Queensland Investment Corporation v Kern Co Ltd (in liq)

[1998] QCA 219

IN THE COURT OF APPEAL	[1998] QCA 219
SUPREME COURT OF QUEENSLAND

Appeal No. 2230 of 1998 Appeal No. 2231 of 1998

Brisbane

[Q.I.C. v. Kern Corp. & Ors.]

BETWEEN:

QUEENSLAND INVESTMENT CORPORATION

(Defendant)

AND:

KERN CORPORATION LIMITED
A.C.N. 010 339 321
(RECEIVERS AND MANAGERS APPOINTED)

(IN LIQUIDATION)

(First Plaintiff)

AND:

KERN KONSTRUCTIONS AUSTRALIA PTY LTD
A.C.N. 010 339 385

(RECEIVERS AND MANAGERS APPOINTED)

(Second Plaintiff)

AND:

COMMONWEALTH BANK OF AUSTRALIA

A.C.N. 123 123 124

(Third Plaintiff)

___________________________________________________________________________

Pincus J.A. Davies J.A. Thomas J.

__________________________________________________________________________

Judgment delivered 31 July 1998

Judgment of the Court
__________________________________________________________________________

1.          THE DEFENDANT’S DEMURRER TO THE PLAINTIFFS’ AMENDED STATEMENT OF CLAIM ALLOWED.

2.          THE PLAINTIFFS’ DEMURRER TO PARAGRAPH 16 OF THE DEFENDANT’S AMENDED DEFENCE AND COUNTER-CLAIM OVERRULED.

3.          THE PLAINTIFFS HAVE LEAVE TO DELIVER, IF SO ADVISED, A FURTHER AMENDED STATEMENT OF CLAIM AND A REPLY AND ANSWER.

4.          THE PLAINTIFFS PAY THE DEFENDANT’S COSTS OF AND INCIDENTAL TO

-

(A)	THE DEFENDANT’S DEMURRER TO THE PLAINTIFFS’ AMENDED STATEMENT OF CLAIM; AND
(B)	THE PLAINTIFFS’ DEMURRER TO PARAGRAPH 16 OF THE DEFENDANT’S AMENDED DEFENCE AND COUNTER-CLAIM,

TO BE TAXED.

___________________________________________________________________________

CATCHWORDS: CONTRACT - demurrer - contract for construction of shopping centre -

deed provided for a security and a guarantee - undertakings provided by bank - demand for monies made after termination of deed - whether demand was made too late.

Counsel:	Mr P D Keane Q.C. with him Mr J Bond for the defendant. Mr D F Jackson Q.C. with him Mr J Sheahan S.C. for the plaintiffs.
Solicitors:	Allen Allen & Hemsley for the defendant. Gadens Lawyers for the plaintiffs..
Hearing date:	18 May 1998.

IN THE COURT OF APPEAL

SUPREME COURT OF QUEENSLAND

Appeal No. 2230 of 1998 Appeal No. 2231 of 1998

Brisbane

Before Pincus J.A. Davies J.A. Thomas J.

[Q.I.C. v. Kern Corp. & Ors.]

BETWEEN:

QUEENSLAND INVESTMENT CORPORATION

(Defendant)

AND:

KERN CORPORATION LIMITED
A.C.N. 010 339 321
(RECEIVERS AND MANAGERS APPOINTED)

(IN LIQUIDATION)

(First Plaintiff)

AND:

KERN KONSTRUCTIONS AUSTRALIA PTY LTD
A.C.N. 010 339 385

(RECEIVERS AND MANAGERS APPOINTED)

(Second Plaintiff)

AND:

COMMONWEALTH BANK OF AUSTRALIA

A.C.N. 123 123 124

(Third Plaintiff)

REASONS FOR JUDGMENT - THE COURT

Judgment delivered 31 July 1998

In this action relating to the rights of the parties to, and a party connected with, a contract for the construction of a shopping centre, the defendant has delivered a demurrer, defence and counter- claim; the plaintiffs have demurred to a claim, made by the defendant, of entitlement to a set-off. It is

common ground that if the defendant’s demurrer is held good then it will not be necessary to discuss

the plaintiffs’ demurrer.

The plaintiffs plead that the work we have mentioned was to be done under a deed executed

by the first and second plaintiffs and containing provision for the giving of what the deed calls a "security"

and a "guarantee" to Queensland Treasury Corporation, a body which may for the purposes of these

proceedings be identified with the defendant; both Queensland Treasury Corporation and the defendant

will be called collectively "the proprietor". Under provisions which will be discussed below,

undertakings were provided by the third plaintiff ("the bank"), in favour of the proprietor to pay sums

exceeding $7M and, as the terms of those documents contemplated, the proprietor demanded payment

of those sums, which were paid. The plaintiffs’ case is that the proprietor was not entitled to those

monies because the demand for them was made too late - specifically, made after the deed was

terminated.

That is the point on which the proprietor’s demurrer depends; it says that it was entitled to

demand the monies even after the termination of the deed. If that is so then its demurrer must be upheld.

Under the deed, the developer (the first plaintiff) promised to cause the works to be carried out

and completed by the builder (the second plaintiff) in accordance with the deed (cl. 8.2); the proprietor

agreed to pay for the works. Clause 11.1 requires the developer to provide security and a guarantee

to the proprietor "for the purpose of ensuring the Developer’s due and proper performance of this Deed and of satisfying the Developer’s obligations under this Deed". For reasons which need not be

explained, both the security and guarantee took the form of unconditional undertakings to pay sums up

to specified maxima, on demand in writing by the proprietor. Clause 11.4 reads as follows:

"In the event of any material default by the Developer under this Deed, the Proprietor may at any time convert into money such part, if any, of the security and/or the guarantee that does not consist of money. The Proprietor shall not be liable for any loss occasioned by such a conversion".

The only point to be decided under the defendant’s demurrer is whether the right given to the proprietor

under cl. 11.4 may be exercised after termination of the deed under cl. 37.9, partly set out below.

Clause 37.1 gives the proprietor the right to call upon the developer to show cause within a

certain period why the powers contained in cl. 37.2 should not be exercised. This may be done if, to

put it simply, certain sorts of breaches are committed by the developer. Under cl. 37.2, if the developer

fails to show cause to the proprietor’s satisfaction then the proprietor may:

". . . without prejudice to any other rights it may have under this Deed or at law:

(a)         take over the whole or any part of the Work under this Deed remaining to be completed and for that purpose and in so far as it may be necessary, exclude from the Site the Developer, the Builder and any other person concerned in the execution of the Works, or

(b)        terminate this Deed and in that case exercise any of the powers of exclusion conferred by paragraph (a) of this clause".

Under cl. 37.7, if the deed is terminated "under this clause" - i.e. under cl. 37 - a quantity surveyor is

to estimate and certify the costs of completion; there is then to be a payment by the developer to the

proprietor, or vice versa, depending upon whether the amount of the certificate plus money already paid

exceeds or falls short of the agreed price. Clause 37.8 reads as follows:

"Within fourteen (14) days after receipt of the Quantity Surveyor’s estimate and certificate, the party stated to owe money shall make payment to the other. In the event that the Developer is stated to owe money to the Proprietor then the Proprietor shall be entitled to apply in whole or partial satisfaction thereof the proceeds of the security provided under this Deed".

There was debate before us as to the meaning of the word "security" in this clause. The proprietor

argued in effect that the clause should be read as if it said "security or guarantee".

Under cl. 37.9, in certain events, one of which is the appointment of a receiver, "the Proprietor

may exercise the power conferred on it by paragraphs (a) or (b) of clause 37.2 as it may elect". This

is what happened in the present case; receivers and managers were appointed in respect of both the

developer and the builder. Two days later the proprietor gave notices to them both, terminating the

deed, under cl. 37.9; that is, while the proprietor could have taken over the work under cl. 37.2(a) or

terminated the deed under cl. 37.2(b), it chose termination. Subsequently, the proprietor demanded

payment of the sums which the bank had promised to pay to it, as we have explained above, and those

sums were paid the same day.

Clause 11.4 gives a right to convert only in the event of "any material default". The proprietor

has made substantial claims for damages for breach of contract against the developer. The plaintiffs do

not of course ask that the Court determine whether or not there has been any material default; their

argument is that even if there has been, the right to convert did not arise, for the reason we have

mentioned.

The right to convert which, according to the proprietor’s argument, continued to subsist under

cl. 11.4 after termination, is not one the exercise of which depends on or requires the fulfilment of any

obligation on the part of the developer or the builder; it is a right against the bank, which is not party to the deed. But as between the parties to the deed, the question whether the proprietor’s act of

conversion, subsequent to termination, was a breach of contract depends (so far as the demurrer point

is concerned) simply on whether termination of the deed brought the right of conversion to an end.

When a contract is rescinded for breach, rights which have been unconditionally acquired

before rescission are not in general lost: McDonald & Anor. v. Dennys Lascelles Ltd (1933) 48 C.L.R.

457 at 476, 477 per Dixon J (as his Honour then was). The passage to which we refer has become

familiar and was approved of in Bank of Boston Connecticut v. European Grain and Shipping Ltd

[1989] A.C. 1056 at 1098-9; see also Westralian Farmers Ltd v. Commonwealth Agricultural Service

Engineers Ltd (1936) 54 C.L.R. 361 at 379, a decision referred to further below. No doubt the same

rule, preserving vested causes of action, governs when there is termination of a contract other than for

breach. The Westralian Farmers case is authority for the proposition that generally where an executory

agreement is terminated, rights establishment of which results from further execution of the contract -

i.e. execution after the date of termination - cannot be sued on, but "if all the facts have occurred which

entitle one party to such a right as a debt" an action for that debt may be brought after termination. (380)

It was argued for the plaintiffs that cl. 11.5 might imply that the words "at any time" in cl. 11.4

should be read down - at least with respect to the guarantee, as opposed to the security. Clause 11.5

says, as to the guarantee, that the proprietor shall return it upon issue of a certain certificate of practical

completion; the argument was that one should infer that the parties meant to put an end to the

proprietor’s rights under the guarantee once it became clear that there was never going to be a

certificate of practical completion. That became clear, in the present case, when the deed was terminated. We find that inference less than compelling. The deed says in cl. 11.1 that the security and

guarantee are provided "for the purpose of ensuring the Developer’s due and proper performance of

this Deed and of satisfying the Developer’s obligations under this Deed". We can see no reason why

one should imply that if, for example because the builder has become insolvent, practical completion is

never reached the proprietor’s right of access to the guarantee, given for the purpose we have stated,

should be brought to an end.

The deed nowhere expressly says whether or not the right of conversion under cl. 11.4 survives

termination; but such indications as the deed contains tend to make one doubt whether the parties could

have intended the right to convert to cease on termination. Under cl. 37.2, if the proprietor terminates

for breach as contemplated by cl. 37.1, that is done "without prejudice to any other rights [the

proprietor] may have under this Deed or at law . . .". Here the termination under cl. 37.9, was done

as we have said in pursuance of the proprietor’s right to ". . . exercise the power conferred on it by

paragraphs (a) or (b) of clause 37.2 as it may elect". This incorporates the relevant part of cl. 37.2 and

it appears to us probable that it was intended to include the reference in cl. 37.2 to the effect of

termination on other rights; we would read the incorporation of the right to exercise the power

conferred by paras. (a) or (b) of cl. 37.2 as including the right to do so on the basis indicated in that

clause. That does not, however, solve all problems as to the effect of termination, for there is room for

argument as to the scope of the expression "any other rights" in cl. 37.2; they plainly would not include,

for example, the proprietor’s right to have the work done by the builder. There is no need finally to

determine the expression’s scope; it is enough for the proprietor’s purposes to conclude that the

language of cl. 37.2 argues against reading the deed as putting an end to a right of the proprietor under
it, in the event of termination.

Next, it should be noted that cl. 37.7, which deals with amounts owing after practical

completion, begins, "If this Deed is terminated under this clause". Clause 37.7 does not itself give any

right of termination and the reference must be to cl. 37, which includes cl. 37.9. It follows that if there

is a termination under cl. 37.9 and the work is completed then the mechanism of cl. 37.7 is available:

a quantity surveyor is to estimate the cost of completing the work and certify that cost and then an

adjustment is to be made between the parties depending on whether (and if so by how much) the

amount of the certificate exceeds the agreed price or vice versa. Under cl. 37.8, if the developer owes

money to the proprietor as a result of the certificate "the Proprietor shall be entitled to apply in whole

or partial satisfaction thereof the proceeds of the security provided under this Deed".

That clearly implies that the rights of the proprietor under the security survive termination under

cl. 37.9 and there is no sensible reason to exclude from those rights that of conversion, under cl. 11.4.

The parties are as we have mentioned in dispute as to the meaning, in cl. 37.8, of the word "security".

It is not easy to see why the proprietor’s right to be paid the excess cost of completion should be

confined to its right under what the deed in other clauses refers to as the "security", excluding its right

under the guarantee. Possibly the use in cl. 37.8 of the word "security" was a mere slip in drafting, but

there is no need to determine whether it should be so treated. Even if the reference was intended to be

to security in the sense used elsewhere in the deed, the provisions of cl. 37.8 make it impossible sensibly

to argue that the right to convert the money covered by the security (as opposed to that covered by the

guarantee) given by cl. 11.4, should be treated as coming to an end on termination under cl. 37.9. Then

one asks: for what reason might the parties have agreed to make termination bring to an end one right
to convert under cl. 11.4, but not another? No satisfactory answer has been suggested.

To summarise, provisions of the deed dealing with this sort of termination make one doubt

whether the proper construction of cl. 11.4 of the deed is that after termination there can be no

conversion with respect to the guarantee; they also make it clear that termination does not put an end

to the right to convert under the security.

Apart from that, applying the general law, even without reference to the specific provisions of

the deed, it is our view that the plaintiffs’ argument on this point has to be rejected. Looking at the

matter broadly, it rather strains credulity to assert that the proper construction of this commercial

contract is one which treats the parties as having agreed to make unavailable provisions giving the

proprietor security for due performance, where the developer and builder have gone into receivership

and the deed has been put an end to for that reason. This would be to read the deed as destroying the

proprietor’s security because of the occurrence of the situation which makes access to the security

necessary: cf. Hyundai Heavy Industries Ltd v. Papadopoulos [1980] 1 W.L.R. 1129 at 1134.

Whether or not one is influenced by that practical consideration, application of the ordinary rule, that

vested causes of action are not put an end to by termination of a contract, brings the proprietor success.

It was argued that the proprietor had no right, at the date of termination of the deed, to convert

the security or the guarantee into money under cl. 11.4 of the deed because there had at that date been

no "election" on the part of the proprietor. The argument was that the proprietor had no immediate right

to payment at the date of termination, not having made the demand required by the terms of the bank’s
promise, which were as follows:

". . . [the bank] hereby undertakes unconditionally to pay on demand any sum or sums which may from time to time be demanded in writing by [the proprietor] to a maximum sum of . . .".

It is true, as argued for the plaintiffs, that the bank’s obligation to pay was expressed to arise on demand

and that no demand had been made before termination. Nevertheless, the proprietor had at the date

of termination a good cause of action for the sums which the bank had promised to pay. There is

authority going back at least as far as Dockery v. Tanning [1610] Cro Jac 242; 79 E.R. 209, that if

there is a promise to pay on demand, suing is demand enough. There are exceptions to that rule some

of which are set out in the judgment of McPherson J. (as his Honour then was) in Australia and New

Zealand Banking Group Limited v. Douglas Morris Investments Pty Ltd [1992] 1 Qd.R. 478 at 484.

One mentioned by his Honour is that of debts "not present but to accrue"; a second is the case of a

"collateral promise", such as one by a surety to pay on demand if the principal does not; and a third is

the case of a debt due on a running account between banker and customer. The debt payable on

demand in the present case falls into none of these categories, but is caught by the general rule; there

was vested in the proprietor at the date of termination a cause of action against the bank on the bank’s

promises to pay, although no demand had at that date been served. The inclusion of the words "at any

time" in cl. 11.4 has, at least, the effect of continuing the right to convert, despite termination of the deed

under cl. 37.9.

That conclusion is all that is necessary in order to dispose of the defendant proprietor’s

demurrer, which must be allowed. It is desirable to mention why it is that there is then no need to deal

with the plaintiffs’ demurrer. The plaintiffs’ demur to para. 16 of the defendant proprietor’s pleading,

which is to the effect that if the defendant was not entitled to call up the monies we have mentioned it would seek to set off against the plaintiffs’ claims certain amounts. Since the claim to set off is made

contingently upon the plaintiffs’ case, which we would reject, being upheld it is unnecessary to deal with

that point. Questions of set-off were the subject of some discussion at the hearing, but it is unnecessary

to say anything about them.

We order that:

1.          The defendant’s demurrer to the plaintiffs’ amended statement of claim be allowed.

2.          The plaintiffs’ demurrer to paragraph 16 of the defendant’s amended defence and counter-claim

be overruled.

3.          The plaintiffs have leave to deliver, if so advised, a further amended statement of claim and a

reply and answer.

4.          The plaintiffs pay the defendant’s costs of and incidental to -

(a)	the defendant’s demurrer to the plaintiffs’ amended statement of claim; and
(b)	the plaintiffs’ demurrer to paragraph 16 of the defendant’s amended defence

and counter-claim,

to be taxed.