Lucas Stuart Pty Ltd v Hemmes Hermitage Pty Ltd
[2010] NSWCA 283
•1 November 2010
NEW SOUTH WALES COURT OF APPEAL
CITATION:
Lucas Stuart Pty Ltd v Hemmes Hermitage Pty Ltd [2010] NSWCA 283
FILE NUMBER(S):
2009/298813
HEARING DATE(S):
26 October 2010
JUDGMENT DATE:
1 November 2010
PARTIES:
Lucas Stuart Pty Ltd (Applicant)
Hemmes Hermitage Pty Ltd (Respondent)
JUDGMENT OF:
Campbell JA Macfarlan JA Young JA
LOWER COURT JURISDICTION:
Supreme Court
LOWER COURT FILE NUMBER(S):
SC 2009/298813
LOWER COURT JUDICIAL OFFICER:
Macready AsJ
LOWER COURT DATE OF DECISION:
21 September 2010
LOWER COURT MEDIUM NEUTRAL CITATION:
Lucas Stuart Pty Ltd v Hemmes Hermitage Pty Ltd [2010] NSWSC 1101
COUNSEL:
M Ashhurst SC/D Hand (Applicant)
S A Kerr SC/T Breakspear (Respondent)
SOLICITORS:
BCP Lawyers & Consultants (Applicant)
Mallesons Stephen Jaques (Respondent)
CATCHWORDS:
CONTRACTS – building and construction contracts – performance bonds – whether entitlement of principal to call on performance bonds conditioned upon the objective fact of material non-compliance by the contactor with its contractual obligations – Clough Engineering v Oil & Gas Corporation (2008) 249 ALR 458 considered – grant of interlocutory injunction – whether contractually unjustified call on bonds likely to damage reputation and financial standing of contractor
EQUITY - injunction to restrain breach of negative stipulation in contract - exercise of equity's auxiliary jurisdiction - need to demonstrate inadequacy of relevant legal remedies including an award of damages - test for grant of interlocutory injunction
LEGISLATION CITED:
Building and Construction Industry Security of Payment Act 1999
CATEGORY:
Principal judgment
CASES CITED:
American Cyanamid Co v Ethicon Ltd [1975] AC 396
Bankstown City Council v Alamdo Holdings Pty Ltd [2005] HCA 46; (2005) 223 CLR 660
Barclay Mowlem Construction Ltd v Simon Engineering (Aust) Pty Ltd (1991) 23 NSWLR 451
Bateman Project Engineering Pty Ltd v Resolute Ltd [2000] WASC 284; (2000) 23 WAR 493
Clough Engineering Ltd v Oil & Natural Gas Corporation Ltd [No 3] [2007] FCA 2082
Clough Engineering Ltd (ACN 009 093 869) v Oil & Natural Gas Corporation Ltd [2008] FCAFC 136; (2008) 249 ALR 458
Curro v Beyond Productions Pty Ltd (1993) 30 NSWLR 337
Dalgety Wine Estates Pty Ltd v Rizzon [1979] HCA 41; (1979) 141 CLR 552
Doherty v Allman (1878) 3 App Cas 709
Fletcher Construction Australia Ltd v Varnsdorf Pty Ltd [1998] 3 VR 812
House v The King [1936] HCA 40; (1936) 55 CLR 499
J C Williamson Ltd v Lukey and Mulholland [1931] HCA 15; (1931) 45 CLR 282
Malik v Bank of Credit and Commerce International SA [1998] AC 20
Murphy v Lush [1986] HCA 37; (1986) 60 ALJR 523
Patrick Stevedores Operations No 2 Pty Ltd v Maritime Union of Australia [1998] HCA 30; (1998) 195 CLR 1
Reed Construction Services Pty Ltd v Kheng Seng (Australia) Pty Ltd (1999) 15 BCL 158
Varley v Varley [2006] NSWSC 1025
TEXTS CITED:
N C Seddon and M P Ellinghaus, Cheshire and Fifoot's Law of Contract, 9th Aust ed (2008) LexisNexis Butterworths
J Beatson and H G Beale, Chitty on Contracts 28th ed (1999) Sweet & Maxwell, London
I C F Spry, Equitable Remedies, 8th ed Law Book Company
The Macquarie Dictionary Online, Macquarie Dictionary Publishers Pty Ltd
DECISION:
(1) Leave to appeal granted;
(2) Appeal allowed;
(3) Orders made by Macready AsJ on 21 September 2010 set aside;
(4) Upon the applicant by its counsel giving to the Court the usual undertaking as to damages, and until further order of this Court or of the court at first instance, restrain the respondent from converting into cash, pursuant to Clause 16.3 of the Contract between the parties, any unconditional undertaking provided by the applicant to the respondent where such conversion is sought to be made by the respondent in reliance upon any failure, or purported failure, of the applicant to comply with the terms of the Notice dated 19 July 2010 issued by the respondent to the applicant;
(5) Order the respondent to pay the applicant’s costs of the applicant’s Notice of Motion filed on 17 September 2010 and of the proceedings on appeal; and
(6) The respondent to have a certificate under the Suitor’s Fund Act 1951, if qualified.
JUDGMENT:
IN THE SUPREME COURT
OF NEW SOUTH WALES
COURT OF APPEAL
CA 2009/298813
CAMPBELL JA
MACFARLAN JA
YOUNG JA1 NOVEMBER 2010
LUCAS STUART PTY LTD v HEMMES HERMITAGE PTY LTD
Judgment
CAMPBELL JA: I agree with the reasons of Macfarlan JA, but wish to explain in more detail my reasons for agreeing with paras [48] and [50].
The Notice of Motion that was before the judge in the court below, sought an injunction:
“…until further order, the Defendant be restrained from converting any of the unconditional undertakings provided by the Plaintiff, through the exercise of any right under clause 16.3 of the Contract between the Plaintiff and the Defendant dated 8 November 2006 for the construction of 320 to 348 George Street, Sydney.”
At the hearing we were not taken to the final relief in support of which this interlocutory injunction was sought, but the hearing proceeded as though the relevant final relief was a permanent injunction enjoining the same conduct.
Mr Ashhurst SC, for the Applicant, explained the basis upon which the final relief was sought as being that calling upon the unconditional undertaking on the basis that the Applicant had not complied with the notice dated 19 July 2010 would be a breach of an implied term of the building contract. That implied term was to the effect that the undertaking would not be called on except in circumstances justified by clause 16. Thus, the injunction that was sought was an equitable remedy for a breach of a common law obligation, ie, it was sought in equity’s auxiliary jurisdiction.
The only justification for equity ever involving itself in providing a remedy for breach of a common law obligation is if the remedy provided by the common law is inadequate. The common law remedy most usually considered in this context is damages, but Dr Spry correctly contends that in rare cases the availability of a common law remedy other than damages might provide a reason why equity had no basis to issue an injunction in its auxiliary jurisdiction: Spry, Equitable Remedies, 8th edition, (Law Book Co 2010), page 389. The fact that inadequacy of available legal remedies must be established before the court has jurisdiction to grant an injunction in its auxiliary jurisdiction is one of the reasons why the statement of Lord Cairns in Doherty v Allman (1878) 3 App Cas 709 at 720 to the effect that an injunction will always issue to restrain a breach of a negative term in a contract, is incorrect. The incorrectness of that statement is now established: Dalgety Wine Estates Pty Ltd v Rizzon (1979) 141 CLR 552 at 560 (Gibbs J), 573-4 (Mason J); Curro v Beyond Productions Pty Ltd (1993) 30 NSWLR 337 at 346-7; J C Williamson Ltd v Lukey and Mulholland (1931) 45 CLR 282 at 299-300 (Dixon J). Other discretionary reasons, not relevant in the present case, might also exist as to why an injunction to restrain a breach of a negative stipulation in a contract would not be granted (eg Cheshire and Fifoot’s Law of Contract, 9th Aust ed (LexisNexis Butterworths Australia 2008) para 24.20; Spry, op cit, page 586-7.)
It is important for the conceptual structure of the law governing the present case that inadequacy of the legal remedy is the foundation of equity’s jurisdiction to grant an injunction to enforce a negative contractual provision. It is authoritatively stated that the test for whether an interlocutory injunction should be granted is whether there is a serious question to be tried, and whether the balance of convenience favours the grant of the injunction: Murphy v Lush (1986) 60 ALJR 523 at 524 per Gibbs CJ, Mason, Wilson, Brennan, Deane and Dawson JJ; American Cyanamid Co v Ethicon Ltd [1975] AC 396 at 407; Patrick Stevedores Operations No 2 Pty Ltd v Maritime Union of Australia (1998) 195 CLR 1 at 24, [21] per Brennan CJ, McHugh, Gummow, Kirby and Hayne JJ. Because an interlocutory injunction aims to preserve the situation until the court can decide whether to grant the final claimed relief, the relevant “serious question to be tried” concerns whether the court will grant the claimed final relief. When the claimed final relief is a permanent injunction to restrain a breach of a negative stipulation in a contract, any inquiry at the interlocutory stage into whether there is a serious question to be tried must include not only whether there is a serous question to be tried concerning whether there has been a breach of the negative stipulation in question, but also whether there is a serious question to be tried concerning whether the common law’s remedy or remedies for the claimed breach will be inadequate (see Varley v Varley [2006] NSWSC 1025 at [19]-[25]).
The distinction between the jurisdictional foundation for equity granting an injunction in the auxiliary jurisdiction, and discretionary reasons why the injunction might ultimately not be granted, is of importance in considering whether an interlocutory injunction should be granted to restrain a breach of a negative stipulation in a contract. This is because an applicant for an interlocutory injunction has the onus of establishing the foundation of the court’s jurisdiction, but does not have an onus of anticipating and negativing all possible discretionary defences that might be raised. (The distinction between the jurisdictional foundation, and the discretionary defences might also be important to an appellate court in deciding whether or not to apply a House v The King test for overturning some alleged error concerning the granting of an injunction in the auxiliary jurisdiction.)
It may be, as Dr Spry at 587 contends, that it will only be in exceptional cases, when an injunction is sought to restrain a breach of a negative stipulation, that the inadequacy of the legal remedy will not be made out. However that is an empirical generalisation, not a legal principle. Any particular case is decided by the application of principle to the facts of that particular case, not by reference to how cases of that type usually (though not inevitably) turn out.
In the present case, the prospect of damage to reputation provides a sufficient reason why the Applicant has established that there is a serious question to be tried concerning not only the existence of a breach of a negative stipulation requiring the Respondent not to call on the performance bonds in circumstances not justified by clause 16, but also that the only relevant legal remedy, namely damages, will not be an adequate remedy.
Concerning the balance of convenience, the only matter that the Respondent put forward as affecting the balance of convenience in its favour was that damage to the Applicant’s reputation had already been sustained through calling up of the bonds, and calling up the remainder of the bonds would not worsen that situation. I agree with the reasons of Macfarlan JA in [50] for not accepting that submission. When that is the only matter that was put as being relevant to the balance of convenience, in my view the balance of convenience favours the granting of the interlocutory injunction.
I agree with the orders proposed by Macfarlan JA.
MACFARLAN JA: On 8 November 2006 the applicant contracted to construct for the respondent a multi-storey retail bar, restaurant and function centre known as “The Ivy” at the respondent’s premises at 320- 348 George Street, Sydney. The work came to be done in three stages. The Project Director appointed under the contract, Caverstock Group Pty Ltd, certified that Practical Completion of the three stages occurred on 1 February 2008, 30 June 2009 and 30 June 2010 respectively.
With its letter to the applicant dated 16 July 2010 enclosing the Certificates of Practical Completion relating to the second and third stages, the Project Director enclosed a Schedule of Defects that it required be rectified by 30 June 2011. On 19 July 2010 the respondent itself issued a Notice to the applicant identifying various of these defects that it required be rectified by the much earlier date of 25 September 2010. The respondent subsequently agreed to extend the time for compliance with its Notice to 14 November 2010.
By Notice of Motion filed on 14 September 2010 the applicant sought an interlocutory order restraining the respondent from calling upon performance bonds in reliance upon non-compliance with its Notice of 19 July 2010. The bonds were provided by the applicant to the respondent pursuant to the Contract.
By his judgment in Lucas Stuart Pty Ltd v Hemmes Hermitage Pty Ltd [2010] NSWSC 1101, Macready AsJ declined to grant the interlocutory relief sought, holding that the applicant had not established that there was any serious question to be tried at a final hearing as to the validity of the Notice dated 19 July 2010.
The Court has heard the application for leave to appeal from this decision concurrently with hearing argument as to the merits of the appeal that would follow if the application for leave to appeal were granted.
The applicant’s draft Notice of Appeal contains two grounds. Only the first is now pressed. It is in the following terms:
“1The trial judge erred in construing clause 16.2 of the contract between the Appellant and the Respondent, dated 8 November 2006, as requiring
(i)a failure by the Applicant to comply with a material obligation under the contract,
whereas, on its proper construction, clause 16.2 required
(ii)a material failure by the Applicant to comply with an obligation under the contract”.
The respondent sought to rely upon a Notice of Contention seeking to uphold the primary judge’s decision on different grounds to those given by his Honour. As these grounds related only to the applicant’s proposed second ground of appeal, the Notice of Contention became irrelevant when the applicant did not at the hearing of this application press its proposed second ground.
Neither side sought to challenge the primary judge’s conclusions in relation to various other arguments that were put at first instance.
1 Pre-condition to issue of Notice to Remedy
Pursuant to the Contract (as varied in relation to this subject matter) the applicant provided to the respondent, as security for performance of its obligations under the contract, six undertakings issued by QBE Insurance (Australia) Ltd. Clause 16.3 of the Contract provides that the respondent may call upon such undertakings if the applicant fails to comply with the terms of a notice given under Clause 16.2. Clause 16.2 is in the following terms:
“16.2 If the contractor has not materially complied with its obligations under this contract, the principal may give a written notice to the contractor stating:
16.2.1 The contractor’s breach.
16.2.2What the principal requires the contractor to do to remedy the breach.
16.2.3A specific reasonable time in which the contractor must remedy the breach”.
The relevant parts of the Notice dated 19 July 2010 that the respondent issued to the applicant are as follows:
“NOTICE PURSUANT TO CLAUSE 16.2 OF THE CONTRACT
Pursuant to clause 16.2 of the contract, we hereby notify Lucas Stuart that:16.2.1 - Lucas Stuart's breaches
1 Lucas Stuart has committed the following breaches of the contract, which comprise material non-compliances with its obligations:(a) the existence of the defects identified in the attached defects program (‘Defects Program’), (breach of clauses 2.1 and 10.1 of the Contract);
(b) Lucas Stuart's failure to rectify the defects identified in the Defects Program (breach of clauses 2.1.2 and 10.15 of the Contract).16.2.2 - What Lucas Stuart is required to do to remedy the breaches
2 In order to remedy the breaches, HHPL, as Principal, requires Lucas Stuart to rectify the defects identified in the Defects Program (‘Defects Rectification Work’),16.2.3 - The reasonable time in which Lucas Stuart must remedy the breaches
3 HHPL requires Lucas Stuart to remedy its breaches by:
(a) commencing the Defects Rectification Work in line with the Defects Program by no later than 26 July 2010, being 7 days from the date of this letter (week 1 of the Defects Program to be the week beginning 26 July 2010); and
(b) completing the Defects Rectification Work within the reasonable time specified in the Defects Program, being by Saturday, 25 September 2010”.The applicant’s argument is that this Notice is invalid because the condition precedent stated in Clause 16.2 to issue of such a notice (that is, that the applicant “has not materially complied with its obligations” under the Contract) had not been satisfied. At least, it argues, there is a serious question to be tried as to whether the pre-condition had been satisfied.
The primary judge placed particular reliance upon Clause 2.1 of the Contract in rejecting this argument. That Clause is in the following terms:
“2 Main obligations
Contractor’s main obligations
2.1 The contractor must construct the project in strict accordance with the requirements of the contract documents by the dates for practical completion.
2.1.1The contractor must also design the excavation and permanent shoring of the site consistently with the design for the rest of the project produced by the principal’s consultants.
2.1.2It must also rectify, in accordance with the contract, all defects”.
Having referred to this provision and noted that the Contract does not contain any provision restricting the use in interpreting the Contract of headings to clauses of the Contract (no doubt a reference principally to the fact that the headings above Clause 2.1 refer twice to the “main obligations” of the applicant), the primary judge said:
“33 The inclusion of rectification of defects as one of the main obligations under the contract is a strong pointer to that [being] included in the obligations upon which clause 16.2 can fasten.
34 It also should be noted that in ordinary parlance a defect in work does constitute a breach of contract: see Honeywood v Munnings (2006) 67 NSWLR 466 at [17] and Tameside Metropolitan Borough Council v Barlow Securities Group Services Ltd (2001) EWCA Civ 1, (2001) BLR 113 at [44] – [45]. Considering this it should be appreciated that the notice refers to two different breaches. One is the actual construction of works containing defects and the second breach is the failure to rectify. Both of the breaches are comprehended within the terms of clause 2 of the contract as main obligations of the parties.
35 Importantly, clause 2.1 has its own time limit, namely, the dates for practical completion. On its face this time limit conditions the obligations to construct without defects. Given the use in clause 2.1.2 of the words “in accordance with the contract” the obligation to rectify a defect that has accrued is conditioned in respect of time by other provisions of the contract.
36 On the question of the arguable construction of clause 16.2 I do not see that clause 10.13 with its reference to minor defects assists the plaintiff. Clause 16.2 applied both before and after practical completion. One can assume that the word ‘material’ has some significance in its application to obligations under the contract. Whether it is one of the Shorter Oxford definitions of the word ‘material’ such as ‘of much consequence’, ‘genuine’ or ‘essential’ does not have to be determined because in my view the elevation of ‘rectification of defects’ into the category of main obligations puts it beyond argument that defects are within clause 16.2.
37 It should be noted that there was evidence before me that the defects in the clause 16.2 notice posed substantial risks, are costly to repair and do require prompt rectification”.
I do not, with respect, agree with this reasoning. Satisfaction of the condition precedent stated in Clause 16.2 occurs only if the applicant “has not materially complied with its obligations” under the Contract. In my view this is not established simply by proof that the applicant has breached one of its “main obligations” described in Clause 2.1. Those obligations, so far as is presently relevant, are expressed in the most general of terms and amount simply to requirements that the applicant construct the project strictly in accordance with the Contract and rectify all defects in accordance with the Contract. If the primary judge’s view were correct, any failure, however minor, to comply with construction requirements would result in the applicant materially non-complying with its obligations under the Contract for the purposes of Clause 16.2. That view would not in my opinion give any operation to the word “materially”. Whilst there is room for much argument as to what might, in particular circumstances, constitute a relevant material non-compliance, an insignificant breach of one of the “main obligations” stated in Clause 2.1 would not do so. The clause in my opinion requires a determination of whether the applicant has failed materially to comply with its obligations under the Contract, with those obligations being looked at as a whole.
The primary judge’s conclusion that there was no serious question to try in relation to the validity of the respondent’s Notice was thus based upon an erroneous construction of the Contract. In my view this error warrants the grant of leave to appeal. On the appeal, it is necessary for this Court to reconsider the construction of the Contract and whether interlocutory relief should be granted.
The primary judge noted, seemingly as an aside rather than as a ground for his decision, that there was evidence before him that the defects described in the respondent’s Notice “posed substantial risks, are costly to repair and do require prompt rectification”. Whilst the evidence to this effect that the respondent called is of course relevant to the question of whether there has been material non-compliance by the applicant with its obligations under the Contract, it does not foreclose the possibility that, as contended by the applicant, there is a serious question to be tried as to whether there has been such material non-compliance.
In favour of the applicant’s contention that there is such a serious question to be tried is the fact that Certificates of Practical Completion for each of the three stages of the Project have been issued by the Project Director. The Certificate certifying Practical Completion of Part 2 of the Project on 30 June 2009 was dated 8 July 2010. As the respondent points out, the Certificate concluded with the following statement:
“Although [the respondent] has been trading prior to Occupation Certificate and Practical Completion, we cannot recommend the release of the QBE Performance Undertakings because of the amount owing to the [respondent] by the [applicant] due to the liquidated damages, major defects and outstanding Practical Completion deliverables”.
The Certificate in respect of Part 3 of the Project certified that Practical Completion had been achieved on 30 June 2010. It contained the same final statement although the word “major” did not appear before the word “defects”. The Certificate stated that it attached the Schedule of Defects to which I have referred earlier. The Schedule was enclosed with the letter of 16 July 2010 by which the Certificate was sent to the applicant.
Clause 10.13 states what must occur for Practical Completion to be achieved. That clause includes the following:
“10.13 Subject to clause 10.14, any separate part will only be practically complete when it is complete in accordance with this clause and the contract documents and may be lawfully occupied by the principal or any person authorised by the principal, without being inconvenienced by the rectification of minor defects and only where the contractor has done each of the following:
…
10.13.2 The contractor has completed each of the following:
• All wall and floor finishes free of significant defects.
• All exterior finishes free of significant defects.
• All signage.
10.13.3Connect, test, balance and certify all services fit for operation for their intended purpose.
10.13.4Fully clean all finishes, fixtures, fittings and glass and has removed all labels (not intended to be permanent labels) and has removed all rubbish from the site.
10.13.5 Adjust and service all door and window furniture”.
It is apparent from these provisions that “practical” completion is contemplated by the Contract to be a stage of completion very close to full completion of the Project. This is consistent with the ordinary meaning of the adverb “practically” when used in relation to the completion of a task or enterprise, that is, “in effect”, “virtually”, “nearly” or “almost” (see The Macquarie Dictionary Online, Macquarie Dictionary Publishers Pty Ltd).
By Clause 3 of the Contract the parties agreed that Caverstock Group Pty Ltd would be the Project Director and, whether acting as the agent of the respondent or as a decision maker in relation to the rights of the parties under the Contract, would be required to act reasonably and honestly (Clause 3.2). The effect of Clauses of 3.4 and 3.5 of the Contract is that the Project Director was acting as agent of the respondent when it issued the Certificates of Practical Completion.
As the Certificates of Practical Completion for Parts 2 and 3 were issued by the Project Director as agent for the respondent and so close in time to the date of the respondent’s Notice of 19 July 2010 they should in my view be regarded as establishing that there is a serious question to be tried as to whether the condition precedent stated in Clause 16.2 has been satisfied and therefore as to the validity of the respondent’s Notice. To my mind the fact that the respondent, through its agent, the Project Director, certified that the works were practically complete raises a real issue as to whether the defects identified in the respondent’s Notice (and indeed all those identified in the Project Director’s Schedule) are of sufficient seriousness to require a conclusion that the applicant has “materially” failed to comply with its obligations under the Contract. Whilst different views may be taken about how complete works have to be to be “practically complete”, it is arguable that, notwithstanding the statements that appear at that end of the Certificates, the respondent, by its agent, certified that the works were “nearly” or “almost” complete. It is arguable also that this certification is inconsistent with the assertion in the respondent’s Notice of 19 July 2010 that the applicant was in material non-compliance with its obligations under the Contract by reason of the existence of defects in the works.
This apparent conflict between different statements by or on behalf of the respondent would have to be resolved at a final hearing. Such a resolution is however neither appropriate nor possible at an interlocutory hearing. The existence of the arguable conflict, being unresolved at this stage, is sufficient to demonstrate the existence of a serious question to be tried.
I add that whilst the concluding statements in the two Certificates (referring in the one to the subsistence of “major defects” and in the other to the subsistence of “defects”) raise a doubt as to the degree of significance that can be attached to the certifications of Practical Completion, they do no more than that. In particular they do not unarguably deprive the Certificates of the significance that the applicant seeks to attach to them.
I note in this context that Clause 16.2 is not conditioned upon the respondent being satisfied of the existence of material non-compliance by the applicant with its obligations. Rather, it is conditioned in my view upon the objective fact of such non-compliance. I accordingly differ from the following view expressed by the primary judge in the course of dealing with an issue that does not arise on this application:
“61 Another point in respect of the breach that is necessary to support a notice under clause 16 is that the actual breach alleged in the notice does not have to be established as for a notice to be valid there need only be a bona fide claim by the proprietor that the builder has not materially complied with its obligations under the contract”.
The primary judge relied upon the decision in Clough Engineering Ltd v Oil & Natural Gas Corporation Ltd [No 3] [2007] FCA 2082 and, on appeal, at [2008] FCAFC 136; (2008) 249 ALR 458, in support of this view. In that case the Full Federal Court placed considerable weight upon the fact that the clause there under consideration required provision of a performance guarantee in the form of that set out in an appendix and that the form referred to the payment by the guarantor “notwithstanding any dispute(s) pending”, without reference to the contractor and “without any demur, reservation, contest or protest” (249 ALR 458 at [30] and [88] – [112]). Whilst the Clause pursuant to which the bonds were provided in the present case (Clause 6.1) refers to “unconditional undertakings” the Contract does not contain any wording such as was contained in the pro forma performance bond regarded in Clough as effectively qualifying the terms of the condition precedent stated in the relevant clause. Clough is accordingly distinguishable.
Because Clough is distinguishable and its correctness was not fully debated before this Court, I refrain from expressing a concluded view as to its correctness. It is appropriate however for me to indicate that I have reservations about its correctness.
There are at least two principal goals that parties may seek to achieve by requiring that performance bonds be provided by a contractor to a principal in circumstances such as the present.
One is to provide security in the event of the insolvency of the contractor. The other is to enable the principal to obtain prompt payment of amounts it claims, notwithstanding disputes raised by the contractor. Not every contract seeks to achieve both goals. The present is one in which only the first is sought to be achieved. To assist in achieving the first goal the Contract thus states that the bonds to be provided are to be “unconditional”, with the consequence that the issuer is obliged to pay, without argument, if called upon by the respondent to do so.
So far as the second goal is concerned, Clause 16.2 however only entitles the respondent to call upon the bonds if, as a matter of objective fact, the applicant “has not materially complied with its obligations”. Accordingly, it is open, as has occurred here, for the applicant to seek to restrain the respondent from calling upon the bonds upon the basis that the pre-condition has, at least arguably, not been satisfied.
The position would have been different if Clause 16.1 had made the respondent’s entitlement to call upon the bonds dependent on the respondent’s satisfaction or even simply upon the respondent’s assertion that the applicant was in breach of the Contract. Provisions of this type would have gone a long way to achieving the second of the goals to which I have referred above.
My reservation about the decision in Clough is as to whether the contract in that case can truly be regarded as having been intended to achieve both purposes. Certainly the terms of the performance guarantee that the Full Court relied upon made it clear that the issuer of the guarantee could not withhold payment if a proper call were made but the condition precedent to the principal’s right to call upon the guarantee was expressed in terms of objective fact, that is, “in the event of the Contractor failing to honour any of the commitments entered into under this Contract” (see clause 3.3.3 quoted at 249 ALR 458 at [24]). It is not obvious to me why the terms of the guarantee given by the issuer should have been regarded as affecting the proper construction of this provision which related to the circumstances in which the Principal was entitled to call on the guarantee.
The balance of convenience
There is no evidence that inability of the respondent to call upon the performance bonds now would cause any particular financial prejudice to the respondent. Nor is there any evidence that, apart from any impact they may have on the applicant’s reputation, calls by the respondent upon the performance bonds would cause the applicant particular financial prejudice.
Courts have recognised on a number of occasions that calls upon performance bonds may cause significant damage to a contractor’s reputation and financial standing that is not readily curable by an award of damages (see for example Barclay Mowlem Construction Ltd v Simon Engineering (Aust) Pty Ltd (1991) 23 NSWLR 451 at 461 – 462 and Reed Construction Services Pty Ltd v Kheng Seng (Australia) Pty Ltd (1999) 15 BCL 158 at 167).
These views are echoed in evidence of a general nature called by the applicant in the present proceedings. As made clear through cross-examination, the evidence was not intended to suggest that if the present bonds were called upon the applicant would be likely to suffer any harm different from that which would ordinarily be suffered if a contractor’s performance bonds were called upon. This does not detract from the applicant’s position. If a performance bond is called upon with contractual justification, the contractor will have to bear, without recourse, whatever loss that follows. However if, as is contended to be the case here, calls made by the respondent in reliance upon non-compliance with its Notice of 19 July 2010 would be without contractual justification, the contractor has a case for restraining the principal from making the calls.
Availability of injunctive relief
For reasons I have given, the applicant has shown there is a serious question to be tried that the respondent’s Notice of 19 July 2010 requiring defects to be remedied within a specified time is invalid. It is common ground between the parties that the respondent wishes to use non-compliance with the Notice as a ground for calling upon the performance bonds under Clause 16.3. As it is clearly implicit in the Contract that the respondent will only call upon the performance bonds in the circumstances identified in the Contract, the applicant has demonstrated an arguable case that the respondent is threatening to breach an implied negative stipulation in the Contract. Authorities dealing with performance bonds confirm that injunctive relief may be given in such circumstances (see for instance Reed Construction Services Pty Ltd v Kheng Seng (Australia) Pty Ltd.
As the considerations referred to above in connection with the balance of convenience in my view establish that there is a serious question to be tried about whether damages would not adequately compensate the applicant for the harm it would suffer if the bonds were called upon, there is a serious question to be tried about whether final injunctive relief is available.
I should refer at this stage to the fact that subsequent to the decision of the primary judge refusing interlocutory relief, the respondent called upon two of the six bonds that were provided to it. It called the full amount of one bond and part of the amount of another. In total the respondent received under the bonds $762,699.50 against a total amount of $1,600,000 secured by the bonds.
Contrary to the submission of the respondent, I do not consider that this occurrence negates the applicant’s evidence that it will suffer a loss of reputation and financial standing if bonds are called upon. The respondent submits that because the bonds have been in part called upon, it can be inferred that any damage to the applicant’s reputation and financial standing has already been suffered and will not be increased by further calls. I do not agree. On the contrary, I see no reason why in the absence of evidence indicating otherwise that the Court should not assume that further calls are likely to increase the damage and that a restraint upon further calls, upon the basis that they would be, and the earlier calls were, arguably contractually unjustified would tend to lessen the adverse impact of the earlier calls.
Conclusion
As I have indicated earlier, the primary judge’s exercise of discretion miscarried because he acted upon a misconstruction of the contract. Accordingly, it is for this Court to re-exercise that discretion. As I consider that there is a serious question to be tried as to the validity of the respondent’s Notice, the balance of convenience favours the grant of interim relief and damages would arguably be an inadequate remedy, I consider that the interlocutory injunction that the applicant seeks should be granted.
I propose the following orders:
(1) Leave to appeal granted;
(2) Appeal allowed;
(3) Orders made by Macready AsJ on 21 September 2010 set aside;
(4)Upon the applicant by its counsel giving to the Court the usual undertaking as to damages, and until further order of this Court or of the court at first instance, restrain the respondent from converting into cash, pursuant to Clause 16.3 of the Contract between the parties, any unconditional undertaking provided by the applicant to the respondent where such conversion is sought to be made by the respondent in reliance upon any failure, or purported failure, of the applicant to comply with the terms of the Notice dated 19 July 2010 issued by the respondent to the applicant;
(5)Order the respondent to pay the applicant’s costs of the applicant’s Notice of Motion filed on 17 September 2010 and of the proceedings on appeal; and
(6)The respondent to have a certificate under the Suitor’s Fund Act 1951, if qualified.
YOUNG JA: There is pending in the Building and Technology List of the commercial section of the Equity Division a weighty building case involving the construction of a large building in George Street Sydney.
The present applicant, Lucas Stuart Pty Ltd, is the contractor and the opponent, Hemmes Hermitage Pty Ltd, is the proprietor.
The litigation seems to have been commenced some time in 2009 and raises multiple issues as to the construction of the relevant contract and who should pay damages to whom for what in respect of various breaches.
On 19 July 2010, not it would appear for the first time, the proprietor sought to cash in some of securities provided by the builder by way of performance bonds issued by the QBE Insurance Company.
The builder issued a notice of motion on 14 September 2010 seeking an injunction to prevent this happening.
The facts and circumstances following the issue of that notice of motion are dealt with thoroughly in the judgment of Macfarlan JA, and it is not necessary for me to repeat them. As noted by his Honour, the motion came on for hearing before Macready AsJ who dismissed it.
The reason given by the learned Associate Judge for dismissing the motion was that he found that the builder had no serious question to try in relation to the validity of the proprietor’s notice to call up the securities.
For the reasons which Macfarlan JA has given, I agree that that decision was erroneous.
That then presents the question as to whether damages are an adequate remedy and where the balance of convenience lies.
It must be remembered that the present claim is in the auxiliary jurisdiction of a court of equity, and thus injunctive relief “would ordinarily only be ordered if damages were not ascertainable or otherwise not an adequate remedy” (Bankstown City Council v Alamdo Holdings Pty Ltd [2005] HCA 46; 223 CLR 660, 665).
The damages in the instant case should be able to be calculated with one problem. Normally in cases of breach of contract damages for loss of reputation are not awarded; see eg Chitty on Contracts (Sweet & Maxwell, London) 28th ed 27-071, with very limited exceptions: Malik v Bank of Credit and Commerce International SA [1998] AC 20 which do not appear to apply in this case though I do not wish to say that categorically. Prima facie then, the parties should be left to their rights in damages.
This is reinforced by the fact that there is continuing litigation between the parties most of which seems to be comprehended in the proceedings in the Building and Technology List but one significant matter is that, as we were told from the bar table, in an earlier episode of the dispute the builder managed to obtain a judgment for a claim of some $4 million because the proprietor apparently failed to comply with the provisions of the Building and Construction Industry Security of Payment Act 1999.
There is a distinction between upholding the commercial sanctity of contracts made between two commercial persons of no disability setting up a system whereby in lieu of providing cash as a security, a bond which can be instantly accessed by the proprietor is substituted and the question as to whether the time has arrived and conditions have been fulfilled entitling the proprietor to call up that security. However, when considering the injunctive remedy in the latter case, one does not leave out of consideration the former matter. It would completely destroy the purpose of the contractual provision for the Court to be too ready to grant injunctions, particularly just to grant injunctions on the basis that the builder’s reputation would be tarnished if the security were called up.
That leads me to the point which appears to have been the touchstone for Macfarlan JA considering an injunction should issue and that is that the supposed fact that a call upon a performance bond may cause significant damage to a contractor’s reputation and financial standing is not readily curable by an award damages is a significant matter as to why an injunction should go.
This practice of paying particular attention to this matter seems to have commenced with the decision of Rolfe J in Barclay Mowlem Construction Ltd v Simon Engineering (Australia) Pty Ltd (1991) 23 NSWLR 451 at 461-462. It is to be noted that before Rolfe J there was evidence on the point, though his Honour was concerned that that evidence might have been inadmissible; once it was admitted it needed to be taken into consideration. In any event, he considered he might have been able to infer the same matter from general experience.
Austin J in Reed Construction Services Pty Ltd v Kheng Seng (Australia) Pty Ltd (1998) 15 BCL 158 took the same line.
Although there has been citation of both the Barclay Mowlem case and the Reed Construction case in other States, interstate judges do not seem to have picked up at all on this particular point, though perhaps it was never argued; see eg Fletcher Construction Australia Ltd v Varnsdorf Pty Ltd [1998] 3 VR 812 (CA) and Bateman Project Engineering Pty Ltd v Resolute Ltd (2000) 23 WAR 493, the court in each case being more concerned with not eroding the principle of commercial certainty of performance bonds and bank guarantees.
It seems to me too that one must take into consideration when working out questions of balance of convenience that even though there may be some commercial opprobrium to a person who has its performance bond called up, there is also commercial opprobrium to a company against which this Court makes an injunction. Indeed, when sitting in Equity one always takes into account the fact that the application for injunction may be brought for just that purpose. Furthermore, it is a little difficult to pay much credence to a statement by a person against whom it is alleged that the building which it and its subcontractors constructed has over a thousand defects and is not watertight would suffer in its reputation any more if in addition to those facts being known by the general community, it was known that its performance guarantee had been called up in a manner which it disputed.
Accordingly, in my view, no injunction should be granted.
I should make mention of two other matters.
The first is that when there is an application for an interlocutory injunction which depends on the construction of a contract, it is for the judge to determine whether he or she has sufficient material to be able to construe the contract on a final basis. The urgency with which the case has to be heard, or the lack of factual investigation to that point, may mean that the judge deals with the question of whether there is an arguable case on flimsy material. However, where the question of construction can be dealt with, then the decision on that matter is a final determination, and ordinarily, if no other remedy is given, a declaration should be made as to the construction of the contract.
I consider that that should have been done in the instant case, but neither party has asked for it to be done so that I will merely make the remark and go no further.
The second point is that the builder did not seek an injunction to hold the status quo pending the appeal and the proprietor in fact called up, I think it was expressed, one and a half of the securities. No-one has asked for restitution. This seems to me to make the case against granting an injunction even weaker than it would have been at first instance because: (a) to use a colloquial expression “the horse has bolted”; and (b) there has already been damage to the commercial reputation of the builder by the fact that some of the securities have in fact been called up.
Accordingly, I respectfully agree with the view of Macfarlan JA on the construction of the contract, but respectfully disagree as to the order that should be made.
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