Walton Construction Pty Ltd v Pines Living Pty Ltd
[2013] ACTSC 237
•4 December 2013
WALTON CONSTRUCTION PTY LTD v PINES LIVING PTY LTD
[2013] ACTSC 237 (4 December 2013)
CONTRACT – building and construction – security – performance guarantees – standard form contract PC-1 1998 – no express provision where recourse to bank guarantee available – whether defendant entitled to call upon bank guarantee – where bona fide but disputed claim to funds
Building and Construction Industry (Security of Payment)Act 2009 (ACT)
Adrija Pty Ltd v Mohamed [2013] ACTSC 120
Bachmann Pty Ltd v BHP Power New Zealand Ltd [1999] 1 VR 420
BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266
Clough Engineering Ltd v Oil and Natural Gas Corporation Ltd (2008) 249 ALR 458
Esso Australia Resources Ltd v Plowman
(1995) 183 CLR 10
Fletcher Construction v Varnsdorf [1998] 3 VR 812
Hawkins v Clayton (1988) 164 CLR 539
Lucas Stewart Pty Ltd v Hemmes Hermitage Pty Ltd [2010] NSWCA 283
PinesLiving v John O’Brien and Walton Construction Pty Ltd [2013] ACTSC 156
Redline Contracting Pty Ltd v MCC Mining (Western Australia) Pty Ltd (No 2) [2012] 29 BCL 256
Walton Construction Pty Ltd v Pines Living Pty Ltd (2013) 8 ACTLR 57
Wood Hall Ltd v Pipeline Authority (1979) 141 CLR 443
Wood Hall Ltd v Pipeline Authority, unreported, NSW Court of Appeal, 20 March 1978
Wood Hall Ltd v Pipeline Authority, unreported, NSW Supreme Court (Rath J), 13 April 1977
No. SC 363 of 2013
Judge: Master Mossop
Supreme Court of the ACT
Date: 4 December 2013
IN THE SUPREME COURT OF THE )
) No. SC 363 of 2013
AUSTRALIAN CAPITAL TERRITORY )
BETWEEN:WALTON CONSTRUCTION PTY LTD
Plaintiff
AND:PINES LIVING PTY LTD
Defendant
ORDER
Judge: Master Mossop
Date: 4 December 2013
Place: Canberra
THE COURT ORDERS THAT:
The proceedings are listed on 16 December 2013 at 10am at which time the parties may:
(a) seek any further or other interlocutory orders necessary to give effect to the decision of the Court including in relation to security for the undertaking as to damages;
(b) bring in short minutes to finally dispose of the proceedings; and/or
(c) seek directions for the further conduct of the matter.
This is an application by the plaintiff, Walton Construction Pty Ltd (“Walton”) for an interlocutory injunction restraining the defendant, Pines Living Pty Ltd (“Pines) from calling upon two bank guarantees each in the sum of $190,000. The bank guarantees relate to a contract for a retirement village development which has been constructed by the plaintiff in Farrer in the ACT.
Chronology
On 21 June 2011 Pines and Walton entered into the construction contract.
On 23 June 2011, two bank guarantees were issued by the National Australia Bank, each in the amount of $190,000 provided by Walton to ‘Mandir Ashram Pty Ltd’, Pines’ previous name.
Since at least early 2013, the parties have been involved in a dispute about building defects and payment for works. There have been other proceedings between the parties relating to an adjudication decision made under the Building and Construction Industry (Security of Payment)Act (ACT) (the SOP Act).
As the range of disputes between the parties was expanding, on 3 April 2013, the plaintiff’s solicitors wrote to the defendant’s solicitors. The letter dealt with a number of different matters that were subject to dispute. It also dealt with the security provided under clause 4 of the contract. The letter provided:
(a) Finally we are concerned by your casual reference to our client’s security in the context of:
(i) a purported LD claim (when there is no bona fide entitlement due to our client having demonstrated its entitlement to EOTs throughout the project generally (noting in particular the former CA’s representation that our client was [entitled] to EOTs at least up until the end of 2012 due to design errors caused by your client)); and
(ii) the cost to rectify defective works (when agreement on what works are ‘defective’ have not been reached and an opportunity has not been afforded to our client to rectify agreed defects).
(b) We refer to clause 4 of the Contract and observe (by agreement between the parties) the drafter did not include a provision which provides your client with a fettered, or unfettered, recourse right to our client’s security.
(c) So that we may avoid yet another issue becoming a matter of ‘dispute’ between the parties we ask that you confirm out interpretation of clause 4 set out at paragraph (b) above.
(d) Should you fail to provide that confirmation, we put your client on notice that should it attempt to have recourse to either of our client’s bank guarantees (in a manner and on a basis that is not supported by a contractual right) our client will immediately seek to injunct such action and seek an order for costs (on a full indemnity basis) from your client.
On 5 April 2013, the defendant’s solicitors responded to the letter of 3 April 2013. That letter also dealt with a range of topics but included the following in relation to the security:
For your client’s assurance, we confirm that our client will not attempt any recourse against your client’s bank guarantees other than in accordance with the contract.
Our client does not maintain that the contract itself provides it with any such right. Recourse will only be had by order or agreement in due course.
The parties engaged in litigation in this Court concerning an adjudication decision under the SOP Act and actions that followed upon that decision. An interlocutory decision was delivered on 11 June 2013: Walton Construction Pty Ltd v Pines Living Pty Ltd (2013) 8 ACTLR 57 and a final decision on 8 August 2013: PinesLiving v Walton Construction Pty Ltd [2013] ACTSC 156. In summary, those proceedings were resolved in favour of Walton.
In June 2013 Walton asserted that Pines had repudiated its obligations under the contract and accepted that alleged repudiation. On 2 July 2013 Walton requested the return of the security.
In August and September 2013 preparations were being made for arbitration of some or all of the disputes between the parties.
On 18 September 2013, the plaintiff’s solicitors became aware that Pines had approached the bank with a view to calling in the bank guarantees. They wrote to the defendant’s solicitors, referring to the statements in the 5 April 2013 letter and warning that if a satisfactory undertaking was not provided Walton would commence proceedings seeking injunctive relief preventing Pines from having recourse to the security.
On 19 September 2013, Pines’ solicitors faxed a letter to Walton’s solicitors. The letter provided:
Our client did not intend to give any ‘undertaking’ by the letter dated 5 April 2013 but was merely confirming its desire to narrow the dispute with your client, in response to your enquiries and in the expectation of reciprocal good faith and cooperation from your client.
For the avoidance of doubt, our client withdraws any suggested previous undertaking.
The letter indicated that it was Pines’ present intention to have recourse to the bank guarantees once certain notices had been issued under the contract. The letter indicated Pines’ willingness to give an undertaking not to have recourse to the bank guarantees except following the issue of a specified contractual notice.
On 19 September 2013 the solicitors for Walton requested an undertaking that Pines would not call upon or otherwise enforce the bank guarantees unless it had given Walton three business days’ notice of its intention to do so. Pines gave that undertaking on 19 September 2013.
On 20 September 2013, the solicitors for Pines sent a letter to the solicitors for Walton which included: “Our client hereby gives notice of its intention to cash one of your client’s bank guarantees pursuant to the undertaking given yesterday...”.
On 25 September 2013 when the application first came before me on an urgent basis, I granted an ex-parte injunction restraining the defendants from calling upon the bank guarantees until 10 October 2013 when the application was initially listed for hearing.
On 24 September 2013 the contract administrator (the appointment of whom was subject to yet another dispute between the parties) issued a unilateral notice of completion pursuant to clause 13.3 of the contract. On 3 October 2013 the contract administrator issued an instruction pursuant to clause 9.6 of the contract in relation to the items on the list of outstanding defects that formed an attachment to the notice of 24 September 2013. That instruction required all defects to be corrected by 16 May 2014.
On 3 October 2013, administrators were appointed to the plaintiff.
On 9 October 2013, Pines became aware of the appointment of administrators.
On 10 October 2013, Pines’ solicitor wrote to the defendant’s solicitor enclosing a notice terminating the contract by reason of an “insolvency event”. The letter estimated that the cost of rectifying outstanding defects was $212,688. The basis of that estimate was set out in an annexure to the letter. That amount was in addition to the sum of $199,794.74 which had already been incurred. Details of those expenditures were also annexed to the letter. The letter also gave notice of Pines’ intention to “cash/call upon both bank guarantees pursuant to [the undertaking] given on 19 September”. That intention was subject to three business days lapsing from the date of the letter and Pines ceasing to be restrained in respect of the bank guarantees.
On 10 October 2013, the parties requested, by consent, an extension of the injunction and an adjournment of the hearing until 17 October 2013. On 16 October 2013, the parties again requested by consent that the injunction be extended and the matter was adjourned to 30 October 2013 when the matter could be heard.
On 29 October 2013, Walton’s administrator advised in the administrator’s report that a creditors’ meeting would be held on 8 November 2013 and recommended that Walton be wound up. As at the date of the hearing it was likely that Walton would be put into liquidation.
Two dispute notices dated 29 October 2013 which were issued by Walton pursuant to clause 15.1 of the contract summarise the presently existing disputes between the parties. It is not necessary to traverse the full range of sub-issues that arise from these notices. It is sufficient to note for present purposes that there is:
(a) a dispute or difference arising out of the letter dated 10 October 2013 referred to above so far as it relates to liability for defects;
(b) a dispute about the entitlement of Pines to liquidated damages and the entitlement of Walton to an extension of time;
(c) a dispute about the entitlement of Pines to withhold the security having regard to Walton’s assertion that the contract was terminated on 14 June 2013, its assertion that an agreement arose as a result of the communication on 5 April 2013 and its assertion that upon termination of the contract the security was required to be returned.
Contract
It is necessary to set out some of the terms of the contract and bank guarantee.
The contract contemplates that the plaintiff would provide security by way of bank guarantee or bond, but is silent about when the defendant might call upon any security. The contract provides:
4. SECURITY
4.1 FORM
The Contract must provide security in the form and amount set out in the Contract Particulars.
Where security is required to be provided by the Contractor in the form of Approved Security the Contractor must provide the Owner with the Approved Security within 14 days of the Award Date.
4.2 RELEASE
The Owner must:
(a) Within 14 days of the issue of a Notice of Completion for a Stage release from the security held under clause 4.1, an amount equal to the lesser of:
(i) 50% of the amount of security specified in the Contract Particulars for the Stage; and
(ii) An amount determined by the Contract Administrator to be reasonable to ensure the Owner’s interests are not prejudiced;
(b) within 14 days of the expiration of the Defects liability Period for a Stage (excluding any extensions under clause 9.11), release such amount of the security specified in the Contract Particulars for that Stage as is then held, as the Contract Administrator determines, to be reasonable, having regard to the work to which the balance of the Defects liability Period for the Stage applies, to ensure the Owner’s Interests are not prejudiced and
(c) release the balance of the security specified in the Contract Particulars for a Stage as is then held for that Stage when:
(i) the Defects liability Period for that Stage has expired; and
(ii) the Contractor has complied with all Its obligations under the Contract insofar as they relate to the Stage.
4.3 INTEREST
The Owner:
(a) is not obliged to pay the Contractor interest on
(i) the Approved Security;
(ii) the proceeds of the Approved Security if it is converted into cash; or
(iii) any money retained under clause 4.1; and
(b) does not hold the proceeds or money referred to in paragraph (a) on trust for the Contractor.
The Contract Particulars provide under the heading “CLAUSE 4 SECURITY”:
Security to be Provided
By the Contractor
(Clause 4.1)Amount and Form:
Security is required for as follows:
BANK GUARANTEE OR BOND:
Approved Security for:
5% OF CONTRACT AMOUNTOption for Release of Security:
(Clause 4.2)OPTION 2 APPLIES
(Option 1 applies unless otherwise stated)
If Option 2 applies amount of security for each Stage is:
Stage Amount
BLOCK E & ROAD 10%
BLOCK B & SITEWORKS 90%
The term “Approved Security” is defined in clause 1.1 as “An unconditional undertaking (duly stamped) on terms, and given by a financial institution, approved by the Owner”.
It should be noticed at this point that the particulars for clause 4.1 are brief and do not appear to respond in a complete way to the bolded headings in the standard form. In relation to the options contemplated by clause 4.2 it appears that option 1 has been deleted from the body of the contract leaving only option 2 which applies to staged works.
The contract sets out a procedure for the resolution of disputes (the Clause 15 procedure). Clause 15.1 provides:
15.1 NOTICE OF DISPUTE
If a dispute or difference arises between the Contractor and the Owner or between the Contractor and the Contract Administrator in respect of any fact, matter or thing arising out of, or in any way in connection with the Contractor’s Activities ... the dispute or difference must be determined in accordance with the procedure in clause 15.
Although the standard form contract contemplates that some disputes will be resolved by reference to an expert with an appeal to an arbitrator, by reason of the way in which the Contract Particulars have been completed, disputes or differences must be resolved by arbitration.
Clause 15.14 provides that “clause 15 will survive the termination of the Contract”. Clause 15.15 provides that:
Despite the existence of a dispute or difference between the parties the Contractor must:
(a) continue to carry out the Contractor’s Activities; and
(b) otherwise comply with its obligations under the Contract.
Each bank guarantee is a two page document. One guarantee relates to practical completion of buildings B and E. The other relates to the defects liability period for buildings B and E. Each is for the amount of $190,000. Relevantly, the terms of the guarantee are as follows:
To: The Beneficiary
1. In consideration of the Beneficiary agreeing at the request of the Customer and the Bank to accept this guarantee with the Agreement, the Bank undertakes to pay the Beneficiary an amount or amounts not exceeding the Amount in total.
2. Payment of the Amount or any part or parts of the Amount will be made by the Bank to the Beneficiary:
(a) upon the Bank receiving at its Outlet while this guarantee remains in force an unconditional written demand from the Beneficiary accompanied by this guarantee; and
(b) whether or not the Bank gives prior notice of the payment to the Customer; and
(c) despite any notice given to the Bank by the Customer not to pay to the beneficiary any moneys payable under this guarantee; and
(d) irrespective of performance or non-performance by the Customer or the Beneficiary of the Agreement in any respect by the customer, and
(e) with no obligation on the Bank to enquire as to the performance or non-performance of the Agreement in any respect by the customer or the Beneficiary; and
(f) with no obligation on the Bank to enquire as to the correctness or validity of any demand pursuant to sub-clause (2)a of this clause.
...
In addition to the contract and the bank guarantee, at the request of Pines the parties entered into a tripartite deed with St George Bank. Clause 4 of that deed requires Pines to obtain the consent of the Bank before enforcing any security provided by the builder in accordance with the building contract. The St George Bank consented to the defendant enforcing the security.
Walton’s submissions
The plaintiff submitted that there was an implied contractual promise of the defendant not to call upon the guarantee in the absence of the dispute resolution procedure being followed as set out in clause 15 of the contract. It submitted that the indications in clauses 4.2(c), 9.8, 13.7 of the contract were that any entitlement to have recourse to the security was only in relation to an agreed or determined entitlement and it was not sufficient that there be merely a claim made in good faith. It pointed to a distinction between those clauses and clause 12.19 which permitted a set off of “any claim to money” that Pines might have from Walton and submitted that where the contract contemplated a claim rather than an objectively determined amount it said so. It submitted that in the absence of an express term dealing with the circumstances in which recourse could be had to the security, the parties could not have intended that the right to call upon the bank guarantees be unconditional and unqualified as such a term would not satisfy the criteria ordinarily considered when implying contractual terms: BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266.
It also alleged that the letter from the defendant’s solicitors on 5 April 2013 gave rise to a binding agreement, amounted to the waiver of any entitlement to call upon the guarantees, gave rise to an estoppel or amounted to unconscionable conduct.
In relation to each of these points, it submitted that there was at least a serious question to be tried that warranted the grant of an injunction. With respect to the balance of convenience, the plaintiff submitted that as the defendant was also under financial pressure, there was a risk that the defendant would not be able to repay the amounts called upon in the event that it was ultimately determined not to be entitled to them. It pointed to the defendant’s interim liability to pay the plaintiff money as a result of an adjudication certificate under the SOP Act entered as a judgment on 3 September 2013 and a liability to pay costs arising out of previous orders of this Court. The former is an amount of $86,150.44 and, the latter, at least so far as Walton’s bill of costs is concerned, $71,338.38. The plaintiff also submitted that if the defendant entered into liquidation, as was likely, the competing claims of the plaintiff would likely be set-off against each other and it would be unfair for the defendant to obtain such an advantage, by calling upon the guarantees at a time when the liabilities between the parties are yet to be finally resolved.
Pines’ submissions
The defendant submitted that it was evident from both the bank guarantees and the construction contract that the parties intended to make demand on the bank guarantees unconditional and unqualified. It did not submit that the contract contained any express term permitting it to have recourse to the security provided under clause 4. It submitted that its entitlement arose from the unconditional nature of the guarantees themselves. It submitted that the authorities established that in the absence of a clear negative stipulation in the contract it was entitled to call upon the bank guarantees. It submitted that the contract follows the form of the Property Council of Australia’s PC-1 (1998) standard form contract which was drafted with such authorities in mind and deliberately contained no term dealing with recourse to securities because it required unconditional guarantees. It submitted that there was no need for the implication of any term in relation to recourse to the security because the contract provides that the guarantees were unconditional and hence there were no restrictions upon the defendant having recourse to them.
It also submits that any implied restriction on its entitlement to call on the guarantees arising from the dispute resolution provisions in clause 15 of the contract is not made out and makes detailed submissions in response to the plaintiff contentions concerning the 5 April 2013 letter.
Consideration
The entitlement to call upon the guarantee is determined by the terms of the guarantee and the contract between the parties. As a consequence the entitlement is to be determined by reference to those written documents. Neither party suggested that there were any factual issues that needed resolution in order to determine the proper interpretation of the documents, construction of their written terms and determination of the scope of any implied terms. During the course of the hearing, I gave the parties an opportunity to make submissions on whether there was any reason why I should not decide the construction of the contract on a final basis rather than merely determining whether the construction contended for by the plaintiff raised a serious question. Counsel for the plaintiff was not opposed to this course. Counsel for the defendant indicated that he was content for the Court to determine interpretation of the contract on a final basis with one qualification, namely, that the plaintiff “would not wish the proceedings to be finally disposed of, lest it be suggested that their final disposition constituted a bar to any other claim by the plaintiff against the defendant”.
Having regard to the fact that I have had the benefit of full argument as to the interpretation of the contract and neither party suggested that there was other material which I would need to consider to construe the contract it is, in my view, appropriate that I construe the contract on a final basis rather than an interlocutory basis.
In the present circumstances the parties proceeded, correctly, on the basis that the claim made by Pines of an entitlement to damages or compensation from the plaintiff was one which was made in good faith. In my view, having regard to the history of the matter that was an appropriate approach. It is sufficient for present purposes that I proceed on the basis that:
(a) the defendant has an arguable claim for damages in relation to, at least, completion of works that were defective as outlined in its letter of 10 October 2013;
(b) that such claim has not been determined on a final basis in a way which is binding upon the parties;
(c) that the claim, if ultimately established, would exceed the amount of the two guarantees.
The critical issue at this stage appears to be whether as a matter of construction of the contract, Pines has an entitlement to claim upon the guarantees when it has no more than an arguable claim made in good faith for damages or compensation. The most obvious alternative would be that it would be required to demonstrate that its entitlement to damages had been determined in a way which was binding upon the parties prior to recourse to the security being permitted. If Pines does not have an entitlement to claim upon the guarantees in relation to an arguable claim then, subject to damages not being an appropriate remedy, at the very least, an interlocutory injunction should issue. That is because Pines would be seeking to exercise an entitlement which, as things presently stand, it does not have. It is only if Pines does, under the contract, have an entitlement to call upon the guarantees at the present point that it would be necessary to determine whether Walton’s contentions relating to the 5 April 2013 letter give rise to a serious question to be tried and where the balance of convenience lies.
This means that in order to resolve the current application I will determine whether or not Walton’s argument that an entitlement to damages must be established in order to permit a claim on the guarantees rather than merely determining whether or not that proposition raises a serious question to be tried. This will mean that, if damages are not an appropriate remedy, then issues of the balance of convenience fall away because there would be no power under the contract to call on the guarantees at this stage.
To finally determine a construction point on an application for an interlocutory injunction is a course which has been adopted in other cases and is appropriate where full argument on the point in question has been received: Clough Engineering Ltd v Oil and Natural Gas Corporation Ltd (2008) 249 ALR 458 at [49]; Lucas Stewart Pty Ltd v Hemmes Hermitage Pty Ltd [2010] NSWCA 283 at [73]; see also Adrija Pty Ltd v Mohamed [2013] ACTSC 120 at [28].
I adopt what was said by the Full Court of the Federal Court in Clough Engineering Ltd at [75]-[85] as to the constructional principles relating to performance guarantees. Relevantly, those principles may be summarised as follows.
(a) It has been recognised that one of the exceptions to the rule that a court will not enjoin a claim upon a performance guarantee, or bond, from performing its unconditional obligation to make payment is where the party in whose favour the bond has been given has made a contract promising not to call upon the bond by way of a negative stipulation in the contract. However, that is best not described as an exception to a rule because the primary focus must always be on the construction of the contract: Clough at [77].
(b) There are generally two purposes for which a performance guarantee may be required, first, to provide security for a valid claim against the contractor and second, to allocate risk between the parties as to who shall be out of pocket pending the resolution of a dispute between them. It is a question of construction of the contract as to whether the guarantee is provided solely as security or also as a risk allocation device: Clough at [79].
(c) Commercial practice will play a significant role in interpreting such provisions. In determining whether or not the underlying contract confers an unfettered right to call upon a performance guarantee the importance of such instruments to the construction industry nationally and internationally is a factor to be taken into account: Clough at [81].
(d) Clauses in a contract which do not expressly inhibit a beneficiary from calling upon security should not too readily be interpreted to have that effect: Clough at [82]. While the court is still required to interpret the terms of the contract, clear words will be required to support a construction which inhibits a beneficiary from calling on a performance guarantee where a breach is alleged in good faith: Clough at [83].
The implementation of these principles can be illustrated by reference to four decisions of intermediate appellate courts: Clough itself, the two decisions of the Victorian Court of Appeal referred to with approval in Clough, Fletcher Construction v Varnsdorf [1998] 3 VR 812 and Bachmann Pty Ltd v BHP Power New Zealand Ltd [1999] 1 VR 420 and the more recent decision of the NSW Court of Appeal in Lucas Stewart Pty Ltd v Hemmes Hermitage Pty Ltd [2010] NSWCA 283. In order to resolve this case it is not necessary to attempt to reconcile the subtleties of emphasis that exist in these authorities or to review the numerous authorities of single judges discussed, in particular in Bachmann or more recently reviewed by Siopis J in Redline Contracting Pty Ltd v MCC Mining (Western Australia) Pty Ltd (No 2) [2012] 29 BCL 256 .
In Clough, the clause permitting calling on the performance guarantee was effectively neutral as to whether or not both or only the first of the two purposes of such a guarantee was intended. It permitted the beneficiary to invoke the guarantee and claim the amount “in the event of the Contractor failing to honour any of the commitments entered into under this contract”. However the pro forma for the required guarantee which, significantly, formed part of the contract, contained, in addition to the usual expansive terms “Any such demand made by the Company on the Bank ... shall be conclusive and binding ... notwithstanding any dispute(s) pending before any court, tribunal, Arbitrator or any other authority ...”. That was sufficient for the Court, reading the contract as a whole, to indicate that the clause permitted a claim on the guarantee even when the entitlement to claim was genuinely disputed: [100]. In other words, the provision of the guarantee fulfilled both the purpose of providing the beneficiary with security as well as the purpose of allocating risk pending final resolution of any dispute.
In Fletcher the builder was required to provide security in the form of an unconditional undertaking in a form approved by the owner. Under clause 3.13 the owner was entitled to obtain “Time Damages” if the builder “does not reach Handover by the Date for Handover”. Those damages were to be obtained by setting them off against amounts owed by the owner to the builder or, following the giving of written notice, by “recourse to [the builder’s] security to obtain the balance”. Clause 5.7 of the contract gave the owner an entitlement to deduct from the payment to the builder and from the security any amounts “which [the builder] owes to the Owner”. The builder argued that resort to the security was only available where the entitlement to Time Damages had been established by arbitration award or judgment and not where the owner’s entitlement was a disputed one (at 818). On the other hand, the owner contended that there was no requirement in the clause that the entitlement to Time Damages be established by arbitration or judgment. Charles JA identified the issue as being whether the purpose of the security was merely to provide security or whether it made provision for allocation of risk as to who should be out of pocket pending resolution of any dispute. He considered (at 821) the purpose was the latter and hence that the undertaking could be called upon notwithstanding that there was a genuine dispute as to whether Time Damages were payable. His Honour relied (at 821-822) upon the following matters:
(a) the unconditional nature of the undertaking;
(b) the fact that the contract provided for Handover to be determined by a certificate of the contract administrator, “a relatively simple procedure under which an independent party” certifies whether or not it had reached Handover (at 822);
(c) the fact that clause 3.13 contemplated self help in the form of deduction of Time Damages which would have a much more limited operation if the entitlement had to be agreed or determined (at 822);
(d) there were no qualifications on the face of clause 3.13 other than those specifically described, namely the want of a handover certificate, the deduction from money owning, the giving of notice and a failure by the Builder to pay the amounts claimed.
Callaway JA pointed out (at 826) the two reasons why a guarantee might be stipulated: security in case there are difficulties recovering from the party in default, or in addition to security the allocation of risk as to who shall be out of pocket pending resolution of the dispute. His Honour ultimately adopted the reasoning of the trial judge who had reasoned:
(a) the parties were sophisticated commercial entities;
(b) they had entered into a complicated and comprehensive construction agreement;
(c) the precise quantum of Time Damages would be difficult to ascertain and would change with each passing day and would often be disputed;
(d) had they intended that the security only be available after the final resolution then they would have so provided;
(e) if they required more than a bona fide claim then they could have imposed a requirement for a certificate of the contract administrator as a precondition but they did not.
Batt JA agreed with Charles and Callaway JJA.
In Bachmann Brooking JA delivered the judgment of the Court. Clause 5.5 of the relevant contract provided: “A party shall not convert into money a security that does not consist of money until the party becomes entitled to exercise a right under the Contract in respect of the security.” Clause 22.4 provided: “The Purchaser may deduct from monies otherwise due to the Supplier any moneys due from the Supplier to the Purchaser and if those moneys are insufficient, the Purchaser can have recourse to the security under the Contract.” His Honour recognised (at [30]) that clause 5.5 was a qualification on the purchaser’s power in relation to the security. The only question was the content of that qualification. His Honour comprehensively reviewed the authorities to date up to and including Fletcher. His Honour said, referring to what Charles JA said in Fletcher, that it would be strange if the two clauses conferred a practical right of recourse only where monies were due in the sense of “actually or indisputably due”. He treated clauses 5.5 and 22.4 when read in conjunction as entitling the purchaser to have recourse to the security where it had a bona fide claim that monies were due to it which exceeded any monies due from it to the supplier (at [53]). His Honour considered that the fact that one of the forms of security permitted was an unconditional promise to pay upon demand supported the view that the parties contemplated that it was the supplier who should be out of pocket pending the resolution of any dispute.
In Lucas Stewart Pty Ltd v Hemmes Hermitage Pty Ltd [2010] NSWCA 283 clause 16.2 of the relevant contract permitted the giving of a notice where “the contractor has not materially complied with its obligations under this contract”. The notice was to specify a reasonable time in which the contractor had to remedy the breach and if it failed to do so then clause 16.3 permitted the principal to “convert any unconditional undertaking into cash” and apply that cash to remedying the breach or compensation for damages. The question was whether or not the clause depended upon the owner’s satisfaction as to non-compliance or the objective fact of non-compliance. McFarlan JA considered (at [36]) that it was conditioned upon the objective fact of such non-compliance. Referring to the different purposes of performance bonds his Honour said (at [39]-[40]):
There are at least two principal goals that parties may seek to achieve by requiring that performance bonds be provided by the 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.
His Honour considered that clause 16 only entitled the owner to call upon the bond if as a matter of objective fact the builder had not materially complied with its obligations. His Honour said that the position would have been different if the clause had referred to the owner’s satisfaction or even the owner’s assertion that the applicant was in breach of the contract.
He also expressed reservations about the decision in Clough and said that it was not obvious to him why the terms of the guarantee should be regarded as affecting the proper construction of the provision which related to the circumstances in which the principal was entitled to call on the guarantee.
Both Campbell JA and Young JA agreed as to the construction of the contract although Young JA differed as to whether an injunction should be granted.
The different results in these cases indicates that whether or not there is power to call upon security when the entitlement is disputed will depend upon subtleties of the particular contractual provisions. Lucas Stewart appears on its face to take a substantially different approach to that adopted in Clough and the two Victorian cases. The reasoning on the critical point in Lucas Stewart is not very detailed. However it turns on precisely what is necessary to provide an indication that the second of the two recognised purposes of performance guarantees exists. It appears that in Lucas Stewart their Honours took as a starting point the existence of only the first purpose and looked for indications that might support the second. In the Victorian cases the presumption appears to have been, having regard to the nature of the unconditional undertaking, that both purposes were intended unless there was some indication of a qualification on the entitlement to call upon the guarantee. In Clough there were clear words in the terms of the guarantee which was incorporated into the contract itself that were consistent with both purposes existing. If indeed there is a difference in emphasis between these cases as opposed merely to differing contractual positions then that is something for the High Court to resolve.
Finally it is necessary to say something about the decision in Wood Hall Ltd v Pipeline Authority (1979) 141 CLR 443. That decision is important because in the present case the defendant placed much emphasis on it as indicating the state of the law in which the standard form contract which was used in the present case was drafted. Wood Hall must be understood in the context of the particular issue that was being addressed. In that case the contractor was required to either provide a cash security or alternatively a bank guarantee. The contractor provided a bank guarantee. Further, by agreement between the parties the owner had accepted a bank guarantee in lieu of keeping retention monies to which it was entitled under the contract. Both bank guarantees were unconditional in their terms. The distinguishing point in relation to the case is that although the issue of whether or not there was an entitlement as between owner and contractor to call upon the guarantees as a consequence of non-compliance with the contract was referred to (see 445, 453), the case was determined on the more limited basis that the owner was entitled to call upon the guarantees so as to convert security or retention guarantees into security or retention held in cash (see Gibbs and J at 453-455 and Stephen J at 458-460). It did not deal with whether or not the cash so obtained could then be appropriated as damages. As the decision of the Court of Appeal made clear the appeal against the decision of the trial judge had been allowed because his Honour had “confuse[d] the right to realise upon a security with the right to have it”: Wood Hall Ltd v Pipeline Authority unreported, NSW Court of Appeal, 20 March 1978 at 17.
The decision of the High Court recorded that the contract was silent on the circumstances in which the owner was entitled to make a demand under the performance guarantee: see 459. However, it is worth noting that it was not as silent as the contract in the present case. In Wood Hall, although there was no provision setting out expressly when recourse may be had to the guarantee, the terms of the guarantee provided that it was “security for Contractor’s due and faithful performance of the Work”: see Wood Hall Ltd v Pipeline Authority, unreported, NSW Supreme Court (Rath J), 13 April 1977. The trial judge said (at 25):
There is no express provision in the contract as to when the Authority might have recourse to the cash security, if cash had in fact been given. This proposition is disputed by the Authority, but for the moment I shall assume it to be true. Having regard to that assumption, and to the foregoing reasoning, it seems clear that the Authority could not, on any reasonable construction of the contract, have recourse to the cash security unless there had been some failure by the plaintiff in its “due and faithful performance of the Work.” By a parity of reasoning, no demand for payment under a bank guarantee could be made (as between the plaintiff and the Authority) unless there had been some failure by the plaintiff in its due and faithful performance, or unless, at least, there was a bona fide claim of failure of such due and faithful performance. In other words, on the assumptions that I have made, the Authority would be in breach of the contract if it made demand for payment under the guarantee in the absence of a bona fide claim of failure of due and faithful performance by the plaintiff.
His Honour found that on this analysis on the facts available to him and in the light of the specific provisions of the contract as to when the security had to be discharged there was no entitlement to have recourse to the guarantee.
The important point to note is that the analysis of the case by the trial judge was much more analogous to the situation arising in this case and indeed in the other cases to which I have referred above. It involved asking whether, as between plaintiff and defendant, the threshold established by the contract for calling upon the security had been reached. Where that threshold for recourse was only partially articulated in the contract it involved working out that threshold by techniques of construction or implication. The passage quoted above refers to either a failure or a bona fide claim of a failure as being necessary to be established. The balance of the judgment makes clear than even a bona fide claim could not be made out. Therefore the critical issue for the purposes of this case did not need to be resolved. By the time the matter reached the Court of Appeal and then the High Court, the critical arguments in the case had evolved and hence those authorities relate to different and much less generally applicable issues.
It is therefore clear in my opinion that Wood Hall does not stand for the proposition that the existence of an unconditional security will in the absence of a negative stipulation give rise to an entitlement as between the parties to a contract to an unconditional entitlement to call upon the security. Rather, although emphasising the commercial importance of such security, the ratio of the case is a narrow one very much dependent upon the particular circumstances that existed.
The unusual feature in the current case is that there is no express provision dealing with the circumstances in which recourse might be had to the guarantee. The contract is, or is based upon a standard form contract - Property Council of Australia, PC-1 (1998). The fact that there are no provisions dealing with recourse to security is a feature of this agreement which has been recognised for some time but not explained: S Cappelli “The Property Council of Australia Standard Form Contract – A User’s Guide” (1999) Australian Construction Law Newsletter 16.
Mr Erskine emphasised the significance of the fact that the guarantee was an unconditional one. That fact, if there was doubt about the scope of a provision in the contract itself which set out the circumstances in which the guarantee could be called upon, would be a matter tending towards an allocation of risk purpose as well as a security purpose. However, in the absence of any express provision in the contract itself relating to the circumstances in which recourse might be had to the guarantee, in my view the fact that the guarantee is an unconditional one would not, even if, as in Clough, incorporated into the contract, be a circumstance which would permit it to serve the allocation of risk purpose. As I have indicated above, Wood Hall does not stand for any such general proposition. I do not accept the submission made by Pines that in the absence of a clear negative stipulation a party may not be enjoined from calling on an unconditional guarantee except where there is fraud or unconscionability. Consistently with the approach taken in Clough, Fletcher, Bachmann and Lucas Stuart, when dealing with an application for an injunction directed to the beneficiary of the guarantee (as opposed to the financial institution providing it) the starting point must be the terms of the contract between those parties that permit recourse to be had to the security. It is the terms of that contract which will define the scope of the entitlement to call upon the security and any constraints upon that entitlement.
In a case where the contract does not expressly deal with the circumstances in which the guarantee may be called upon, any capacity within the contract that would permit the defendant to have recourse to the security must, if it exists, be implied. The outcome of the present application turns, in my view, upon whether or not it is possible to imply into the contract a term which covers both the security and risk allocation purposes identified in the authorities. It would be sufficient, in order to determine the current application, to find that it is possible to imply into the contract a term which fulfils the broader allocation of risk purpose. That would permit, at least so far as the contract is concerned, the defendant to call upon the guarantees at this stage. However the authorities do not extend to require such a term to be implied as a matter of law into a contract of this nature wherever there is an absence of a negative stipulation: cf Hawkins v Clayton (1988) 164 CLR 539 at 572; Esso Austraila Resources Ltd v Plowman (1995) 183 CLR 10 at 30. Further, the implication of such a term would not meet the test for the implication of a term to give business efficacy to the contract set out in BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266 at 283. Having regard to the controversy demonstrated in the authorities referred to above, it is clearly not open to say that an entitlement extending to the risk allocation purpose “goes without saying”, the third element in the BP formulation. In other words, in my view, the contract does not permit recourse to the bank guarantee in circumstances where although a claim by the owner is made bona fide that claim is subject to a genuine dispute.
As pointed out above, I am satisfied in the present case that, as a matter of fact, the claim made by the defendant is subject to a genuine dispute. I did not understand the defendant to contest otherwise.
The plaintiff has established that the contract itself does not permit the defendant to call upon the guarantee while its entitlement to do so is subject to a genuine dispute. Damages would not be an appropriate remedy because Pines is in very difficult financial circumstances and there is therefore a significant risk that any monies paid to it may not be recoverable if it is ultimately found that it is not entitled to them. The evidence as to Pines’ financial difficulties was not disputed and Pines made no submission to the effect that it should not be accepted. Therefore the plaintiff is entitled to an injunction to restrain the defendant from calling on the guarantee in the circumstances which presently exist.
The present interlocutory injunction restraining Pines continues until further order. It is appropriate to make no order that would affect the continuation of the existing interlocutory injunction at this stage. While my conclusions as to the terms of the contract are likely to permit the final disposition of the proceedings I will permit the parties to be heard as to whether or not that is the case and if final orders are to be made what their terms should be. If no final orders are made then it will be necessary to deal with the issue of security for the undertaking as to damages given by Walton.
It also means that it is not necessary to resolve the plaintiff’s alternative contention that the letter sent by the solicitors for the defendant on 5 April 2013 arguably amounted to a waiver of any entitlement to call upon the guarantees, gave rise to an estoppel against the defendant or was unconscionable conduct. Further it is not necessary to deal with any other issues in relation to the security arising out of the purported termination of the contract by Walton in June 2013.
The orders of the Court will be:
1. The proceedings are listed on 16 December 2013 at 10 am at which time the parties may:
(a) seek any further or other interlocutory orders necessary to give effect to the decision of the Court including in relation to security for the undertaking as to damages;
(b) bring in short minutes to finally dispose of the proceedings; and/or
(c) seek directions for the further conduct of the matter.
I certify that the preceding sixty-eight (68) numbered paragraphs are a true copy of the Reasons for Judgment herein of Master Mossop.
Associate:
Date: 4 December 2013
Counsel for the plaintiff: M K Condon SC
Solicitors for the plaintiff: Crisp Legal
Counsel for the defendant: C Erskine SC
Solicitors for the defendant: J S O’Connor, Harris & Co
Date of hearing: 30 October 2013
Date of judgment: 4 December 2013
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