Hansen Yuncken Pty Ltd v Parliament Square Hobart Landowner Pty Ltd
[2021] TASSC 7
•3 March 2021
[2021] TASSC 7
COURT: SUPREME COURT OF TASMANIA
CITATION: Hansen Yuncken Pty Ltd v Parliament Square Hobart
Landowner Pty Ltd [2021] TASSC 7
PARTIES: HANSEN YUNCKEN PTY LTD
v
PARLIAMENT SQUARE HOBART LANDOWNER PTY LTD
WOLFERSTAN VERNEY AND PARTNERS PTY LTD
FILE NO: 1707/2020
DELIVERED ON: 3 March 2021
DELIVERED AT: Launceston
HEARING DATES: 23, 25 September 2020
JUDGMENT OF: Brett J
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.
Woodhall Ltd v Pipeline Authority (1979) 141 CLR 443; Fletcher Construction Australia Ltd v Varnsdorf Pty Ltd [1998] 3 VR 812 (Vict CA); Bachmann Pty Ltd v BHP Power New Zealand Ltd [1999] 1 VR 420; Clough Engineering Ltd v Oil and Natural Gas Corporation Ltd [2008] FCAFC 136, 249 ALR 458; Electricity Generation Corporation v Woodside Energy Ltd [2014] HCA 7, 251 CLR 640; Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd [2015] HCA 37; 256 CLR 104; JKC Australia LNG Pty Ltd v CH2M Hill Companies Ltd [No 2] [2020] WASCA 112, referred to.
Aust Dig Contract Law [254]
REPRESENTATION:
Counsel:
Plaintiff: S B McElwaine SC, A Rollnik
First Defendant: J Twigg QC, K J Naish
Second Defendant: D Deller
Solicitors:
Plaintiff: Crawford Legal
First Defendant: Arnold Block Leibleh
Second Defendant: Colin Biggers and Paisley Lawyers
Judgment Number: [2021] TASSC 7
Number of paragraphs: 51
Serial No 7/2021
File No 1707/2020
HANSEN YUNCKEN PTY LTD
v PARLIAMENT SQUARE HOBART LANDOWNER PTY LTD
WOLFERSTAN VERNEY AND PARTNERS PTY LTD
REASONS FOR JUDGMENT BRETT J
3 March 2021
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.
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.
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.
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.
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 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.
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.
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.
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.
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.
In each case, the correspondence demanded payment by 10 July 2020.
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.
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.
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.
Issue 1 – the defects bond
The law
The provision of security by the party carrying out the works for the performance of its obligations is a common feature in construction contracts. The effect of such contractual provision has been the subject of a number of cases determined by the High Court and intermediate courts of appeal. See, for example, Woodhall Ltd v Pipeline Authority (1979) 141 CLR 443; Fletcher ConstructionAustralia Ltd v Varnsdorf Pty Ltd [1998] 3 VR 812 (Vict CA); Bachmann Pty Ltd v BHP Power New Zealand Ltd [1999] 1 VR 420; Clough Engineering Ltd v Oil and Natural Gas Corporation Ltd [2008] FCAFC 136, 249 ALR 458. These cases are invariably concerned with contracts which have provided for the provision of security by way of an undertaking or guarantee by a third party, such as a bank, to make payment to the principal under the contract. As in this case, the issue in such cases has arisen in the context of an attempt by the builder to prevent the principal from having recourse to the security.
The following principles can be distilled from these cases:
(a)The question of the principal's right to call upon such security is ultimately a matter of construction of the contract. That construction will be informed by and require consideration of the commercial purpose of the guarantee. The courts have recognised the commercial reasons for the provision of a performance guarantee. As summarised by the Full Court of the Federal Court in Clough: "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 the dispute between them." In a case in which the guarantee is intended to allocate risk, it would generally be understood that the purpose is to ensure that the party benefiting from the guarantee is not out of pocket pending the resolution of the dispute.
(b)A further principle of construction is that the contract should be read as a whole. The effect of this is that where, as in this case, the form of the performance guarantee is set out in the contract, that must be taken into account in construction. In Fletcher Constructions (above), the Victorian Court of Appeal was concerned with the interpretation of a clause which provided for the principal to draw on standby letters of credit in the event of an unsatisfied demand for payment of pre-assessed damages relating to delay on the part of the builder. The builder argued that the proper meaning of the contract was that resort could only be had to the security if the entitlement to the damages was undisputed. Charles JA considered that the "critical question" was whether the commercial purpose of the provision of the letters of credit was limited to the provision of security for the builder's obligations, or whether it was to make provision for the allocation of risk between the parties pending resolution of any dispute. If the latter, then his Honour took the view that the principal would be entitled to have recourse to the security notwithstanding the existence of genuine dispute. In resolving this question, his Honour considered that the form of the undertaking was a significant matter. His Honour said:
"It is, I think, of great importance that Varnsdorf's right to the security which is to be provided under cl 6.6 and the Schedule of Contract Information, is in a form approved by Varnsdorf and 'in the form of an unconditional undertaking to pay in favour of' Varnsdorf. Hudson on Building and Engineering Contracts (para 17,075) asserts that:
'Insofar as a construction contract may make clear provision for the furnishing of an unconditional guarantee as security for due performance, the normal interpretation, ... will be that, in response to the stipulated demand, an unqualified transfer of the sums in question is intended, provided only that there is a bona fide dispute or claim on the secured party's part, and that any further investigation of its merits or extent is not usually intended by the contract."
Callaway JA took a similar view, and the remaining judge, Batt JA, agreed with both.
The agreed nature of the security was also considered to be an important matter in Woodhall. Stephen J observed that the incorporation of a guarantee which provided for payment upon demand without qualification was "as good as cash".
(c) In JKC Australia LNG Pty Ltd v CH2M Hill Companies Ltd [No 2] [2020] WASCA 112, the Western Australian Court of Appeal summarised the proper approach to the determination of whether a performance guarantee operates for the purpose of risk allocation at [82] as follows:
"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.]
(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.
The contract
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:
"1The 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.
2In 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.
3The 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."
In this case, the contract separately defines the terms "performance bond" and "defects bond", as follows:
"Performance Bond means:
(a) a Bank Guarantee in the amount of 5% of the Contract Sum; and
(b) a [sic] insurance bond in the amount of 2.5% of the Contract Sum."
"Defects Bonds means a Bank Guarantee in the amount of 2.5% of the Contract Sum."
"Bank guarantee" is also defined:
"Bank Guarantee means an irrevocable, unconditional guarantee:
(a)given by one of the four major Australian banks;
(i) as defined in the Banking Act 1959 (Cth):
(ii) with a branch office in Hobart; and:
(iii) having a Minimum Credit Rating;
(b)enforceable in Australia on presentation in Hobart; and
(c)in the form set out in Schedule 4 or such other form as the Principal agrees to in writing from time to time."
The form of the bank guarantee contained in schedule 4 is consistent with this definition. It provides 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 up to a maximum aggregate sum specified in the undertaking. It further provides that should the bank "be notified in writing" by the first defendant that the first defendant "desires payment to be made of the whole or any part or parts of the sum, 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". It is a reasonable conclusion that this formulation rendered the guarantee "as good as cash", as explained in Woodhall.
The use and operation of the security is dealt with in cl 6. Clauses 6.1 to 6.5 deal with the "performance bonds". It is clear that these provisions are intended to deal with the performance bond as defined, because cl 6.1 provides that the plaintiff must deliver the performance bonds to the first defendant "prior to financial close". The "financial close" is defined to mean the date on which the first defendant enters into binding agreements for the provision of financial accommodation in connection with the works. This is a step which occurs prior to the substantial undertaking of the works. Clauses 6.4 and 6.5 strongly support the conclusion that the performance bond is intended to allocate risk between the parties "as to who shall be out of pocket pending the resolution of the" bona fide dispute between them. See Clough (above). Clause 6.4(a) provides that the first defendant "may draw down on any performance bond at any time without notice" in certain circumstances which include the fact that the first defendant has a bona fide claim against the plaintiff under or in connection with the contract. Clause 6.4(b)(i), provides that the first defendant, if it draws down on a performance bond, will not hold the proceeds on trust for the plaintiff. Under cl 6.4(d), it is not required to provide notice to the plaintiff before drawing down on the bond. Clause 6.5 provides that the plaintiff is prohibited from taking steps to injunct or restrain the first defendant from drawing down on the performance bond and using the proceeds received from doing so. The plaintiff is also prohibited from restraining the issuer of the performance bond from paying the first defendant pursuant to it. The entitlement of the first defendant to draw down on the bond without notice, upon the existence of a bona fide dispute, and the irrevocable and unconditional nature of the bond itself, also strongly support the conclusion that the performance bond is intended to allocate risk.
Clause 6.6 deals with the defects bond:
"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 [sic] 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)."
In contrast to the performance bond, there are no further provisions dealing with the right of the first defendant to draw down on the defects bond, or the consequences of such draw down. 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.
Discussion
Mr McElwaine SC, who appears for the plaintiff, argues that the differential treatment of the performance bond and the defects bond in cl 6 is consistent with a contractual intention that they operate in a different way and for a different purpose. He concedes that the performance bond is intended to operate as a risk allocation mechanism in the conventional sense as described in the abovementioned cases. However, it is argued that the allocation of risk changes upon stage practical completion. Mr McElwaine submits that it can be inferred from the fact that the contract requires an exchange of one for the other at this time, and the provisions of cl 6 applicable to the performance bond are not repeated in cl 6.6 in respect of the defects bond, 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. In this regard, he notes that in contrast to the performance bond, the only express right of the first defendant to drawn down on the defects bond is contained in cl 76 of the contract. This clause deals with the principal's remedies for default events. The pertinent parts of cl 76.1 are as follows:
"Principal's remedies for Default Events
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)...
(c)...
(d)...
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:
(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;
I observe that the term "Performance Bond Secured Amounts" is not defined in the contract.
This clause must be read with cl 75, which prescribes the circumstances in which the contractor will become liable to remedy a "Default Event." In particular, the clause sets out a process, under which if a default event occurs, the principal may give the contractor a default notice, whereupon the contractor must remedy the default notice within the remedy period. The remedy period is defined as "the period of 15 business days from and including the date of service of" the default notice, and any extended period granted under cl 75.3. A "business day" is defined to mean "any day on which the banks are open for business in Hobart but does not include a Saturday, Sunday or a public holiday generally observed in Hobart". Accordingly, the practical result is that the contractor will have three calendar weeks or longer, dependent on the occurrence of bank or public holidays during the relevant period, to remedy the default under this process.
Mr McElwaine's argument is that the only right of the first defendant to draw down on a defects bond arises from these provisions. He argues that, accordingly, the following steps must be taken before the first defendant is entitled to have recourse to the defects bond:
(a)A default event must occur.
(b)The first defendant must serve a default notice on the plaintiff.
(c)The plaintiff then has 15 business days in which to remedy the default event specified in the notice.
(d)The plaintiff must fail to remedy the default to the first defendant's satisfaction during that period.
Mr Twigg QC, who appears for the first defendant, argues that Mr McElwaine's submission is tantamount to an assertion that the Court should infer the existence of a negative stipulation from the combined contractual provisions discussed above, in particular the fact that cl 76.1 contains the only express reference to a draw down on the defects bonds by the first defendant. Mr McElwaine eschews any reliance on a negative stipulation, but I think that Mr Twigg's submission must be correct. Mr McElwaine's submission necessarily relies upon the reality that the only provision in the contract which expressly permits recourse to the defects bond is cl 76.1. An inescapable premise of the reasoning which underpins this submission is that the first defendant may not have recourse to the bond other than in accordance with an express provision. This is a negative stipulation. However, the case law makes it clear that the contractual intention of the parties must be derived from a consideration of the whole contract, which in this case will include the form of the bank guarantee which constitutes each form of bond, and the fact that the bond is contractually required to be delivered into the possession of the first defendant. The unconditional and irrevocable nature of the bond is not consistent with the right to have recourse to the defects bond being limited to the express provision contained in cl 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 cl 76.1(e). This question was discussed by Callaway JA in Fletcher Constructions at 826:
"A moment's reflection will show that the beneficiary, unlike the bank, may be restrained if there is an express prohibition in the underlying contract against calling upon the guarantee. In theory an implicit or implied prohibition is just as good. The practical problem is that it is much harder to establish. That is not because of a requirement that an implicit or implied prohibition against calling upon a guarantee must be clear. It is because the implication cannot be made if it would stultify, or even if it would be inconsistent with, the purpose for which the guarantee was taken.
I should explain the sense in which I am speaking of express, implicit and implied prohibitions. By an express prohibition I mean a provision of the underlying contract, which may be positive or negative in form but is specifically directed to calling upon the guarantee, as for example a provision saying that it shall not be called upon during stage 1 of a contract to be performed in stages or, as in this case, that it is necessary to give 10 days' notice before calling upon it. A provision simply saying that recourse may be had to the guarantee for moneys due or the like is not an express prohibition in the sense that I intend. The question in a case like that is whether a prohibition against recourse is implicit in the words of the contract. By an implied term I mean a term of the kind associated with the decision of the Privy Council in BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266. Implication is the process of discerning either an implicit or an implied term.
...
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."
On Mr McElwaine's submission, the primary, if not exclusive, intended function of the defects bond is to operate as security for the performance by the plaintiff of its obligations during the defects liability period. However, this purpose is inconsistent with access to the bond by the first defendant being limited to the circumstances prescribed by cl 76.1. This is because it is extremely unlikely that cl 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. Clause 76 is concerned with the principal's remedies for default events. The operation of cl 76.1 is triggered by a default event. "Default event" is defined to mean each of the following events:
"(a)a failure by the Contractor to comply with any provision of this Deed or any other Project Document;
(b)the occurrence of a Material Default;
(c)the occurrence of a Financial Default;'
(d)the occurrence of a Construction Activity Default; and
(e)a representation or warranty given by the Contractor under this Deed or any other Project Document being or becoming incorrect or misleading in any respect."
It is apparent from the definitions of Material, Financial and Construction Activity Default, that they have little, if anything, to do with the day to day operation of the defects liability period. In particular, they do not include within their scope, a defect or omission which is the trigger for the contractor's obligation to perform remedial work during the said period. Further, although it might be thought that the identification of a defect during that period is capable of constituting a default event under the general definition contained in subpar (a), the contract specifically deals with the operation of the defects liability period in cl 68. It is significant that this provision contains a discrete process for the rectification of "defects in or omissions from the works". In particular, there is provision for the first defendant "from time to time" to give notice in writing specifying such defects and omissions. The plaintiff is obliged to make good any defects or omissions "that it becomes aware of ... as soon as practicable, but in any event within 7 business days ... after becoming aware of the defect or omission". It must also rectify any defects or omissions notified in the certificate of stage practical completion "as soon as possible after the date of stage practical completion". The requirement to rectify defects and omissions within seven days is subject to cl 68.2(b). This clause provides that if the defect or omission is associated with plumbing, hydraulics, electrical, mechanical and fire protection services, and such defect or omission prevents the leased area "or a substantial part of it" for the purposes of the lease being used by the Minister or the Crown, for the permitted use described under the lease, the plaintiff must make good the defect or omission within 24 hours after becoming aware of it. Clause 68.5 provides that where the plaintiff fails to properly make good all known defects or omissions, the first defendant may carry out the rectification works. In this event, the contractor is required to "pay or reimburse" to the first defendant all loss incurred by the first defendant attending to this work.
It is abundantly clear from these provisions that the remedies prescribed by cl 76 are intended to have little, if anything, to do with the operation of the defects liability period. 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.
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.
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.
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, 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.
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.
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.
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.
Issues 2 and 3
These issues concern the dispute which has arisen between the plaintiff and the first defendant concerning the plaintiff's alleged liability for liquidated damages. The background to the dispute is as follows.
The first defendant's right to payment of liquidated damages arises pursuant to cl 76.8 of the contract. Clause 76.8(a)(i) provides that liquidated damages will be payable where the contractor "does not achieve Stage Practical Completion by the Date for Stage Practical Completion". The amount of liquidated damages is prescribed by Schedule 1 at $15000 per day.
As already noted, it is common ground that stage practical completion was achieved on 20 September 2017. The definition of "Date for Stage Practical Completion" is "the date by which the event of Stage Practical Completion must be achieved by the Contractor, as identified in Schedule 1 and as may be extended from time to time in accordance with clause 66.2." Predictably, cl 66.2 exhaustively lists the circumstances in which the contractor will be entitled to an extension of the date for stage practical completion. Schedule 1 provides that the date for stage practical completion was to be 6 October 2016. It seems to be conceded by the first defendant that that date had been extended in accordance with the contract to 10 February 2017. Accordingly, the first defendant's claim for liquidated damages is based on an asserted delay between 10 February 2017 and 20 September 2017, 222 days. When this is calculated in accordance with cl 76.8, the relevant calculation is $15,000 x 222 days = $3,330,000.
The first defendant's assertion of delay and consequent entitlement to liquidated damages is disputed by the plaintiff. The plaintiff's reasons for dispute are set out in detail at para 5.3 of the statement of claim. However, the merits of this dispute are not relevant to the question before me.
The second defendant's role in respect of liquidated damages is prescribed by cl 76.8(g), which is in the following terms:
"(g)Liquidated damages will be:
(i) certified by the Sub-Independent Certifier under clause 42B; and
(ii) payable by the Contractor notwithstanding any dispute in relation to such certification."
On 23 June 2020, the first defendant forwarded a letter to the second defendant requesting that the second defendant, as the sub-independent certifier, "certifies the sum of $3,330,000 liquidated damages" calculated in the manner which I have discussed above. The letter concluded with this sentence:
"The principal requests the sub-independent certifier provide a certificate forthwith as required by clause 76.8(g)."
On 29 June 2020, the second defendant forwarded a letter to both the plaintiff and the first defendant enclosing what it described as "our determination of liquidated damages under clause 76.8 of the construction contract, as requested by principal's project manager on 23/6/2020". It enclosed with that letter a document entitled "Certificate for Payment (excluding GST)". The certificate was numbered WTP46, showed an assessment date of 26 June 2020, and then set out a calculation which amounted to an adjustment to the contract sum for work completed to the assessment date, in the amount of the assessed liquidated damages. The certificate attached a schedule of previously certified claims by the contractor for payment for work performed under the contract. The last entry in that schedule was for the liquidated damages and this is shown as a negative sum. Hence, the certified payment was shown in the negative, presumably on the basis that it was a sum to be paid by the contractor to the principal.
Questions 2 and 3 raise the proper construction and operation of cl 76.8(g). Counsel for the plaintiff submits that the words "under clause 42B" in subpar (i) mean that the second defendant may only certify liquidated damages under that provision if a payment claim has first been made by the plaintiff under cl 42B, and then only as part of the process under that provision initiated by that payment claim. It is submitted that the second defendant has no other power under the contract to certify liquidated damages. It is further submitted that the certification by the second defendant in this case arose not as part of a process initiated by a payment claim under cl 42B, but rather by way of a request from the first defendant directly to the second defendant. It is argued that in those circumstances, the second defendant has acted beyond its power and authority under the contract, and the resultant certification is null and void, and of no effect whatsoever.
Clause 42B is headed "Payments". It is concerned with the process for and assessment of claims by the contractor for payment of the project works contract sum. In summary, it provides for ongoing monthly progress payments during the performance of the works and a final payment at the end of the defects liability period. Some particular aspects of this clause are as follows:
· Clause 42B.1 provides that the principal must pay to the contractor the project works contract sum for works completed in accordance with the Deed. Clause 42B.2 provides that on the 28th of each month the contractor must, as a condition precedent to payment under cl 42B.1, issue a payment claim for work completed during that month.
· The sub-independent certifier must then determine the amount payable to the contractor in respect of the payment claim. If the sub-independent certifier determines that any part of the payment claim is not payable, then the principal is under no obligation to pay that amount.
· Clause 42B.6 provides for a final payment claim to be made by the contractor within a prescribed time after the issue of a certificate under cl 68.4, which is the certificate issued by the sub-independent certifier at the completion of the defects liability period, and for practical purposes marks the end of work, including the rectification of defects and omissions, by the contractor.
· Clause 42B.7 provides that payment will be on account only and will not be evidence of the value of the work, nor an admission on the part of the principal that performance by the contractor of the work is in accordance with the deed.
Mr Rollnik, junior counsel for the plaintiff, argued that the second defendant's authority to certify as to liquidated damages is limited to the circumstances prescribed by cl 42B. In particular, it is submitted that, having regard to cl 42B.2, a payment claim is a precondition of certification by the sub-independent certifier, and this must necessarily include the certification of liquidated damages. It is argued that, although there is no express provision in cl 42B for the certification of liquidated damages, nor indeed for the determination of any sum payable by the contractor to the principal, the certification of such damages is necessarily incorporated into the process prescribed by cl 42B by the words contained in cl 76.8(g)(i). Hence, the second defendant's power to certify is subject to the limitations imposed by cl 42B, which include the requirement that a payment claim will be a "precondition" of certification. It is argued that this interpretation is consistent with the limited role of the sub-independent certifier in respect of the approval of payment claims. Certification of a claim is not a final adjudication or determination of the contractor's entitlement to payment. Mr Rollnik points to cl 42B.7 in this regard.
There is, in my view, a clear difficulty with this reasoning. Clause 42B.2 provides that the issue of a payment claim is a condition precedent to payment under cl 42B.1, which requires payment by the principal of the project works contract sum for project works completed in accordance with the contract. The term "project works contract sum" means the fixed lump sum price set out in Schedule 21, as adjusted in accordance with the deed. Specific examples of provision for the adjustment of the project works contract sum appear in respect of provisional sums under cl 42B.11. It is not difficult to see that it would also include adjustments arising from variations to the project works under cl 42 and delay costs payable to the contractor under cl 66.3. The commercial purpose of basing progress payments on a payment claim is obvious. However, cl 42B.2 says nothing about the question of liquidated damages. In particular, there is no express provision that a payment claim be a precondition of such an assessment or certification. This may well be because in contrast with the assessment of claims for payment for work done, there is no commercial purpose in making a payment claim a condition precedent to the assessment of liquidated damages. On the contrary, as in this case, it is easy to envisage that liquidated damages could far exceed a monthly payment claim by the contractor. If the plaintiff's interpretation is correct, then the plaintiff could simply defer liability for payment by not making a payment claim. This seems to me to be contrary to an interpretation which makes commercial sense, and is unlikely to reflect the intention of the parties. I think it far more consistent with the parties' intention as expressed throughout the whole deed, that it was intended that the sub-independent certifier would certify for liquidated damages upon the request of either party, more likely the principal, and that such certification would trigger payment, but only on account and not as a final determination of the plaintiff's liability to pay liquidated damages. The provisional nature of the assessment of progress claims, and the incorporation of the assessment of liquidated damages into that provisional process, suggest that a purpose of cl 42B is again to allocate risk between the parties by ensuring that as far as possible the parties are not out of pocket as the work proceeds, despite the possibility of adjustment upon final adjudication. It follows that payments which are assessed as due by one party to the other should actually be paid, but only on the provisional basis already discussed. There is no commercial reason therefore why liquidated damages, once certified by the sub-independent certifier, should not actually be paid by the contractor. It is a commercial nonsense to suggest that this should only take place in response to a process initiated by the party liable to make that payment.
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.
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 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.
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.
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 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.
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