Laing O'Rourke (BMC) Pty Limited v Estate Property Holdings Pty Limited - [2007] NSWSC 1199

No judgment structure available for this case.

CITATION: Laing O’Rourke (BMC) Pty Limited v Estate Property Holdings Pty Limited [2007] NSWSC 1199

HEARING DATE(S): 22 October 2007

JUDGMENT OF: Hammerschlag J

EX TEMPORE JUDGMENT DATE: 22 October 2007

DECISION: Summons dismissed. Injunction granted by McDougall J on 9 July 2007 dissolved.

CATCHWORDS: CONTRACT - Building contract - Australian Standard AS4300 1995 - Construction of certificate provisions and provisions concerning security provided by builder for its obligations

LEGISLATION CITED:

CASES CITED: Southern Region Pty Ltd v State of Victoria (No.2) (2002) 18 BCL 211

PARTIES: Laing O’Rourke (BMC) Pty Limited (ABN 36 009 830 460)
Estate Property Holdings Pty Limited (ACN 090 775 161)

FILE NUMBER(S): SC 55053/2007

COUNSEL: S.A. Kerr (Plaintiff)
M. Ashhurst SC with S O'Brien (Defendant)

SOLICITORS:
Baker & McKenzie (Plaintiff)
Church & Grace (Defendant)

- 15 -

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION
TECHNOLOGY AND CONSTRUCTION LIST

HAMMERSCHLAG J

22 OCTOBER 2007

55053/07 LAING O’ROURKE (BMC) PTY LIMITED v ESTATE PROPERTY HOLDINGS PTY LIMITED

EX TEMPORE JUDGMENT

1 HIS HONOUR: The plaintiff, (“the Contractor”), is a builder.

2 On 15 November 2002 by project deed ("the Contract") it contracted with the defendant (“the Principal”) to construct a residential development at Gosford in the State of New South Wales for a price of $41,668,474.

3 The provisions of the Contract which are relevant to the present dispute are:

a the definition in cl 2 of “Final Certificate” which is a certificate issued by the Superintendent to the Principal and to the Contractor pursuant to cl 42.7;

b the definition in cl 2 of “Superintendent” which is the person stated in item 4 Annexure Part A as the Superintendent. The Superintendent stated is Estate Constructions of Australia Pty Ltd and its authorised delegate is identified as Jamin Tappouras.

c

SECURITY, RETENTION MONEYS AND PERFORMANCE UNDERTAKINGS

Purpose

Clause 5

Provision of Security

Clause 5.

Form of Security

The security will be two unconditional undertakings, in the form provided in Annexure Part F, in favour of the Principal, each in the amount of 2.5% of the Contract Sum.

Time for Provision of Security

Security will be provided within 7 days of the Date of Contract.

Conversion of Security and Recourse to Retention Moneys

The Principal may have recourse to security and may convert into money security that does not consist of money where:

(a) the Principal has become entitled to exercise a right under the Contract in respect of the security;

(b) the Principal has given the Contractor 5 days notice writing of its intention to have recourse to the security; and

(c) 5 days has elapsed since the notice was given.

Reduction of Security and Retention Moneys

(a) Upon the issue of the Certificate of Practical Completion, the Principal’s entitlement to security will be reduced to 2.5% of the Contract Sum.

(b) At the expiry of the Defects Liability Period, the Superintendent will assess the value of defects, if any, which remain unrectified, and will issue a certificate to the Contractor and the Principal stating, in its opinion, the value of such defects.

Clause 5.6(b)

Release of Security

(a) The Principal will release to the Contractor:

Clause 5.6(a)

Clause 5.6(c)

Clause 5.6(b)

(iii) the balance of the security within 14 days after the issue of the Final Certificate.

Clause 42.3,

d Clause 21 entitled “Superintendent” of which sub cl 21(a) provides, relevantly, that the Principal will ensure that at all times there is a Superintendent and will ensure that in the exercise of the functions of the Superintendent under the Contract the Superintendent:

(ii) acts within the time prescribed under the Contract or where no time is prescribed, within a reasonable time;…”

e Clause 37 entitled "Defects Liability" of which sub cll 37(a), (b) and (c) provide, relevantly, as follows:

(a) The Defects Liability Period stated in item 25 Annexure Part A will commence at 4.00pm on the Date of Practical Completion.

(b) As soon as possible after the Date of Practical Completion, the Contractor will rectify any defects or omissions in the work under the Contract existing at the Date of Practical Completion.

Clause 37

f Clause 42 entitled "Certificates and Payments" of which sub cll 42.6 and 42.7 provide, relevantly, as follows:

Final Payment Claim

(a) Within 28 days of the expiry of the Defects Liability Period, or where there is more than one, the last to expire, the Contractor will provide the Superintendent with a final payment claim and endorse it ‘Final Payment Claim’.

Clause 42.2

Clause 42.6

Final Certificate

Clause 42.6

Clause 42.1(c)(i)

42.1(c)(iv)

(b) Within 14 days after the issue of a Final Certificate, the Principal will release to the Contractor any security then held by the Principal.

4 The Contractor provided security by way of bank guarantees from the ANZ Bank in compliance with the Contract.

5 Practical completion occurred on 3 June 2004.

6 The Defects Liability Period (after various consensual extensions) expired on 31 March 2006.

7 The Contractor made no Final Payment Claim as contemplated in cl 42.6(a).

8 On 24 May 2007 the Contractor requested the Superintendent to issue a Final Certificate. By that same letter, a copy of which was sent to the Principal, it requested release of the security held within 14 days after the issue of the Final Certificate.

9 This request spawned a number of responses and consequences.

10 On 5 June 2007 the Superintendent wrote to the Contractor stating that there had been reported defects which remained outstanding. The letter identified a number of them. It concluded as follows:

“Based of (sic) the information contained herein the defects liability has not expired as these items remain unrectified, and therefore your Contractual obligations are not met.

The Final Certificate you request is unable to be issued until all obligations are met. Therefore the security held by Estate Property Holdings should not be released."

11 On 8 June 2007 the Contractor responded stating that “all defects which were to be rectified during the Defects Liability Period have in fact been rectified” and maintaining that the security was to be released.

12 There were events in the Newcastle area and the Central Coast during the period of about 31 May to 9 June 2007 which resulted in water ingress to the buildings. The Contractor undertook to act in accordance with its obligations under the Home Building Act 1989 (NSW) with respect to those matters.

13 On 4 July 2007 the Superintendent purported to issue two certificates.

14 The first was a certificate headed “Certificate Pursuant to Clause 5.6(b)” and was in the following terms:

“Following expiry of the defects liability period, this company, as Superintendent under the Contract, certifies:

1. there are defects in the work which remain unrectified; and

2. in its opinion the value of such defects is $166,000.00 in total.

The defects, and this company’s opinion of the value of each item, are set out in the attached schedule."

Pursuant to clause 5.6(c), the Principal's entitlement to security is therefore reduced to $166,000.”

15 The schedule attached was entitled “Schedule of Incomplete/Unrectified Work” and included a number of items described as “water penetration” to parts of identified units.

16 The second certificate was headed "Final Certificate” and was in the following terms:

“Your letter requesting the Final Certificate dated 24th May 2007 has been considered. As Superintendent under the Contract, this company certifies that the amount, which in its opinion, is finally due from Lange O'Rourke (BMC) Pty Limited (as Contractor) to Estate Property Holdings Pty Limited ("Administrator Appointed") (as Principal) arising out of the Contract and any breach of it is $166,000.

The amount certified as due from you to the Principal differs from the amount claimed in your final payment claim due to the inclusion of the costs of rectification of the defects and omissions which remain unrectified as certified in the clause 5.6(b) certificate of this date."

17 The security held by the Principal by way of bank guarantee was then reduced to $166,000, and it stands at that figure now.

18 By letter of the same date (4 July 2007) the Principal gave notice to the Contractor that after 5 days it would have recourse to its security.

19 On 9 July 2007 McDougall J gave leave to the Contractor to commence proceedings against the Principal (which was then under voluntary administration), and restrained the Principal from taking steps to realise its security.

20 By summons issued on 9 July 2007 the Contractor seeks injunctive relief restraining the Principal from “calling on the security pursuant to cl 5.5” of the Contract. The summons further seeks a declaration that the Principal “has no entitlement under cl 5.5 of the Contract” to recourse to the security provided to the Principal under cl 5.1 of the Contract and to convert the security into money.

21 After discussion between the Court and counsel for both parties the issues in the case were narrowed substantially. Ultimately Mr Kerr of counsel, who appeared for the Contractor, limited the case put on behalf of the Contractor to the following contentions:

a the right, if any, in the Contractor to call upon the guarantee depended on the issue by the Superintendent of a valid certificate under cl 5.6(b);

b the document purporting to be that certificate was invalid and of no effect because:

i. the power of the Superintendent under cl 5.6(b) was limited to certifying the value of defects which remained unrectified as at the expiry of the Defects Liability Period whereas the certificate here on, its face, purported to certify defects beyond defects which remained unrectified “As at the end of the Defects Liability Period”; and

ii. it was late;

c it followed that the Principal had no right to call upon or retain the security and therefore was obliged to return it.

22 Mr Ashhurst SC, with whom Mr S O'Brien appeared, for the Principal, put that:

a the cl 5.6(b) certificate was at best ambiguous and that the Contractor here bore the onus, which it had not discharged, of establishing that it purported to certify defects not covered by the Defects Liability Period provisions;

b the invalidity of the cl 5.6(b) certificate did not infect the final certificate because cl 42.7 had a different field of operation to cl 5.6(b) and that the Contractor’s submission that the certificate there contemplated was a reference to, or comprehended the cl 5.6(b) certificate, was unsustainable; and

c neither cl 5.6 nor cl 42.7 were provisions where the times stipulated were of the essence.

23 The principal line of attack with respect to the form of the certificate was on the use in it by the Superintendent of the words “Following expiry of the defects liability period”, which words, Mr Kerr put, made it clear that what was being certified was not the value of defects which remained unrectified “At the expiry of the Defects Liability Period” (as cl 5.6(b) required) but rather defects which had not been identified as at that time and therefore could not have then remained unrectified. Accordingly, Mr Kerr put, the certificate was invalid because it went outside what the Superintendent was entitled and required to certify.

24 Mr Kerr’s submission and the summons where it seeks a declaration that the defendant has no entitlement “under cl 5.5 of the Contract” to recourse to the security provided under cl 5.1 and to convert the security into money, have inherent in them the premise that a cl 5.6(b) certificate concerns determination of an amount which the Principal is entitled to demand be paid by the Contractor. On this premise, if there is no certificate there is no determination of an amount owing by the Contractor to the Principal in respect of which recourse may be had to the guarantee.

25 Mr Ashhurst initially accepted (probably as a consequence of what fell from the Court) that if the cl 5.6(b) certificate was invalid the Principal had no entitlement to rely on the bank guarantee or, put another way, that the right of the Principal to retain its security depended on the valid issue of such a certificate.

26 However, it became apparent, and I conveyed to both counsel that it seemed to me that both the Contractor’s case as put, as well as Mr Ashhurst’s concession, were based on the premise that the cl 5.6(b) certificate provides a mechanism for the certification of an amount due, which premise was incorrect because cl 5.6(b) is not such a provision. It is not directed to certifying an amount due by the Contractor to the Principal of which the Principal can then effectuate payment by calling up the guarantee.

27 Rather, it is a provision designed to ensure that the Principal does not hold security for more than the then certified value of defects which remain unrectified at the end of the Defects Liability Period. The guarantee is clearly intended to secure only the Contractor’s obligation to remedy those defects. At the end of the Defects Liability Period the Superintendent is in a position to estimate the value of remedying the defects and the guarantee is to be reduced if that estimate is below the value of the security held to secure payment of it.

28 In due course, the true value of those defects (which may be less or perhaps even more), will be determined and may in whole or in part become the subject of the Final Certificate. Pending that determination, the Principal's entitlement is to have security limited to the amount of the value estimated by the Superintendent under cl 5.6(b). All a cl 5.6(b) certificate does is to place a ceiling on the security held. It says nothing of any amount ultimately to be paid.

29 Clause 42.7, on the other hand, is a provision intended to result in determination of an amount payable by one party to the other.

30 Under it, if the Contractor fails to lodge a Final Payment Claim, all claims which have not already been barred are, after the expiration of the period for lodging the final payment claim, barred. Either way, within the specified period, the Superintendent must issue a Final Certificate certifying the amount finally due in either direction. Fourteen days after that, the Principal must release the balance of any security then held.

31 The existence or otherwise of a valid certificate under cl 5.6(b) accordingly has no impact on the liability of the parties in either direction, as contemplated by cl 42. It merely fixes the maximum amount of the security to be held to secure the Contractor’s ultimate liability in respect of unrectified defects as at the end of the Defects Liability Period.

32 Even though the Principal may have breached the obligation to ensure, under cl 21(a)(ii), that the Superintendent acted within time prescribed under the Contract (which Mr Ashhurst fairly conceded it had), which breach may give the Contractor a right to damages, the failure to issue such, or a valid, certificate would simply mean that there had been no trigger for the reduction of the security held by the Principal. The Contract is still on foot. It has never been terminated by the Contractor for that breach.

33 It follows that the logical outcome of upholding Mr Kerr's submission that the cl 5.6(b) certificate is invalid would be that the machinery necessary to effect the Contractor’s entitlement to a reduction of the security provided by it had not worked. The existence or otherwise of such a certificate does not impact on the amount of the liability which the Contractor may ultimately have (and be certified to have) to the Principal whether secured by the guarantee or not. The absence of such a certificate does not impair in any way the Principal’s right to hold the security.

34 Mr Ashhurst, with leave, advisedly withdrew the concession that the absence of the certificate impaired the Principal’s security.

35 However, Mr Ashhurst accepted, in my view, properly, that cl 5.6 makes it clear that the security is to be held only in respect of liability of the Contractor for defects which were unrectified at the date of the expiry of the Defects Liability Period, as contemplated by cl 5.6(b). It follows that it would not be permissible for the Principal to enliven the guarantee with respect to any defects which do not meet that qualification, and if it were to do so, it would be in breach of the Contract, with the legal consequences such a breach would bring with it.

36 It seems to me that under cl 42.7, when it comes to final certification, the Principal has recourse to the guarantee to ensure payment of the amount which the Superintendent properly finally certifies as due from the Contractor to the Principal in respect of defects unrectified as at the expiry of the Defects Liability Period. Clause 42.7 makes no reference to the existence of, nor is it intended to facilitate or govern the issue of, a certificate pursuant to cl 5.6(b).

37 On the above analysis, invalidity for lateness is a false issue. However, I nevertheless deal with it.

38 Mr Kerr put that cl 42.7 required the Superintendent to have issued a certificate under cl 5.6(b) by no later than the date he was to issue the Final Certificate, which in this case was 28 days after the expiry of the Defects Liability Period (the Contractor having made no final payment claim as contemplated in cl 42.6).

39 He put that the reference in cl 42.7(a) to the amount certified by the Superintendent to be finally due from the Contractor to the Principal arising out of the Contract or any alleged breach thereof, was a reference to, or at least comprehended, the certification contemplated by cl 5.6(b).

40 The effect of this delay, he put, was within 28 days after the expiry of the Defects Liability Period the Superintendent was required to issue a Final Certificate and thereafter could not raise any issue in relation to outstanding works. Inherent in these submissions is the proposition that cl 5.6(b) read with cl 42.7 makes time of the essence with respect to the provision of the cl 5.6(b) certificate. The cl 5.6(b) certificate was invalid because it was late.

41 In support of the proposition that time was not of the essence in cll 5.6 and 42.7, Mr Ashhurst cited the decision of Byrne J in Southern Region Pty Ltd v State of Victoria (No.2) (2002) 18 BCL 211. He drew attention to salient features of those provisions, including that cl 5.6 itself contained no time limitation, that what was required was for an assessment of the value of defects at the expiry of the defects period not the issue of a certificate by that date, and he contrasted those provisions with other provisions where time is made of the essence such as cll 42.6 and 42.7 which, with respect to the making of a final payment claim, contain provisions for barring claims made after the expiration of the period for lodging a final payment claim. He put that a cl 5.6(b) certificate was required to be issued within a reasonable time which was not later than the issue of a Final Certificate.

42 In Southern Region Pty Ltd v State of Victoria (No.2) Byrne J considered provisions which were, in effect, on all fours with those in this case and concluded that they did not make time of the essence.

43 Mr Ashhurst's submissions with respect to time being not of the essence are well founded. It seems to me that the reference in cl 5.6(b) is a reference to the date to which the certificate to be issued under that provision is to speak. It says nothing of when the certificate is to be given. That being so, it is to be given within a reasonable time. Even if it be the case that the cl 5.6(b) certificate was late, that fact would not invalidate it.

44 I have made it clear, and reiterate, that recourse to the guarantee, whatever the terms of the Final Certificate, is only available in respect of defects which qualify as defects which remained unrectified at the expiry of the Defects Liability Period.

45 No attack was made on the terms of the Final Certificate, or on its efficacy on the basis that it did not properly purport to certify what was required to be certified. It, however, bears a direct relationship to the certificate pursuant to cl 5.6(b) which, on its face, contains references to water penetration, which the correspondence indicates might have occurred as a consequence of events subsequent to the expiry of the Defects Liability Period. They, of course, may have been defects which were in existence as at, and which remained unrectified as at, the expiry of that period.

46 The consequence of the aforegoing is that the plaintiff's claim to restrain the defendant’s recourse to the security (on the basis of an invalid certificate under cl 5.6(b)) must fail.

47 The summons is dismissed.

48 The injunction granted by McDougall J on 9 July 2007 is dissolved.

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Laing O'Rourke (BMC) Pty Limited v Estate Property Holdings Pty Limited [2007] NSWSC 1199

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CITATION:	Laing O’Rourke (BMC) Pty Limited v Estate Property Holdings Pty Limited [2007] NSWSC 1199
HEARING DATE(S):	22 October 2007
JUDGMENT OF:	Hammerschlag J
EX TEMPORE JUDGMENT DATE:	22 October 2007
DECISION:	Summons dismissed. Injunction granted by McDougall J on 9 July 2007 dissolved.
CATCHWORDS:	CONTRACT - Building contract - Australian Standard AS4300 1995 - Construction of certificate provisions and provisions concerning security provided by builder for its obligations
LEGISLATION CITED:
CASES CITED:	Southern Region Pty Ltd v State of Victoria (No.2) (2002) 18 BCL 211
PARTIES:	Laing O’Rourke (BMC) Pty Limited (ABN 36 009 830 460) Estate Property Holdings Pty Limited (ACN 090 775 161)
FILE NUMBER(S):	SC 55053/2007
COUNSEL:	S.A. Kerr (Plaintiff) M. Ashhurst SC with S O'Brien (Defendant)
SOLICITORS:	Baker & McKenzie (Plaintiff) Church & Grace (Defendant)