Sci Operations P/L v Westpoint Constructions P/L No. DCCIV-95-765 Judgment No. D3574

[1997] SADC 3574

Court

DISTRICT COURT OF SOUTH AUSTRALIA

Judgment of His Honour the Chief Judge

Hearing

19/02/97, 21/02/97.

Catchwords

GUARANTEE OF PERFORMANCE - WHETHER GUARANTEE PROPERLY INVOKED The defendant, a building contractor, entered into a sub-contract with a company known as Bettaform who, in turn, sub-let the reinforcing works to the plaintiff - both the plaintiff and Bettaform provided the defendant with bank guarantees reflecting the final purchase price and work to be undertaken by them respectively. Bettaform ran into financial difficulties and was unable to perform all of its contractual obligations to the defendant - the plaintiff had, however, fully discharged its obligations under its contract with Bettaform and was not, at any time, in default with the due performance of its work - the defendant made demand upon the bank for the amounts referred to in the bank guarantees, which amounts were duly paid to it by the bank. Plaintiff seeks a declaration that the defendant was not entitled to make a demand pursuant to the bank guarantees and that the defendant holds the amount paid upon trust for the plaintiff. Declaration that the defendant holds the sum of $34,730 upon trust for the plaintiff.

Representation

Plaintiff SCI OPERATIONS PTY LTD:
Counsel: MR D HOWARD - Solicitors: MARTIROVS &; CO

Defendant WESTPOINT CONSTRUCTIONS PTY LTD:
Counsel: MR J LUNN - Solicitors: O'LOUGHLINS

DCCIV-95-765

Judgment No. D3574

12 March 1997

(Civil)

SCI OPERATIONS PTY LTD v WESTPOINT CONSTRUCTIONS PTY LTD

Civil

The Chief Judge

In this action the plaintiff seeks to recover from the defendant certain monies paid by the ANZ Banking Group Limited to the defendant pursuant to certain "bank guarantees" issued by the bank at the request of the plaintiff.

At all material times, the defendant carried on business as a building contractor.Prior to the month of August 1994, the defendant had signed a contract by which it had agreed to construct a shopping complex at Tea Tree Gully.The complex was to be known as the "Tea Tree Centre."

At all material times, the plaintiff carried on business as suppliers and fixers of steel reinforcing components.In the course of its business, the plaintiff had developed a novel system for constructing floor slabs.The system was known by the name of "Transfloor."Mr S.B. Freeman, the Engineering Manager of the plaintiff company, described the system in the following terms:-

"... Transfloor is a trade name for a system of precast concrete floor slabs where the bottom section of the floor slab is actually cast in the factory with some reinforcing steel already cast into it.It is then taken to the site as concrete units and lifted up onto the job and it forms the bottom half of the floor.So it has the effect of reducing the amount of form work on the job and reducing the volume of concrete on the job;so part of our reinforcing goes into the concrete in the factory, the rest of it is placed on site as normal."

Prior to the events with which this case is concerned, the plaintiff had licensed a company called Bettaform Constructions (SA) Pty Ltd to produce and install "Transfloor" units in South Australia.For convenience I shall refer to that company simply as "Bettaform."

The plaintiff became aware of the defendant's involvement in the building project and obtained a copy of the structural drawings from the defendant with a view to submitting in its own right a quotation for the fabrication and installation of the steel reinforcing members to be used in the construction of the Centre.In due course, it submitted a tender for that work to the defendant.

Not long afterwards, Mr G.T. Pearson, the Managing Director of Bettaform, spoke to Mr Freeman about the project.Mr Pearson suggested that the proposed project was eminently suited to the use of the Transfloor system, notwithstanding the fact that the system had not been stipulated by the architect who had prepared the documents upon which tenders were to be based. Mr Pearson suggested to Mr Freeman that Bettaform, the plaintiff and a suitable worker in concrete should submit a joint offer to do all of the structural work involved in the completion of the project using the Transfloor system.Mr Pearson maintained that his proposal would be advantageous to all parties.

The plaintiff was not averse to the suggestion that had been made by Mr Pearson.On learning of the plaintiff's interest, Mr Pearson spoke to representatives of a company called Ballestrin Concrete Construction Pty Ltd (referred to hereafter simply as "Ballestrin").That company also showed interest in Mr Pearson's proposal.It was ultimately agreed that the plaintiff, Bettaform and Ballestrin should submit a joint tender to the defendant for "Transfloor, pre-cast to basement, insitu concrete, formwork, reinforcement."That tender was submitted to the defendant on 17 August 1994 by Bettaform, stating that "this tender is submitted on behalf of a partnership" of the three companies concerned.Notwithstanding the statement made in that letter, the three companies had not determined the nature of the legal relationship that would be created between them in the event that their joint tender were to be accepted.

A revised tender was submitted by Bettaform on behalf of the future "partnership" on 31 August 1994.On the same day, however, Bettaform submitted a tender of its own for "Transfloor, formwork and basement pre-cast."

As a result of the discussions between its representatives and Mr Pearson and as a result of the joint tenders that had been submitted, the defendant became interested in the use of the Transfloor process for the project.Discussions, however, concentrated on other matters for a time by virtue of the fact that the sum of the tenders for the whole project had exceeded the owner's budget for it.The defendant sought to find ways in which reductions in the various estimates could be achieved.In this connection, it came to the notice of the defendant that Piotto Bros Cement Flooring Pty Ltd (hereafter referred to simply as "Piotto Bros") had submitted a lower tender than Ballestrin for the work to be done in concrete on the site.The defendant suggested that Piotto Brosshould replace Ballestrin in the proposed "partnership" and that the new "partnership" would then be able to offer a lower tender than that previously submitted.This suggestion was made by Mr K.J. Bell, on behalf of the defendant, to Mr Pearson.Mr Pearson saw merit in Mr Bell's suggestion, but it would seem that he did not at once notify the plaintiff or Piotto Bros of the turn that events had taken.

Nevertheless, on 22 October 1994, the defendant wrote a letter to the plaintiff, Bettaform and Piotto Bros at Bettaform's address, advising that it was the intent of the defendant to enter into a sub-contract agreement with the three companies for the execution and completion of the work for the fixed price stated in that letter.The letter also stated some "special conditions of contract."One of those conditions read as follows:-

"2. Bank Guarantee for 5% of contract sum to be held until project completion at which point 75% will be released and the remainder retained through the defect liability period (52 weeks)."

On 24 October 1994, Mr Pearson sent a message by facsimile to Mr Bell stating, "Except for a couple of minor points - refer attached - I don't have any problems with this [i.e. the terms of the letter of intent]."

On the following day, Mr Bell advised Mr Pearson that he, Mr Bell, would be in Adelaide on 26 October 1994 and that he would wish to discuss the terms of the contractual arrangement between the members of the new "partnership."It is clear that, at that stage, no binding agreement had been made between either the original companies upon whose behalf the tender had been submitted or the companies addressed in the defendant's letter of intent.

It would seem that there was not a meeting of representatives of all of the four companies then concerned either on 26 October 1994 or at any other time. Whether it had become apparent by that day is not entirely clear, but there can be no doubt that Piotto Bros was not prepared to enter into a joint venture with the plaintiff and Bettaform.

Mr Freeman, representing the plaintiff, and Mr Pearson, representing Bettaform, did meet on 26 October 1994 and they then decided to abandon any thought of forming a partnership.The practical difficulties were considered to be too great.They agreed that Bettaform would seek to enter into a sub-contract with the defendant for the whole of the building work that had been discussed and that Bettaform would engage the plaintiff to supply and install the steel reinforcing elements required.Mr Freeman and Mr Pearson discussed the possibility of their respective companies opening a joint banking account into which progress payments made by the defendant for work executed by the plaintiff could be paid.

I am satisfied that, at that meeting, Mr Pearson raised the topic of the bank guarantee that Bettaform would have to provide to the defendant under the terms of the sub-contract that it was envisaged Bettaform would make with the defendant.Mr Pearson asked Mr Freeman whether the plaintiff would be prepared to raise a bank guarantee in favour of the defendant for the part of the work that would be performed by the plaintiff.The approximate amount of such a guarantee was calculated.Mr Freeman's response was that he would have to discuss the matter with his superiors in the plaintiff company.I have no doubt that Mr Pearson did not at any time ask the plaintiff to provide a guarantee in respect of any matter other than the due performance of its own work.The plaintiff did not consider undertaking any greater liability at any time.Mr Freeman was instructed by his superiors that he was to take the advice of the plaintiff's solicitors and that the guarantee could be provided if they so advised.Mr Freeman did confer, on 31 October 1994, with a member of the firm of solicitors who then acted for the plaintiff in South Australia. As to the bank guarantee, Mr Freeman was advised to ensure that it was limited to the plaintiff's performance of its own sub-contract with Bettaform.

On that same day, the plaintiff submitted a quotation to Bettaform for the steel reinforcing work required on the job.The letter containing the quotation did not refer to the proposed bank guarantee, but I have no doubt that Mr Freeman informed Mr Pearson of the plaintiff's willingness to provide a bank guarantee in respect of its obligations with regard to the steel reinforcing work.

It is obvious that further negotiations took place over the following days. The sub-contract price as between Bettaform and the defendant was still under discussion.There would not seem to be any dispute that Mr Pearson and Mr Bell spoke on a number of occasions during the first two weeks of November 1994.It is common ground that Mr Pearson raised with Mr Bell the suggestion that Bettaform and the plaintiff should raise separate bank guarantees to the value of their respective contributions to the due performance of the whole of the sub-contract works.Mr Pearson said in evidence that he had raised with Mr Bell the proposal that Bettaform should provide a bank guarantee for its content of the work and that the plaintiff would put up a bank guarantee for the reinforcing content of the work.He said that Mr Bell had agreed with this proposal in principle.He said that there had been a later discussion between them as to the amounts of the respective guarantees once the final sub-contract price had been negotiated.

Mr Bell said that, when the matter had been raised by Mr Pearson, the suggestion had been that Bettaform would put forward a bank guarantee and the plaintiff would also put forward a bank guarantee.He said that he had expressed no objection to that proposal provided that the full value of the bank guarantees equalled five per cent of the contract sum.He said that there had not been any discussion as to there being separate guarantees being in respect of the work to be performed by Bettaform and the plaintiff respectively.He said that it had been his understanding, from what Mr Pearson had said, that the plaintiff had agreed to provide a bank guarantee because it would be beneficial for Bettaform not to have to provide a guarantee for the whole of the sub-contract price.He said, in cross-examination, that he could not be absolutely sure that Mr Pearson had not said that the plaintiff was prepared to guarantee its portion of the total work.

Mr Pearson made a note with regard to the respective amounts of the proposed guarantees.I accept his evidence that he made that note on or after 2 November 1994 and not later than 9 November 1994.The note was obviously first made whilst the subcontract price was still in the process of negotiation.It was amended after the contract price had been finally agreed.Following that agreement, the amounts appearing on the memorandum had been altered.At the foot of the memorandum Mr Pearson had noted that he had spoken to Mr Bell "about this."I am satisfied that such a conversation did take place and that Mr Bell was aware of the amount of the guarantees to be provided by the plaintiff and Bettaform respectively.Indeed, on 9 November 1994 the plaintiff sought from its bank a guarantee for the amount noted on Mr Pearson's memorandum.

I should record that there were two alternative calculations on Mr Pearson's memorandum, but that, as matters turned out, it was the second alternative that reflected the final purchase price and the respective values of the work to be undertaken by the plaintiff and Bettaform respectively.

The plaintiff actually sought two guarantees from its bank because its obligations varied as at the date of practical completion and as at the date of the end of the defects liability period respectively.The total amount sought agreed with the amount noted on Mr Pearson's memorandum and the plaintiff instructed its bankers to note that a condition was required on each guarantee that, "This guarantee is in respect of supply and fixing of reinforcement."

A few further events should be noted.

On 10 November 1994, the plaintiff, by letter addressed to Bettaform, formally agreed with that company upon the terms and conditions for its supply and installation of the steel reinforcing components.

On 15 November 1994, the defendant submitted to Bettaform for its approval a final draft of the contract proposed between those companies.

On 28 November 1994, Bettaform provided to the defendant its bank guarantees in the amounts calculated by Mr Pearson and agreed by Mr Bell.

On 2 December 1994, the plaintiff wrote a letter to the defendant which, omitting the formalities, stated, "Attached are bank guarantees nos. 13203 & 13204 for the supply and fixing of reinforcement on the above contract." That letter enclosed two bank guarantees for the amounts that had been requested by the plaintiff.A copy of that numbered 13203 is annexed.The two documents were virtually identical.The second guarantee was only different to that copied in that it referred to an amount of $8,680 and to an expiry date of "to end of defects liability period."

It will be noted that the bank guarantees were inaccurately drafted in that they referred to a contract or agreement made between the plaintiff and the defendant.Of course, the parties had not entered into a direct contractual relationship.

Neither the terms of the plaintiff's letter to the defendant nor the terms of the guarantees evoked any response from the defendant.

On 12 December 1994, the execution of the contract between Bettaform and the defendant was finally completed.Prior to that date, work both on the site and off the site had commenced.

Subsequently, in March 1995, Bettaform ran into financial difficulties.It was unable to perform all of its contractual obligations to the defendant.The plaintiff, however, had fully discharged its obligations under its contract with Bettaform to that time.It was not in default with the supply or fixing of reinforcement.It was not possible for it to have done any more work than had actually been done until such time as appropriate formwork could be erected on the site.

On 4 May 1995 - the defendant made demand upon the ANZ Banking Group Limited for the amounts referred to in the bank guarantees, which amounts were duly paid to it by the bank.

In these proceedings, the plaintiff seeks a declaration that the defendant was not at any time entitled to make a demand pursuant to the bank guarantees or either of them because the plaintiff was not at any time in default with the due performance of its work.It also seeks a declaration that the defendant holds the amount paid upon trust for the plaintiff.Other forms of relief sought in the plaintiff's amended statement of claim were not pursued at the trial.

There was little dispute at trial with regard to the findings that I have made thus far.There is, however, one important factual dispute which must be resolved.That issue is whether or not Mr Bell was informed of and agreed to the proposition that the bank guarantee to be provided by the plaintiff was to be limited to a guarantee of the plaintiff's performance of its work.

In this regard, it must be said that none of Mr Freeman, Mr Pearson and Mr Bell had a clear recollection of all of the details relating to the matters in issue in this case.Each had to rely to a great extent upon the contents of their respective files and diaries in order to give evidence.That is not surprising.They were each busy men with responsible positions.The situation is, however, unfortunate in so far as the determination of these proceedings is concerned.

As I have said, there can be no doubt about the plaintiff's intentions in the matter.But, as I see it, the more important question relates to the defendant's knowledge and understanding at the relevant times.The defendant, through Mr Bell, was well aware of the initial intentions of the plaintiff and Bettaform with regard to the proposed "partnership."The defendant was also well aware of the lapse of that proposal and of the fact that Bettaform was intended to become the tenderer and, if successful, the sub-contractor, and that Bettaform would, in turn, sub-let the reinforcing works to the plaintiff.

Upon considering all of the evidence carefully, I am satisfied, on the balance of probabilities, that Mr Bell was informed of the full nature of Bettaform's proposal (which, of course, was also the plaintiff's proposal) with regard to the bank guarantees.Mr Bell was, obviously, concerned to ensure that the total of the sum guaranteed would equate with the figure that represented five per cent of the contract price.In my finding, he was not concerned that the plaintiff and Bettaform each proposed to provide a guarantee of their own work only.The position from the defendant's point of view would be no different than if each had entered into separate sub-contracts with the defendant, presumably as Piotto Bros did.This may well be why he now has no recollection of the discussions on the topic.

It is not just a matter of my preferring the evidence of Mr Pearson to that of Mr Bell on this topic.In my finding, the surrounding circumstances point to the same conclusion.

I find that Mr Pearson spoke to Mr Bell on a number of occasions on the topic. It seems to me to be highly unlikely that he would not have mentioned to Mr Bell at all the full nature of the guarantees proposed.I bear in mind Mr Bell's failure to react at all to the terms of the plaintiff's letter and to the terms of the accompanying bank guarantees proffered by the plaintiff.One would have thought that there would have been a strong reaction to their terms had they not been prepared upon lines that had been discussed.

In my finding, Mr Bell did not attach as much importance to the question of the guarantees as did the plaintiff and Bettaform.I am satisfied that he agreed initially with Mr Pearson's proposal and that, thereafter, his only concern was to ensure that he received the documents.The reason why he did not react to their contents was the fact that they carried into effect the proposal that had been put to him by Mr Pearson.My finding that he was not greatly concerned with the documentation of the guarantees is confirmed by his failure to act upon the inappropriate recital in the guarantees as to the existence of a contract between the plaintiff and the defendant.

Whilst I agree with counsel for the defendant that there were some anomalies in the plaintiff's case as to the time at which Mr Bell was made aware of the true nature of Mr Pearson's proposals, I do not think those anomalies are significant.One must bear in mind that Mr Freeman was not, in the earlier stages, in communication with Mr Bell at all.All of the communication passed between Mr Pearson and Mr Bell, whilst Mr Freeman relied upon Mr Pearson for his information as to what had taken place.On the other hand, I do not accept the proposition advanced for the defendant by Mr Lunn that the problem as to the identification of the scope of work covered by the guarantees arose because of a mistake by the plaintiff in the drafting of the guarantees.In my finding, the mistake in drafting was of minor significance.The parties had established their positions in discussion prior to that time.

In summary and as I have said, I prefer the evidence of Mr Pearson to that of Mr Bell on the issue of the bank guarantees.The surrounding circumstances, in my finding, confirm that preference.

The plaintiff performed its obligations to Bettaform and, in so doing, achieved a position whereby it would be unfair for the defendant to retain the monies gathered by it as a result of calling in the plaintiff's guarantee.I did not understand counsel for the defendant to argue, if these were to be my findings, that the plaintiff is not entitled to the relief claimed.

There will, accordingly, be a declaration that the defendant holds the sum of $34,730 upon trust for the plaintiff.

I will hear counsel as to any consequential matters.