Mackie Pty Ltd v Republic of Turkey
[2013] VCC 430
•16 April 2013 (revised)
| IN THE COUNTY COURT OF VICTORIA AT MELBOURNE CIVIL DIVISION | Revised Not Restricted Suitable for Publication |
COMMERCIAL LIST
BUILDING CASES DIVISION
Case No. CI-13-01367
| MACKIE PTY LTD | Plaintiff |
| v | |
| REPUBLIC OF TURKEY | Defendant |
---
JUDGE: | HIS HONOUR JUDGE GINNANE | |
WHERE HELD: | Melbourne | |
DATE OF HEARING: | 15 April 2013 | |
DATE OF JUDGMENT: | 16 April 2013 (revised) | |
CASE MAY BE CITED AS: | Mackie Pty Ltd v Republic of Turkey | |
MEDIUM NEUTRAL CITATION: | [2013] VCC 430 | |
REASONS FOR JUDGMENT
---
Building contract – security – bank guarantee – whether entitlement to exercise right under the contract in respect of the security – interlocutory injunction granted
---
APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr J A F Twigg | ICA Lawyers |
| For the Defendant | Mr R Andrew | BMA Lawyers |
HIS HONOUR:
1 On 18 December 2009, the plaintiff and the defendant entered into a building contract for the redevelopment of the Consulate residence in Toorak. The plaintiff seeks the continuation of an interlocutory injunction granted on 27 March 2013 that the defendant be restrained from converting a bank guarantee given by it into cash. The bank guarantee is an unconditional undertaking to pay, on written demand, any sum which may from time to time be demanded by the Consul-General to a maximum of $108,750. The original guarantee expired on 23 March 2013 but was renewed or a new guarantee was given which expires on 1 May 2013.
2 The test for obtaining an interlocutory injunction is:
(a)that there is a serious question to be tried as to the plaintiff’s entitlement to relief;
(b)the plaintiff is likely to suffer injury for which damages would not be an adequate remedy; and
(c)the balance of convenience favours the granting of an injunction.[1]
[1]See Australia Broadcasting Corporation v O’Neill (2006) 227 CLR 57 at [19]; Australian Broadcasting Corporation v Lenah Game Meats Pty Ltd (2001) 208 CLR 199 at [8] – [13]..
3 I take this summary from the defendant’s outline of submissions, with which I agree. It is also the case, as defendant’s counsel pointed out, that interlocutory injunctions are not just to be granted by seeking them.[2]
[2]Australian Broadcasting Corporation v Lenah Game Meats Pty Ltd (2001) 208 CLR 199 at [15] – [16].
4 The building contract was in the form of AS 2124-1992 with some revisions or amendments. The principal clauses to which submissions were directed was clause 5.5, “Recourse to Retention Moneys and Conversion of Security”, which, as revised, reads:
“A party may recourse to retention moneys and/or cash security and/or may convert into money security that does not consist of money where:
[and then the replacement sub-paragraph (a) reads]
(a) the party has become entitled to exercise a right under the Contract in respect of the retention moneys and/or security or there is a debt due under the Contract to the party from the other party;
(b) the party has given the other party notice in writing for the period stated in the Annexure, or if no period is stated, five days of the party’s intention to have recourse to the retention moneys and/or cash security and/or to convert the security; and
(c) the period stated in the Annexure or if no period is stated, five days has or have elapsed since the notice was given.
5 The following paragraph was inserted by the amendments:
“A party is not entitled to commence any proceeding, seeking relief by way of injunction or any other relief, which has as its objective the obtaining of an order preventing the other party from having recourse to retention moneys and/or security even though the party contemplating the commencement of proceedings may assert that there is no right to have recourse to retention moneys and/or security.”
6 The other clause of particular relevance is clause 37, “Defects Liability”, which states:
“The Defects Liability Period stated ion the Annexure shall commence on the Date of Practical Completion.
As soon as possible after the Date of Practical Completion, the Contractor shall rectify any defects or omissions in the work under the Contract existing at Practical Completion.
At any time prior to the 14th day after the expiration of the Defects Liability Period, the Superintendent may direct the Contractor to rectify any omission or defect in the work under the Contract existing at the Date of Practical Completion or which becomes apparent prior to the expiration of the Defects Liability Period. The direction shall identify the omission or defect and state a date by which the Contractor shall complete the work of rectification and may state a date by which the work of rectification shall commence. The direction may provide that in respect of the work of rectification there shall be a separate Defects Liability Period of a stated duration not exceeding the period stated in the Annexure. The separate Defects Liability Period shall commence on the date the Contractor completes the work of rectification. Clause 37 shall apply in respect of the work of rectification and the Defects Liability Period for that work of rectification.
If the work of rectification is not commenced or completed by the stated dates, the Principal may have the work of rectification carried out at the Contractors expense, but without prejudice to any other rights that the Principal may have against the Contractor with respect to such omission or defect and the cost of the work of rectification incurred by the Principal shall be a debt due from the Contractor.
If it is necessary for the Contractor to carry out work of rectification, the Contractor shall do so at times and in a manner which causes as little inconvenience to the occupants or users of the Works as is reasonably possible.”
7 The last paragraph added to clause 5.5 raises an ouster of jurisdiction issue. Counsel for the plaintiff argued that because clause 5.5 purported to disentitle the plaintiff from commencing the proceeding, it was on its face a clause intended to oust the jurisdiction of a Court and void for public policy in accordance with the decision in Dobbs v National Bank of Australasia.[3] The decision of Owen J in Bateman Project Engineering Pty Ltd v Resolute Ltd[4] also provides some support for that proposition. For the purposes of considering whether to continue the grant of the interlocutory injunction, I consider that there is a serious question to be tried about whether the clause is invalid as contrary to public policy on the basis stated in Dobbs case.
[3](1935) 53 CLR 643 at 652.
[4][2000] WASC 284.
8 The other matter of initial importance is, what is the effect of the relief sought in the proceeding? All it seeks is a permanent injunction restraining the conversion of the guarantee into cash. There is no substantive relief sought in determination of what seems to be a dispute, or at least a dispute that existed at some point, between the parties about defects that are said to exist at the Consulate.
9 I should add, for the sake of completeness at this point, what I trust is self-evident. I have read the Consul’s affidavit and his description of the defects he alleges at the property and the effects that those defects have had on him and his family and the performance of his duties. I have also read Mr Mackie’s affidavits in response. My task is not to adjudicate on those alleged defects and my decision should not be seen in any way as a reflection on either party or endorsing either party’s position in respect of those issues. They were really not argued before me.
10 However, a proceeding that only seeks an injunction in respect of the guarantee seems to be analogous to what was sought in the principal case upon which the plaintiff relies: Rejan Constructions Pty Ltd v Manningham Medical Centre Pty Ltd.[5] In addition, the plaintiff foreshadowed an amendment to its pleading to raise issues relating to the wider dispute between the parties. In those circumstances, I do not consider that the fact that the Writ only seeks an injunction is a reason to refuse to grant such a remedy.
[5][2002] VSC 579 at [15].
11 The plaintiff’s primary ground for maintaining that there is a serious question to be tried was that that the pre-conditions for the defendant to have recourse to the guarantee have not been established. There is authority that, if the entitlement to have recourse to a guarantee is conditioned by the terms of the contract, it cannot be relied on unless the condition is met and an injunction restraining an incorrect call may be obtained.
12 In this case, on 24 January 2013, the Superintendent of the project sent to the plaintiff a list of defects and stated:
“All defects noted in the attached Defects Inspection Schedule dated 24th January 2013 must be rectified by 4.00pm 6 February 2013. Unless all outstanding defects have been rectified by 4.00pm 6 February 2013, the Superintendent will not be able to provide the Final Certificate and the remaining Bank Guarantee on behalf of the Republic of Turkey (2.5% of the total Contract Sum, $108,750.00) to Mackie Pty Ltd.”[6]
[6]Exhibit RM-19 to the Affidavit of Ralph Mackie, sworn 21 March 2013.
13 On 15 March 2013, the Consul-General wrote a letter which the plaintiff received on 18 March, stating that:
”We note that despite numerous requests, you have failed to complete the defective works which you have been aware of for some time.
Your failure has left us with no choice than to obtain quotations from 4 different builders to finalise the outstanding works and incur further costs with the Superintendent firm.”[7]
[7]Exhibit RM-45 to the Affidavit of Ralph Mackie, sworn 21 March 2013.
14 The quotations are then set out. There is then a reference to the Superintendent’s charges and then the letter states:
“As you have no doubt been aware, we have waited for your company to undertake these works for over 12 months and despite attending the premises, you have otherwise failed to make good the defects that have been identified and advise to your numerous occasions.
We confirm that the contracts have now been exchanged between Project Building & Property Services Pty Ltd and us. Building & Property Services Pty Ltd were retained given that their quotation was the lowest of the four building companies as identified above. Your failure under Clause 37 of the building contract to repair the defects has meant that you are now on notice under Clause 5 that unless you pay $126,060.00 within 5 days, we intend to use the amount of the bank guarantee to apply towards our loss.”[8]
[8]Exhibit RM-45 to the Affidavit of Ralph Mackie, sworn 21 March 2013.
15 The plaintiff argues that clause 37, the defects clause, does not prescribe a period for the completion of the defects and therefore, any period must be a reasonable period. The period of less than two weeks that was provided was not reasonable when the other quotes are considered. The plaintiff argues that the notice period in the Superintendent’s notice is ineffective and therefore, no debt under the contract is due and payable by the plaintiff to the defendant. Further, it is argued that there was no debt until the cost of remedying defects is incurred. That cost is not incurred by the exchange of contracts with the new contractor. It also submitted that the notice period given by the defendant under its clause 5.5 notice had expired or did not give the necessary five day period before the original bank guarantee expired on 23 March 2013. The plaintiff pointed to provisions of clause 44 in the contract that created a debt.
16 The plaintiff placed considerable reliance on the judgment of Byrne J in Rejan Constructions to which I have already referred.
17 There were some distinctions between that case and the present. In that case, the principal contended that the contract had been lawfully terminated and the contract did not contain the amendments or revisions to which I have referred in the present contract. However some observations in the judgment are relevant.. His Honour described the circumstances in which rights were created under a contract, such as the present, in the following terms:
“As between the grantor of the security and the beneficiary, … [who were] the Contractor and the Principal respectively, the rights of the beneficiary to make a demand upon the surety may be qualified by the terms of the contract between the grantor and the beneficiary.”[9]
[9][2002] VSC 579 at [4].
18 Byrne J also stated, with reference to clause 5.6, which was analogous to clause 5.5 in the present contract (save for the revision),:
“Notwithstanding its misleading heading, cl5.6, with which this case is concerned, deals with two matters: the conversion of non-cash security into money and recourse to retention money, security or both. These steps may be taken only where three preconditions have been satisfied. In this sense, the right of the Principal to convert the non-cash security into money and to have recourse to it is not unfettered.”[10]
[10][2002] VSC 579 at [17].
19 The second and third pre-conditions were satisfied in that case. His Honour continued:
“The first precondition is that the Principal ‘has become entitled to exercise a right under the Contract in respect of the security, retention moneys or both’.. It is only an entitlement to exercise this particular right under the building contract that triggers the right of access to the security, in this case to call upon the bank bonds.”[11]
[11][2002] VSC 579 at [17].
20 His Honour also stated:
“As a matter of terminology, it is difficult to characterise as ‘money due’ a sum which is asserted by a party in dispute to be owing by its adversary in a draft interim claim without substantiation and without detail and, of course, without any determination by adjudication, arbitration or otherwise.”[12]
[12][2002] VSC 579 at [24].
21 Counsel for the plaintiff relied on that last phrase. The plaintiff argued that the only debts that could fall due under this contract would be under clauses 42.10 and 42.11, which are the counterparts of clauses 42.8 and 42.9 in the contract considered in the Rejan Constructions Case.
22 His Honour stated:
“As the Standards Australia commentary on the AS2124-1992 form points out this is evidently directed to giving to the grantor the right to approach the court for relief where it disputes the beneficiary's right to act under cl5.5. Such a right would be illusory if the grantor could obtain relief only where the entitlement to exercise the right in respect of the security were construed to depend only upon a claim for the payment of money, and one which is bona fide and not specious or fanciful.”[13]
[13][2002] VSC 579 at [33].
23 The defendant’s submissions referred particularly to the Court of Appeal decision in Bachmann Pty Ltd v B.H.P. Power New Zealand Ltd[14] which is binding authority. It was submitted that a bona fide belief in an entitlement was sufficient to justify converting security into cash. Counsel for the defendant submitted that the judgment in Rejan Constructions was clearly distinguishable on the facts because in the present case, the crucial clause 5.5 has been amended in a substantial respect.
[14](1999) 1 VR 420.
24 The defendant also argued that the plaintiff could not show any harm that it might suffer for which damages would not be an adequate remedy. The possibility of embarrassment with the bank were insufficient. That possibility was to be balanced against the embarrassment which the defendant would suffer by being subjected to an injunction issued by the Court.
25 I have given particular consideration to the judgment of the Court of Appeal in Bachmann, Byrne J discussed it at some length in Rejan Constructions but distinguished it. His Honour noted that the 1992 version of the contract and the similar 1995 version represented significant developments over previous versions.[15] He noted that the contract in the case of Fletcher Construction Australia Ltd v Varnsdorf Pty Ltd[16], that had been relied on significantly in Bachmann, was quite a different contract and provided access to the security according to different pre-conditions.[17]
[15][2002] VSC 579 at [25].
[16](1998) 3 VR 812.
[17][2002] VSC 579 at [30].
26 Byrne J stated:
“It is necessary also to bear constantly in mind that the right which triggers the operation of cl5.6 is not a right to payment but rather a right under the contract in respect of the security. It is clear from an examination of cl42.9 that this right, if it arises as a consequence of an amount becoming due and payable under the building contract, does not arise until further pre-conditions have been satisfied. It would be anomalous if the cl5.6 right which arises in consequence of an ex-contract indebtedness should be less circumscribed. Moreover, as a matter of ordinary English usage, I have great difficulty in characterising as ‘moneys due’ the case where a party in dispute merely asserts an indebtedness without detail or substantiation of any kind.”[18]
[18][2002] VSC 579 at [39].
27 His Honour continued:
“The drafters of the 1992 version of the Standards Australia contract and of the building contract presently under consideration have demonstrated a great care that the grantor of the security, the Contractor, should not be disadvantaged by inappropriate action against the security by a party in dispute. The evident reason for this is that the maintenance of the security is in effect no disadvantage to either disputant; it simply means that there is a secure fund available to satisfy the Principal’s claim when, in due course, it should be shown to be well-founded. The exercise by the Principal of rights under clause 5.6 in the case where no money is later found to be owed to it risks imposing a grave disadvantage upon the Contractor.”[19]
[19][2002] VSC 579 at [40].
28 In the Court of Appeal decision in Sopov v Kane Constructions Pty Ltd,[20] Whelan AJA, with whose judgment the other members of the Court of Appeal, substantially agreed, quoted that paragraph and stated:
“Those observations seems to me to be well founded and to apply with equal cogency to retention moneys, or securities held in lieu of retention, as they do to other security. Recourse to both is regulated by cl 5.”[21]
[20](2007) 20 VR 127.
[21](2007) 20 VR 127 at [104].
29 In those circumstances, the approach applied in Rejan Constructions. Is relevant in these interlocutory application.
30 I consider that the plaintiff has established a serious question to be tried. It consists in whether the defendant is entitled to have recourse to the security and whether the pre-conditions for having access to that security have been established. The question or issue includes: whether the defendant has become entitled to exercise a right under the contract and whether there is a debt due under it within the meaning of clause 5.5. The plaintiff raised some other connected arguments, to which I have already referred. These were whether the notice given by the Superintendent was reasonable notice and whether any debt had been incurred merely by the exchange of contracts with the chosen contractor. I consider that those matters, together with the issue of the operation of clause 5.5, give rise to a serious question to be tried.
31 I am less persuaded by the argument that the clause 5.5 notice did not give any requisite five day notice before the expiration of the guarantee, but it is unnecessary for me to say anything more about that.
32 So far as balance of convenience is concerned, I again propose to adopt the approach of Byrne J in Rejan Constructions, that:
“The exercise by the Principal of rights under clause 5.6 in the case where no money is later found to be owed to it risks imposing a grave disadvantage upon the Contractor.”[22]
[22][2002] VSC 579 at [40].
33 A significant factor when considering the balance of convenience in a case like the present, is the purpose for which the guarantee was provided. That consideration is also relevant to the question of whether damages are an adequate remedy. While it is always true that the payment of damages can provide compensation, Byrne J’s observations suggest that the availability of damages may not be a reason for refusing an interlocutory injunction to prevent, in appropriate circumstances, the conversion of a bank guarantee into cash.
34 Subject to the giving of the appropriate undertakings, I would continue the interlocutory injunction until trial. I require the plaintiff to give an undertaking that it would maintain or renew the guarantee until trial.
35 I am concerned that this case may just drift on, because of the present form of the pleadings. If there is no real dispute, and/or no further claims for payments of money are made by the plaintiff, then the circumstances that have led me to continue the interlocutory injunction may alter. I therefore reserve liberty to the defendant to apply to discharge the injunction.
- - - - 3#3
0
6
0