to have recourse to the Defects Bond "is that conferred by clause 76.2(e) which is conditional upon the occurrence of a Default Event and the issue of the Default Notice pursuant to clause 75.1". • "If there is no relevant difference between the Defects Bond and Performance Bond (the former being embraced within the latter), then the exchange mechanism at clause 6.6(b) makes no sense: Performance Bond cannot be exchanged for a Defects Bond if the two are one in the same thing". • "In rejecting the appellant's construction arguments, the primary judge erroneously strayed from the plain textual and contextual meaning of the clauses in issue by reference to general considerations of risk allocation which in turn led him to erroneously conclude at [33] that, despite the distinction between the Performance Bond and the Defects Bond, the purpose of provision of the security required the conclusion that the first respondent may access the Defects Bond simply in the event of a bona fide dispute. That reasoning is inconsistent with the division of risk in this Contract. Clause 6 does not confer a right to access the Defects Bond where the first respondent has a bona fide dispute. The definition of Performance Bond does not embrace the Defects Bond. The only express reference to a right to access the Defects Bond is at clause 76.1(e). It must follow that there is no general right to do so, which is the conclusion of the primary judge." 44 In oral submissions, counsel for the plaintiff submitted that the approach of the first defendant in asking whether there is a qualification to the right to call upon the unconditional guarantee is the incorrect approach. Counsel contended that the question is "very simple", namely, "what is the right of the first defendant to call on the Defects Bond?" The answer given by counsel was that the right exists only if clause 76 is engaged.
45 In this context, the plaintiff submitted that the contract under consideration between the parties is different from the contracts considered by the authorities upon which the trial judge relied. In particular, counsel contended that the trial judge erred in reasoning by "analogy" from judicial statements made in Fletcher Construction Australia Ltd v Varnsdorf Pty Ltd [1998] 3 VR 812 and Clough Engineering Ltd v Oil and Natural Gas Corporation Ltd [2008] FCA 191, 249 ALR 458.
Authorities
46 In Wood Hall Limited v The Pipeline Authority (1979) 141 CLR 443, the High Court was concerned with a construction contract which provided that a contractor would, at the time of the execution of the contract, pay $1.5 million cash to the owner as security for the contractor's "due and faithful performance of the Work". The contract also provided that, as an alternative to cash security, the contractor could provide a bank guarantee. The parties agreed that a bank guarantee given by the bank pursuant to an earlier contract could be provided as the security. Additional guarantees were also provided
47 The bank guarantee provided that the bank would unconditionally pay on demand any sums which might be demanded from time to time by the owner.
48 The owner took deliberate steps to conceal from the contractor its intention to make demand upon the bank, and made the demand for payment in full of the amounts payable under each of four bank guarantees. Demand was made in the context of serious disputes between the parties. Gibbs J
19 No 11/2021
identified the ultimate question as whether the bank was bound to make payment under the guarantees, or whether the action of the owner in making the demands constituted a breach of contract. The contractor argued that the obligation of the bank to make payment was "conditional upon the making of a demand by the Authority in circumstances in which the Authority had a right under the contract to make such a demand ie after the contractor had committed a breach of its primary obligations under the contract." (450)
49 Gibbs J found that on the proper construction of the guarantees, the obligation of the bank to meet the demand was not dependent upon the existence of circumstances which gave the Authority a right to have recourse to the guarantees. In his Honour's view (451):
"To hold that the bank guarantees are conditional upon the making of a demand that conforms to the requirements of the contract between the Authority and the contractor would of course be quite inconsistent with the express statement in the bank guarantees that the undertaking of the Bank is unconditional. To hold that the Bank should not pay on receiving a demand, but should be bound to enquire into the rights of the Authority and the contractor under a contract to which the Bank was not a party would be to depart from the ordinary meaning of the undertaking that the Bank is to pay on demand. It would be contrary to the settled rules governing the implication of terms in contracts to imply provisions that would contradict the ordinary meaning of the words of the bank guarantees in this way."
50 Stephen J emphasised the "commercial currency" of the guarantees being the equivalent of a cash payment, and "being instantly and unconditionally convertible to cash" (457). As to the argument that in making the demands the Authority was in breach of the contract and, therefore, was not entitled to call upon the guarantees, Stephen J held that the contention "must fail because of the terms of the guarantees themselves". Again, his Honour emphasised that the guarantees "stood in place of cash securities", and that since their terms provided for an unqualified right to demand payment at any time, those terms "must be taken to have represented the intention of the parties" (458).
51 Stephen J added a qualification (459):
"Had the construction contract itself contained some qualification upon the Authority's power to make a demand under a performance guarantee, the position might well have been different. In fact the contract is silent on the matter."
52 Gibbs J declined to determine whether a breach of contract would alter the result (452):
"It is unnecessary to consider whether it would be possible to grant to the contractor any relief against the Bank if it were established that the making of a demand by the Authority was a breach of its duty to the contactor, because, for the reasons which I am about to state, I consider that the Authority was entitled, as between itself and the contractor, to make the demands when it did."
53 The plaintiff is correct in identifying that, unlike the contract between the plaintiff and the first defendant, the contract in Wood Hall was silent as to any qualification to the right to have recourse to the guarantee. However, the emphasis given to the unconditional nature of the guarantees, and their "commercial currency", remains relevant to the question of construction.
54 In Reed Construction Services Pty Ltd v Kheng Seng (Australia) Pty Ltd (1999) 15 BCL 158, Austin J was concerned with a maintenance bond provided by the contractor "for the purpose of ensuring the due and proper performance of the contractor's obligations" under a construction contract. Austin J observed that the bond "constitutes an unconditional promise by FAI to pay to the defendant on demand any sums which may from time to time be demanded", but although the bond was expressed as security to ensure due and proper performance of the builder's obligations, the bond did not, "as a matter of construction import the terms of that contract into the bond" (161).
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55 A clause of the contract stated that any security provided by the contractor "shall be available to the proprietor whenever the proprietor shall be entitled to payment of monies by the builder … or whenever the proprietor shall be entitled to reimbursement of any monies paid to others under this Agreement".
56 Austin J referred to Wood Hall and other authorities and made the following remarks which were subsequently approved by the Full Court of the Federal Court in Clough Engineering Ltd v Oil and Natural Gas Corporation Ltd (above) (164):
"While, therefore, the court will not enjoin the issuer of the bond from performing its unconditional obligation to make payment, there are some exceptions to the proposition that the performance of the bond is an event in which the court will not intervene at all.
There are three principal exceptions. The first, noted in passing by Gibb J in Wood Hall case (at 451) and recognised as well by Young J in Hortico (Aust) Pty Ltd v Energy Equipment Co (Aust) Pty Ltd (1986) 2 BCL 366, 370, is that the court will enjoin the party in whose favour the bond has been given for acting fraudulently. The second exception, recently recognised by the Victorian Supreme Court in Olex Focas Pty Ltd v Skodaexport Co Ltd [1997] (ATER Digest) [46-163], is that the court will intervene to restrain the party for whose benefit the bond was given from acting unconscionably for the purposes of s 51AA of the Trade Practices Act 1974 (Cth).
There is a third exception, which is based on contract and is the most important for present purposes. A line of cases has recognised that whilst the court will not restrain the issuer of the bond from acting on the unqualified promise to honour it, if the party in whose favour the bond has been given has made a contract promising not to call upon the bond, breach of that contractual promise may be enjoined on normal principles relating to the enforcement by injunction of negative stipulations in contracts.
In the building context the key issue will be whether a negative stipulation is expressed or implied in the building contract."
57 Austin J identified the question for consideration as to whether there was an express or implied negative stipulation in the building contract that the proprietor had promised not to call upon the bond in the circumstances under consideration. His Honour found that there was an implied prohibition which amounted to "a contractual stipulation between the plaintiff and the defendant which limits what would otherwise be the defendant's absolute entitlement to insist on payment under the security". His Honour then analysed the clause to which I earlier referred and, in particular, found that the words "shall be entitled" require "substantially more than having a bare claim to be entitled to reimbursement".
58 The plaintiff denies any reliance on a negative stipulation in the contract. As mentioned, the case for the plaintiff is based upon the proposition that the correct approach is to identify, from the terms of the contract, the right of the second defendant to call on the Defects Bond, and the circumstances in which the second defendant is entitled to exercise that right.
59 In Clough Engineering Ltd v Oil and Natural Gas Corporation Ltd, the Full Court of the Federal Court was concerned with performance bank guarantees and the relevant principles of construction. After referring to the decision of the High Court in Wood Hall, the joint judgment identified "three principal exceptions" to the rule that a court will not restrain the issuer of the guarantee from performing its obligations under the guarantee:
"77 Nevertheless, the authorities have recognised three principal exceptions to the rule that a court will not enjoin the issuer of a performance guarantee, or bond, from performing its unconditional obligation to make payment. The exceptions were succinctly stated, with references to relevant authorities, by Austin J in Reed Construction Services Pty Ltd v Kheng Seng (Aust) Pty Ltd (1999) 15 BCL 158 at 164-165:
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First - the Court will enjoin the party in whose favour the performance guarantee has been given from acting fraudulently: see eg Wood Hall Ltd 141 CLR per Gibbs J (at 451). As the primary judge observed at [36] Clough does not assert that ONGC has made a fraudulent claim. Accordingly, the first exception has no application in the present case.
Second - the party in whose favour the performance bank guarantee has been given may be enjoined from acting unconscionably in contravention of s 51AA of the TPA: Olex Focas Pty Ltd v Skodaexport Co Ltd [1998] 3 VR 380. On this point, different views have been expressed about the reach of s 51AA. The High Court has not determined which of these views is correct: Australian Competition and Consumer Commission v CG Berbatis Holdings Pty Ltd (2003) 214 CLR 51 at [44]-[45]. In any event, none of the categories of unconscionable conduct recognised in Australian Competition and Consumer Commission v Samton Holdings Pty Ltd (2002) 117 FCR 301 at [48] apply in this case. Accordingly, the second exception has no application.
Third - the most important exception for present purposes, is that, whilst the Court will not restrain the issuer of a performance guarantee from acting on an unqualified promise to pay:
'… if the party in whose favour the bond has been given has made a contract promising not to call upon the bond, breach of that contractual promise may be enjoined on normal principles relating to the enforcement by injunction of negative stipulations in contracts.
Reed Construction Services 15 BCL at 164 (Austin J)'
It may be preferable not to describe this as an exception but rather as an over-riding rule because it emphasises that the 'primary focus' will always be the proper construction of the contract: Bateman Project Engineering Pty Ltd v Resolute Ltd (2000) 23 WAR 493 per Owen J at [30]. Stephen J recognised this in Wood Hall Ltd 141 CLR at 459 by observing that the provisions of the contract may qualify the right to call on the undertaking contained in a performance guarantee.
78 Numerous authorities have accepted the third proposition. Many were referred to in Reed at 165. Others include Fletcher Construction [1998] 3 VR at 826- 7; Bachmann Pty Ltd v BHP Power New Zealand Ltd [1999] 1 VR 420 at [28]; Baulderstone Hornibrook Pty Ltd v Qantas Airways Ltd [2000] FCA 672 at [10], Rejan Constructions Pty Ltd v Manningham Medical Centre Pty Ltd [2002] VSC 579 at [37].
79 In Fletcher Construction [1998] 3 VR 812, Charles JA at 821 and Callaway JA at 826 recognised that there are generally two commercial reasons why a beneficiary of a performance guarantee may have stipulated for such an entitlement. One is to provide security for a valid claim against the contractor. The second, which is additional to the first, is to allocate the risk between the parties as to who shall be out of pocket pending the resolution of a dispute between them. Callaway JA went on to observe that it is a question of construction of the underlying contract whether the guarantee is provided solely by way of security or also as a risk allocation device. He went on to say (at 827):
'Remembering that we are speaking of guarantees in the sense of standby letters of credit, performance bonds, guarantees in lieu of retention moneys and the like, the latter purpose is often present and commercial practice plays a large part in construing the contract. No implication may be made that is inconsistent with an agreed allocation of risk as to who shall be out of pocket pending resolution of a dispute and clauses in the contract that do not expressly inhibit the beneficiary from calling upon the security should not be too readily construed to have that effect. As I have already indicated, they may simply refer to the kind of default which, if it is alleged in good faith, enables the beneficiary to have recourse to the security or its proceeds.'
80 It seems to us that his Honour's reference to a default 'alleged in good faith' was intended to embrace the first exception we have set out above. That is to say, the breach relied upon to support a call on the performance guarantee must not be asserted fraudulently because the Court will enjoin a party from so acting. Thus, subject to the exceptions of fraud and unconscionability, the beneficiary of a performance guarantee granted in its favour as a risk allocation device, will be
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entitled to call upon the guarantee even if it turns out, ultimately, that the other party
was not in default: Fletcher Construction [1998] 3 VR at 827.81 In determining whether the underlying contract confers an unfettered right to call upon the performance guarantee, the importance of such instruments in the construction industry, both nationally and internationally, is a factor which bears upon the question of construction of the Contract. A number of authorities support this proposition:
(1) In Wood Hall Ltd 141 CLR at 457-458, Stephen J referred to English authority which described the performance guarantee as standing on a similar footing to a letter of credit.
(2) In the passage from the judgment of Callaway JA in Fletcher Construction [1998] 3 VR at 827 quoted above, his Honour emphasised the importance of commercial practice in construing the contract. The reference in the judgment of Charles JA at 822 to the passage from Hudson's Building and Engineering Contracts, is to similar effect.
(3) In Bachmann [1999] 1 VR 420, Brooking JA referred at [51] to the practice in the United States. He said that the generally accepted view in that country is that standby letters of credit (and hence, performance guarantees) are intended by the parties to the underlying contract to require the supplier or contractor to:
… stand out of the amount of the credit in favour of the buyer pending resolution of commercial contract are to be taken to have contracted against a background which includes the earlier authorities on the construction of similar contracts.
the underlying dispute.
(4) This approach is supported by the observations of Hobhouse LJ in Toomey v82 Notwithstanding the importance of commercial practice, the statements in these authorities do not suggest that the Court should depart from the task of construing the terms of the contract in each case. What the authorities emphasise is that the commercial background informs the construction of the contract. In particular, as Callaway JA said in the passage quoted above, the Court ought not too readily favour a construction which is inconsistent with an agreed allocation of risk as to who is to be out of pocket pending resolution of the dispute about breach.
83 It follows that clear words will be required to support a construction which inhibits a beneficiary from calling on a performance guarantee where a breach is alleged in good faith, ie, non-fraudulently. This view is also supported by the remarks of Charles JA in Fletcher Construction [1998] 3 VR at 820-821. There, his Honour analysed and placed some doubt upon the correctness of decisions such as Pearson Bridge (NSW) Pty Ltd v State Rail Authority of New South Wales (1982) 1 Australian Construction Law Reports 81 at 86.
84 In Pearson Bridge 1 Australian Construction Law Reports at 86, and in other authorities which have followed it, Yeldham J held that the words '(i)f the Principal becomes entitled to exercise all or any of the rights under the Contract …' contained an implied negative stipulation which qualified the Principal's entitlement to call upon the guarantee. In Fletcher Construction [1998] 3 VR, Charles JA at 820- 821 appeared to prefer the views of Cole J in Hughes Bros Pty Ltd v Telede Pty Ltd (1989) 7 BCL 210, where his Honour concluded that a similar clause contained no such qualification.
85 The question of construction as to whether the underlying contract contains a qualification on the right to call upon the security must be determined in light of the contract and the form of the performance guarantee as contained in the contract. This accords with the basic principle of construction that the terms of an instrument must be read as a whole: Re Media, Entertainment and Arts Alliance; Ex parte The Hoyts Corporation Pty Ltd (1993) 178 CLR 379 at 386-387. It also accords with the approach taken to the construction of the underlying contract in the leading authorities to which we have referred: see eg Wood Hall Ltd 141 CLR at 445, 451, 457- 458; Fletcher Construction [1998] 3 VR at 821-822."
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60 The judgment in Clough Engineering supports the approach taken by the trial judge, as does the judgment of the Western Australian Court of Appeal in JKC Australia LNG Pty Ltd v CH2M Hill Companies Ltd (No 2) [2020] WASCA 112. The court was concerned with a construction contract and parent company guarantees provided in respect of the performance of a sub-contractor's obligations. The joint judgment of Buss P and Vaughan JA emphasised that previous decisions are of assistance in identifying features which are often considered to be of significance in construing contracts and performance guarantees, but there is no separate rule of construction for such contracts and "the usual process of constructions applies" [74].
61 Having observed that many cases are concerned with the proper construction of a contract, rather than the guarantee itself, their Honours said [77]:
"In that connection it is established that, in construing the contract, the unconditional nature of a performance bond, and its terms, can be taken into account where the contract attaches and approves the form of the bond. However, the terms of the performance bond do not control the question of construction". [Citation omitted.]
62 The trial judge cited a passage from the joint judgment in JKC Australia which he identified as summarising the proper approach to determining whether a performance guarantee operates for the purpose of risk allocation [82]:
"2 The court should not too readily favour a construction which is inconsistent with an agreed allocation of risk as to who is to be out of pocket pending resolution of a dispute. However, whether an instrument has a purpose of allocating risk pending determination of a dispute cannot be assumed. It is to be identified as a matter of contractual construction. The description 'risk allocation device' expresses a process of conclusion after the process of construction has been worked through. 3 The fact that a guarantee is required to be unconditional is one factor which may lead to the conclusion that the intention of the parties was to allocate risk. Thus the typical language of a performance bond (where appended to the underlying contract so as to constitute an approved form for the purposes of the contract) may provide a reason to conclude that the contract between principal and contractor is to have the consequence that the bond is to operate as a risk allocation device. [Footnotes omitted.]"
63 From the authorities, in my view the trial judge correctly summarised the position with respect to constraining access to a performance guarantee which fulfils the function of risk allocation [15(d)]:
"(d) In a case where on the proper construction of the contract, the performance guarantee fulfils the function of risk allocation, and is facilitated by an undertaking on the part of the third party which is unconditional and irrevocable, the court will not prevent access to the security by the benefiting party, except:
(i) in the case of fraud, or
(ii) in order to prevent unconscionable conduct on the part of the
benefiting party, or
(iii) where to do so would contravene a negative stipulation contained in
the contract. It is accepted that the negative stipulation can be express or
implied.
See Clough at [77]
(e) The cases have generally accepted that a precondition of recourse to the security is that there must be a bona fide dispute on foot. This seems to be simply another way of saying that the party benefiting from the guarantee must not act fraudulently or unconscionably."
[48] Accordingly, I do not agree with Mr Rollnik that the words in cl 76.8(g) 'under clause 42B' create a condition precedent or something analogous to a jurisdictional barrier to certification by the sub-independent certifier of liquidated damages. In my view, the clear purpose of those words is to bring the certification and payment of liquidated damages into the same provisional process relevant to the assessment of progress payments under cl 42B. The certification is not intended to finally determine the principal's entitlement to liquidated damages, but in the same way as a certification authorises payment or non-payment of a payment claim, so certification under cl 76.8(g) of liquidated damages will authorise a payment in favour of the principal. The critical effect of those words is that the certification by the sub-independent certifier in respect of liquidated damages has the same status as a certification in respect of a payment in favour of the contractor, that is, it 'will be on account only' pursuant to cl 42B.7. Although the balance of that provision reserves the rights of the principal to contest payments without referring to the contractor, it seems to me that, applying the principles applicable to construction contracts, that provision should also apply in the same way to reserve the contractor's rights with respect to the certification of liquidated damages.
[49] This construction is consistent with the terms of cl 76.8(g), read as a whole. Subparagraph (ii) makes it clear that the contract envisages that liquidated damages will be actually paid by the contractor upon certification by the sub-independent certifier, albeit on a provisional basis and without a final determination of any dispute relating to it. That provision clearly proceeds on the assumption that the certification
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will not simply be a negative adjustment against a payment claim for the same or greater amount, but that such damages will actually be payable by the contractor. Further, it confirms that the provisions of cl 42B.7 are applicable, because it assumes that such damages will be paid prior to the resolution of any dispute.
[50] It follows, therefore, that the issue of a payment claim by the contractor is not a necessary precondition of certification under cl 42B and the consequent payment of liquidated damages by the contractor. Accordingly, my conclusion with respect to issue 2 is that the second defendant did certify the payment of liquidated damages in accordance with the contract."
89 The plaintiff submitted that a reasonable business person would understand the words "under clause 42B" to mean that "the certification of liquidated damages must follow the payment claim process." This construction applies because "the ordinary and natural meaning of the words, 'under clause 42B' requires that, as far as possible, all clauses that comprise Part 42B (ie clauses 42B.1 – 42B.11) are to apply to the certification of liquidated damages, and there is no warrant to artificially constrain the meaning of the words 'under clause 42B'." The plaintiff contended that the trial judge took an impermissible and narrower approach which departs from the clear and unambiguous words "under clause 42B", and the approach of his Honour meant that in clause 76.8(g), the words "under clause 42B" have no work to do.
90 As I have said, clause 42B says nothing about liquidated damages or defects. It is concerned with the plaintiff issuing payment claims, and payment by the first defendant of progress payments. It expressly provides that the "contractor" (the plaintiff) must issue payment claims. The plaintiff's interpretation involves either a re-writing of clause 42B, or completely ignoring the natural meaning of the plain words in clause 42B.
91 In clause 76.8(g)(i), the phrase "under clause 42B" applies to the certification of liquidated damages by the certifier. Clauses 42B.3, 42B.9 and 42B.10 apply to certification, but not in respect of liquidated damages or remedying defects. Clause 42B.3 provides for certification within 10 days of receipt of a "payment claim" made by the plaintiff in respect of project works performed, such payment claim being required as a condition precedent to payment for such works. Such claims and payment operate independently of the obligation to pay liquidated damages or remedy defects. It would distort the words of the contract to infer that the parties intended some form of payment claim for liquidated damages must be made by the first defendant. I agree with the trial judge that the reference to certification "under clause 42B" is intended to bring the certification of liquidated damages into the "same provisional process relevant to the assessment of progress payments under clause 42B" [48].
92 Ground 3 should be dismissed.
Ground 4 – liability to pay
93 Ground 4 of the plaintiff's appeal contains an assertion rather than a basis for appeal. Its states that, having wrongly construed clause 76.8(g), the trial judge did not decide the third question as it "fell away" following his Honour's determination. This is an issue that is encompassed by the appeal of the second defendant.
First defendant's appeal
94 As discussed earlier in these reasons, as part of its response to the proceedings taken by the plaintiff, the first defendant filed a counterclaim for $3.3 million, payable as liquidated damages "pursuant to clause 76.8(g)(ii) of the Contract". Before the trial judge, the first defendant submitted that following his Honour's determination that the second defendant certified the payment of liquidated damages in accordance with the contract, his Honour should have entered judgment for the first defendant on the counterclaim.
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95 The trial judge did not accept the submissions of the first defendant and ordered that the proceedings on the counterclaim be adjourned for a future directions hearing before his Honour. The first defendant's grounds of appeal against that order are set out in par [11] of these reasons. In essence, those grounds complain that his Honour erred in finding that the questions raised on the defence to the counterclaim had not been fully resolved by his judgment on the preliminary issues because that judgment "finally and fully" disposed of all the issues involved in the counterclaim. Further, the first defendant asserts that the defence to the counterclaim does not raise an arguable defence.
Background
96 In its defence to the counterclaim, the plaintiff pleaded that the first defendant is estopped from relying upon the date of Stage Practical Completion used by the second defendant to calculate the amount of liquidated damages. In addition, or in the alternative, the plaintiff pleaded that the first defendant had impliedly waived any right to insist on that particular date, and had waived any entitlement to be paid liquidated damages calculated from that date. Finally, the plaintiff pleaded that, by reason of its conduct, the first defendant is prevented from insisting that it is entitled to liquidated damages calculated from the date used by the second defendant in making the certification of liquidated damages.
97 As discussed earlier, the trial judge decided to conduct an early hearing with respect to specific issues. His Honour described those arrangements as follows [13]:
"… The practical circumstances involved the Court offering, and the parties accepting, an early hearing in respect of certain defined issues which are central to the overall dispute between the parties. Those issues are the subject of an order by me pursuant to r 559 of the Supreme Court Rules 2000, that they be heard and determined before each other issue in the action. The specific issues are:
(a) The first defendant's right to call upon the defects bond. (b) Whether the second defendant certified the payment of liquidated damages in accordance with the contract. (c) Whether cl 76.8(g)(ii) of the contract requires the plaintiff to pay the sum certified by the second defendant, notwithstanding any dispute in relation to such certification, including any dispute within the plaintiff's Type 1 notice of dispute dated 6 July 2020, or in the plaintiff's reply and defence to the counterclaim."
98 Having found that in the event of a bona fide dispute that the first defendant was entitled to have recourse to the Defects Bond without notice to the plaintiff [36], and that the second defendant certified the payment of liquidated damages in accordance with the contract [50], with respect to the third issue his Honour said [51]:
"[51] Having regard to the argument advanced on behalf of the plaintiff with respect to issue 3, the resolution of that issue must follow that of issue 2. The plaintiff's argument acknowledges that liquidated damages are payable notwithstanding that there is a dispute concerning facts and matters which might affect the liability of the plaintiff to pay liquidated damages. However, counsel argued that by way of an analogy with jurisdiction, a dispute within the meaning of cl 76.8(g)(ii) did not arise in circumstances where the sub-independent certifier had purported to certify as to liquidated damages, but was not authorised by the contract to do so. In my view, there is considerable force in that argument. If the sub- independent certifier has acted completely outside its authorisation, then the provisions of cl 76.8(g)(ii) would simply not be applicable. However, given my conclusion with respect to the second issue, that consideration does not arise. The fact of the matter is that, in my view, the sub-independent certifier was entitled to certify as it did. It is acknowledged that there is a Type 1 dispute in force concerning the plaintiff's liability for liquidated damages, but it is not suggested by either party that
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the provisions of cl 76.8(g)(ii) do not apply to such a dispute. It follows that the resolution of this issue is that cl 76.8(g)(ii) of the contract does require the plaintiff to pay the sum certified by the second defendant, notwithstanding the existence of a Type 1 dispute in that regard."
99 To the observations in [51] of his Honour's reasons should be added earlier remarks which followed his Honour's discussion concerning the plaintiff's attempt to apply clause 42B to a determination under clause 76.8(g):
"This construction is consistent with the terms of cl 76.8(g), read as a whole. Subparagraph (ii) makes it clear that the contract envisages that liquidated damages will be actually paid by the contractor upon certification by the sub-independent certifier, albeit on a provisional basis and without a final determination of any dispute relating to it."
100 Bearing in mind the first defendant's submission that, in substance, his Honour finally determined the issues arising under the counterclaim, it is necessary to bear in mind the distinction between the third issue identified as the subject of the early hearing, and the answer given by the trial judge. The third issue identified in his Honour's reasons was whether clause 76.8(g)(ii) requires the plaintiff to pay the sum certified as liquidated damages "notwithstanding any dispute in relation to such certification, including any dispute within the plaintiff's Type 1 notice of dispute dated 6 July 2020, or in the plaintiffs reply and defence to the counterclaim". [My emphasis.] However, the answer given by the trial judge in his reasons did not extend to "any" dispute in relation to the certification. Nor did it deal with a dispute based on the plaintiff's reply and defence to the counterclaim. His Honour said [51]:
"It follows that the resolution of this issue is that clause 76.8(g)(ii) of the contract does require the plaintiff to pay the sum certified by the second defendant, notwithstanding the existence of Type 1 dispute in that regard." [My emphasis.]
101 Judgment was delivered on 3 March 2021. The matter resumed before the trial judge on 13 April 2021 when submissions were presented as to the orders and whether his Honour should grant an injunction pending an appeal. Counsel for the first defendant submitted that his Honour should enter judgment for the first defendant on the counterclaim.
102 Counsel contended the first defendant was entitled to judgment on the basis of clause 76.8(g)(ii) because the estoppel argument raised in the defence to the counterclaim did not "undercut the question of the certificate". In response to a submission that his Honour should not be "self- deprecating" because his Honour had taken the next step and considered the contractual effect of the certificate, and answered that question by determining that the contractual effect was to give "a provisional entitlement to payment pending the resolution of the dispute", the trial judge answered:
"But not the interaction with the estoppel".
103 Counsel for the first defendant responded that the estoppel argument does not meet the claim being made in the counterclaim. Later in submissions, counsel urged the trial judge to read his Honour's reasons at [53] which counsel contended would result in his Honour saying "that there is a difference between a payment on a provisional basis and the final determination of the rights of the parties with respect to liquidated damages entitlements or any other contractual rights that our learned friends may wish to ventilate through the Type 1 dispute".
104 In response, counsel for the plaintiff submitted that the issues raised in the defence to the counterclaim go to the question of whether there is an obligation to make a provisional payment, as provided for in the contract.
Reasons of the trial judge
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105 The trial judge delivered ex tempore reasons. The essence of his Honour's reasoning is found in the following passages:
"Now, on the basis of the answers to the second and third questions, the first defendant is seeking judgment on the counterclaim. I note the answer to the second question determined that the second defendant had correctly – had certified the liquidated damages in accordance with the Act, and there was the question that arose in respect of clause 76.8(g)(i i) in relation to the payment of the liquidated damages, notwithstanding any dispute in relation to that certification.
The question is whether the claim of estoppel raised in the defence to the counterclaim prevents or can affect the payment, irrespective of clause 76.8(g)(ii). It seems to me that it is arguable that if this claim is made out then it may well prevent the first defendant from asserting or relying upon the certification in order to insist on payment pursuant to that provision.
I note the provisions of – or what's – what's asserted in paragraph 18 of the – of the – it's probably correctly termed 'the reply to defence and counterclaim', but I've calling it 'defence to the counterclaim', that asserts an estoppel by convention. The – where the convention, which is asserted is that neither party would insist on strict compliance with the requirements of the contract.
The counterclaim attached to the defence or further added to the defence, without
further pleading, relying entirely on the pleadings contained in the defence, claim the
relief of the payment of the liquidated damages in the sum of three point three million
dollars.
The defence to the counterclaim by asserting a claim of estoppel which – which is
wide enough to assert that the first defendant is estopped from relying on the terms of
the contract, seem to have – well there's two things that can be said about that. Firstly,
it may well not be a dispute as to certification at all, but rather something that
transcends the contract . In any event , it seems to me to assert that the claim in
respect of the payment of the liquidated damages and the estoppel of the first
defendant from asserting such a claim goes well beyond the contemplated ambit of
the contract and falls outside the risk allocation mechanism of the contract , which
includes, of course, and is what – is what gathers in the requirement of payment on
certification under clause 76.8(g).
So I – my conclusion – my view is that this question raised on the defence to the
counterclaim has not been fully resolved by my determination. I looked again at the
arguments , I don't think it was argued on that basis, I think it was argued on the very
narrow basis of contract construction. It's not fully resolved by my determination in
any event. The estoppel claim, it seems to me, requires determination before the – the
counterclaim can be resolved.
So , having regard to that, I'm not satisfied that the determination of the issues by me
thus far makes it appropriate or even authorises the entry of judgment on the
counterclaim, and so the counterclaim will need to proceed to further determination.
…… me that I should simply adjourn these proceedings, which are now limited to the counterclaim, for a directions hearing before me on a date to be fixed, which will be – which will be not before the resolution of the plaintiff's interlocutory application. So, in other words, not leaving it to the appeal but leaving it , at least until the interlocutory application is resolved, because that , I think, will determine what happens with the counterclaim and whether it can go – go forward."
Discussion
106 The first defendant submitted that contrary to the views of the trial judge, the hearing of the preliminary issues "was argued on the basis that the answers to questions 2 and 3 would resolve the dispute over the [second defendant's] certification of liquidated damages". Further, it was submitted
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that the plaintiff "did not argue at the trial of the separate questions that a dispute estoppel argument
prevented judgment from being entered on the counter-claim".107 On the hearing of the preliminary issues, the first defendant's written submissions contended that on a plain reading of clause 76.8(g)(ii), the plaintiff is obliged to pay the certified sum "pending the resolution of any dispute whatsoever" concerning certification of liquidated damages. The submission asserted that "any dispute over certification is managed under the contract as a Type 1 dispute". Further, the written submissions advanced the proposition that even if the certification was in breach of the contract, the parties were aware of such a possibility at the time the contract was made, and agreed that resolution of all disputes was to be brought within the dispute resolution procedure. Further, that "payment of the sum certified allocated the risk pending resolution". Emphasis was placed on the word "any" in clause 76.8(g)(b)(ii), which provides that following certification, liquidated damages would be payable "notwithstanding any dispute in relation to such certification".
108 In response, the plaintiff submitted that the reference to a "dispute" in clause 76.8(g)(ii) concerned a dispute about "the facts and matters described in the payment mechanism of clause 42B", and not a dispute about whether the conditions precedent to the ability of the Certifier to make the certification had been met. It could be considered by way of "jurisdiction" analysis, and the question "is about the power of the Sub-IC to make any determination about LDs [liquidated damages] at this time". For that reason, contended the plaintiff, the fact that clause 76.8(g)(ii) requires payment notwithstanding any dispute had no application because there was a "(precursor) question about the power of the Sub-IC to make a determination at all in the circumstances". If the Certifier did not possess the power to make the determination, in such circumstances the plaintiff was not required to pay the sum certified.
109 It is clear that the issue of whether, notwithstanding the defence to the counterclaim, the plaintiff was liable to pay the liquidated damages on a provisional basis, was before the trial judge. That question was encompassed as the third issue identified by the trial judge, and was the subject of submissions. However, the answer given by his Honour in his reasons for decision was restricted to a determination that clause 76.8(g)(ii) requires payment of the sum certified notwithstanding the existence of a Type 1 dispute. The answer did not extend to the dispute raised in the counterclaim.
110 The trial judge was aware of the distinction between payment on a provisional basis of liquidated damages, and a final determination of the issues concerning liquidated damages. This distinction was emphasised during oral submissions on 13 April 2021 by counsel for the first defendant. It was contended that the estoppel argument did not "undercut the question of the certificate", and that there is a difference between payment on a provisional basis and "the final determination of the rights of the parties with respect to liquidated damages entitlements". Counsel urged that his Honour had determined that the contractual effect of the certificate was to give provisional entitlement to payment, to which his Honour responded "but not the interaction with estoppel". The same distinction was apparent in the responding submissions of counsel for the plaintiff:
"So the estoppel claim goes to the question of whether there is an obligation to make
a provisional payment, as provided for in the contract".
111 The question whether the plaintiff was liable to pay the liquidated damages on a provisional basis under clause 76.8(g)(ii), notwithstanding the issues raised in the defence to the counterclaim, was identified as included in the third issue to be determined in the preliminary proceedings, and was addressed in submissions by counsel for the parties. However that question was not answered by the trial judge. His Honour found only that the plaintiff was required to pay the sum certified notwithstanding the existence of a Type 1 dispute. In addition, it is apparent from the submissions to which I have referred, and the comment of the trial judge during those submissions, that when his
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Honour delivered his reasons he did not address the question of whether the issues raised in the defence to the counterclaim were capable of providing an answer to the liability of the plaintiff otherwise to pay the liquidated damages on a provisional basis.
112 Further, in the ex tempore reasons for making the orders, the trial judge plainly took the view that regardless of the third question, the issue had not been fully argued before him on the hearing of the preliminary questions. No application was made for summary judgment on the counterclaim to the extent of judgment that the plaintiff is liable to pay liquidated damages on a provisional basis.
113 For these reasons, in my view the trial judge did not err in adjourning proceedings on the counterclaim, and the appeal by the first defendant should be dismissed.
any nature however arising and whether present or future, fixed or unascertained, actual or contingent, and whether at
law, in equity, under statute or otherwise."
3 December 2010 (as amended).
2
11
1