Kennedy Taylor (Vic) Pty Ltd v Baulderstone Hornibrook Pty Ltd
[2000] VSC 43
•18 January 2000
| Do not Send for Reporting | |
| Not Restricted | |
| SUPREME COURT OF VICTORIA | |
| PRACTICE COURT | |
No. 7514 of 1999
| KENNEDY TAYLOR (VIC.) PTY. LTD. | Plaintiff |
| v. | |
| BAULDERSTONE HORNIBROOK PTY. LTD. | Defendant |
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JUDGE: | BEACH, J. | |
WHERE HELD: | MELBOURNE | |
DATE OF HEARING: | 14 JANUARY 2000 | |
DATE OF JUDGMENT: | 18 JANUARY 2000 | |
CASE MAY BE CITED AS: | KENNEDY TAYLOR (VIC.) PTY. LTD. v. BAULDERSTONE HORNIBROOK PTY. LTD. | |
MEDIUM NEUTRAL CITATION: | [2000] VSC 43 | |
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CATCHWORDS: Building contracts – Provision of security by subcontractor to contractor – Whether recourse to security available to contractor – Clause for security survives termination of contract.
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APPEARANCES: | Counsel | Solicitors |
For the Plaintiff | Dr. C.L. Pannam QC and Mr. G.G. McArthur | Madgwicks |
| For the Defendant | Mr. M.G. Roberts | Deacons Graham & James |
HIS HONOUR:
The plaintiff is an electrical contractor. The defendant is a builder. By a subcontract made between the plaintiff and the defendant in 1997, the plaintiff agreed to construct the electrical services at the Museum of Victoria presently being built by the defendant at Carlton.
The work required to be performed by the plaintiff was to be completed within a period of 22 months. That has now blown out to some 35 months. The parties have made various allegations and counter-allegations concerning the causes for the delay. I am in no position to resolve such matters.
The subcontract entered into by the plaintiff and the defendant required the plaintiff to provide security for the work to be performed by it pursuant to the contract. In fulfilment of that obligation and on 17 June 1997 the plaintiff forwarded to the defendant two unconditional bank guarantees each in the sum of $175,000.
Clause 5.5 of the subcontract reads:
"5.5. Recourse to Retention Moneys and Conversion of Security.
Any security whether by way of retention moneys or other security including, without limitation, any unconditional bank guarantee provided by the Subcontractor pursuant to the Subcontract, shall be available to the Main Contractor and any security that does not consist of money may be converted into money whenever the Main Contractor may be entitled to the payment of moneys by the Subcontractor under or in connection with the Subcontract or, whenever the Main Contractor may be entitled to reimbursement of any moneys paid to others under or in connection with the Subcontract in all such cases as if the security were a sum of money due or to become due to the Subcontractor by the Main Contractor."
By 4 January 2000 the nature of the dispute between the parties in relation to the subcontract had become such that on that day the plaintiff's solicitors wrote to the defendant stating that the defendant had repudiated the subcontract and that the plaintiff had accepted its repudiation.
On 5 January 2000 the plaintiff made an urgent ex parte application to me for an interim injunction restraining the defendant from calling up the two guarantees. The fear expressed to me at that time by counsel for the plaintiff was that unless such an order was made the defendant would call-up the guarantees in circumstances where it had no entitlement to do so.
Despite having some misgivings in relation to the matter, upon the plaintiff through its counsel giving an appropriate undertaking as to damages, I acceded to the application.
I now have before me an application by the plaintiff for a continuation of the injunction to the trial of the proceeding.
Having heard the matter fully argued by counsel for both parties, I consider it is inappropriate to grant the relief sought.
In his affidavit of 12 January 2000 the defendant's Project Manager, Mark Joseph Moran, has sworn the following:
"53.I refer to paragraph 17 of the McLeod Affidavit. To the best of my knowledge and belief at no time has BHPL made any demand or threatened to make any demand on the bank guarantees.
54.Further, whilst BHPL has not awarded Kennedy Taylor an extension of time after 12 October 1999 by BHPL letter to Kennedy Taylor dated 18 October 1999 (included in exhibit IMcL-5) BHPL stated that it would defer BHPL's rights to recovery of liquidated damages pending BHPL's determination of the matter.
55.It is and remains BHPL's preference for Kennedy Taylor to see fit to return to site and complete the outstanding works remaining under the Subcontract in accordance with the Subcontract.
56.However, if Kennedy Taylor fails to perform its Subcontract obligations BHPL will incur additional costs in having the works completed by others. The purpose of the provision of the bank guarantees was to safeguard BHPL in the circumstance that it was faced with such an eventuality. Indeed had BHPL continued to retain retention monies rather than allow their substitution by the unconditional guarantees it would have been adequately protected against such an eventuality. I respectfully request that BHPL not be further restrained from demanding or receiving payment on the two bank guarantees in the event that BHPL is required to make any such demand for payment."
It is clear, therefore, that the fears expressed to me by counsel for the plaintiff on 5 January have proved to be unfounded. I should add I make no criticism whatsoever of counsel in that regard.
But more importantly I think is the fact that if one has regard to the provisions of clause 44 of the subcontract, it would be quite wrong in my view to restrain the defendant calling up the guarantees to cover any claims made by it against the plaintiff pursuant to that clause.
The sub-clauses of clause 44 relevant for present purposes read:
"44.2 Default by the Subcontractor
If the Subcontractor commits a substantial breach of contract and the Main Contractor considers that damages may not be adequate remedy, the Main Contractor may give the Subcontractor a written notices to show cause."
There is then set out a number of matters each of which is to be regarded as a substantial breach:
"44.4 Rights of the Main Contractor.
If by the time specified in a notice under clause 44.2, the Subcontractor fails to show reasonable cause why the Main Contractor should not exercise a right referred to in clause 44.4, the Main Contractor may by notice in writing to the Subcontractor:
(a)take out of the hands of the Subcontractor the whole or part of the work remaining to be completed.
44.6.Adjustment on Completion of the Work Taken Out of the Hands of the Subcontractor.
When work taken out of the hands of the Subcontractor under clause 44.4(a) is completed the Main Contractor's representative shall ascertain the cost incurred by the Main Contractor in completing the work and shall issue a certificate to the Main Contractor and the Subcontractor certifying the amount of that cost.
If the cost incurred by the Main Contractor is greater than the amount which would have been paid to the Subcontractor if the work had been completed by the Subcontractor, the difference shall be a debt due from the Subcontractor to the Main Contractor. If the cost incurred by the Main Contractor is less than the amount that would have been paid to the Subcontractor if the work had been completed by the Subcontractor, the difference shall be a debt due to the Subcontractor from the Main Contractor. The Main Contractor shall keep records of the cost in a similar manner to that prescribed in clause 41.
If the Subcontractor is indebted to the Main Contractor, the Main Contractor may retain constructional Plant or other things taken under clause 44.5 until the debt is satisfied. If after reasonable notice, the Subcontractor fails to pay the debt, the Main Contractor may sell the Constructional Plant or other things and apply the proceeds to satisfaction of the debt and the costs of sale. Any excess shall be paid to the Subcontractor."
What the defendant has said is that if, contrary to the defendant's wishes, the plaintiff walks away from the contract, it will have no option but to take the work remaining to be completed under the subcontract out of the hands of the plaintiff and place it in the hands of a new contractor.
If the cost of having the work completed by a new contractor is higher than it would have been if completed by the plaintiff, as the defendant believes it will be, then the defendant will have a perfectly valid claim against the plaintiff in respect of the additional cost and it will be fully entitled to call up the guarantees under clause 5.5 of the subcontract.
In my opinion that is a perfectly valid argument.
See in that respect Fletcher Construction Australia Ltd. v Varnsdorf Pty. Ltd. (1998) 3 V.R. 812, Backman Pty. Ltd. v BHP Power New Zealand Ltd. (1999) 1 V.R. 420, and Anaconda Operations Pty. Ltd. & Ors. v Fluor Daniel Ltd., (Court of Appeal, unreported 13.12.99).
Indeed even if one was minded to adopt the view of similar security clauses expressed by Cole, J. in Hughes Brothers Pty. Ltd. V Telede Pty. Ltd. (1989) 7 B.C.L. 210 at p.215, referred to by Charles, J.A. in Fletcher Construction at p.820 namely:
"On the other hand, in Hughes Brothers Pty. Ltd. v Telede Pty. Ltd. (1989) 7 B.C.L. 210, especially at 215, Cole, J. held that a clause which stated that any security provided by the builder should be available to the proprietor 'whenever the Proprietor may be entitled to the payment of moneys by the Builder', permitted the proprietor to have recourse to securities where the proprietor had a claimed entitlement, provided that the claimed entitlement was not specious or fanciful."
The defendant would be entitled to call up the guarantees because its claim made pursuant to clause 44 could not be said to be specious or fanciful.
There was some debate before me as to whether clause 5 survives termination of the subcontract.
In that regard I was referred to the observations of Callaway, J.A. in Fletcher Construction where at p.830 His Honour said:
"In the absence of fraud or illegality, Varnsdorf cannot be restrained from acting in conformity with the contract. We are not concerned with the vexed question whether, and if so in what circumstances, a beneficiary may be prevented from calling upon a guarantee where the underlying contract has been discharged. Compare Potton Homes Ltd. v Coleman Contractors Ltd. (1984) 28 B.L.R. 19, 28-9."
In Pearson Bridge (NSW) Pty. Ltd. v The State Rail Authority of New South Wales, 1 Australian Construction Law Reports 81, Yeldham, J. was required to consider a similar argument.
At p.86 His Honour said:
"The final matter for consideration is Mr Sperling's submission that even if the clause does give rise to a negative stipulation, it has ceased to be operative in the present case as the contract has come to an end, whether under a right reserved to the defendant by the contract itself, or as a result of the acceptance by the plaintiff of the defendant's wrongful repudiation as the plaintiff alleges in paragraphs 14 and 15 of the statement of claim."
Having then analysed the situation, His Honour continued at p.87:
"In my opinion a clause such as clause 5.5 in the present contract, concerned as it is with the provision, retention and disposal of security, is in a similar category to clauses providing for arbitration, forum clauses, and the like so far as the effect of termination of the contract by rescission for breach, or acceptance of repudiation is concerned. The clause might be described as one dealing with secondary obligations within the analysis of Lord Diplock in Photo Production Limited v Securicor Transport Limited (1980) A.C.827 at pp.848-850. As a matters of construction, I am of the view that clause 5.5 envisages a post-rescission state of affairs and is in no way abrogated by termination of the contract, whether that termination came about as the plaintiff alleges, or as the defendant claims in the pleadings. Hence I reject Mr Sperling's second submission."
I agree with His Honour's conclusion in the matter. In my opinion a clause relating to security such as clause 5 in the present subcontract is not abrogated by termination of the contract. To hold otherwise would render nugatory a security given by a subcontractor in circumstances where a subcontractor itself wrongly terminated a contract. Such a result could never have been within the contemplation of the parties.
The application for interlocutory relief is dismissed with costs to be taxed, including any reserved costs, and paid by the plaintiff.
(Discussion ensued.)
I do not propose to vary the orders I have pronounced.
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