Clarke Road Developments Limited v Rohits Civil & Infrastructure Limited
[2017] NZHC 2844
•20 November 2017
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV-2017-404-2558 [2017] NZHC 2844
BETWEEN CLARK ROAD DEVELOPMENTS
LIMITED Plaintiff
AND
ROHITS CIVIL & INFRASTRUCTURE LIMITED
First Defendant
CHINA CONSTRUCTION BANK (NEW ZEALAND) LIMITED
Second Defendant
CIV-2017-404-2519
BETWEEN ROHITS CIVIL & INFRASTRUCTURE LIMITED
Plaintiff
ANDCHINA CONSTRUCTION BANK (NEW ZEALAND) LIMITED
Defendant
Hearing: 13 November 2017 Appearances:
K F Gould for Clark Road Developments Limited
J Miles QC and A Stuart for Rohits Civil & Infrastructure
Limited
A E Murray for China Construction Bank (New Zealand
LimitedJudgment:
20 November 2017
JUDGMENT OF MUIR J
This judgment was delivered by me on Monday 20 November 2017 at 3.00 pm
Pursuant to Rule 11.5 of the High Court Rules.
Registrar/Deputy Registrar Date:…………………………
CLARK ROAD DEVELOPMENTS LTD v ROHITS CIVIL & INFRASTRUCTURE LTD [2017] NZHC 2844 [20 November 2017]
Introduction
[1] In two related proceedings Rohits Civil & Infrastructure Limited (RCIL) seeks summary judgment against China Construction Bank (New Zealand) Limited (CCB) under a document styled “Principal’s Bond” (“the Bond”), and Clark Road Developments Limited (CRDL) seeks an injunction against RCIL preventing it from claiming under the Bond and against CCB from making payment accordingly.
[2] I intend to approach the respective claims by asking whether RCIL can satisfy the Court that CCB has no defence to the claims against it. To do so it must establish the absence of any real questions to be tried.1 Assuming it can, then there can be no basis for the issue of the injunction CRDL seeks against CCB.
[3] Insofar as CRDL seeks to restrain RCIL from making a call under the Bond it is accepted that the horse has already bolted. A call was made on 9 October 2017 prior to the application for the interim injunction which was filed on 25 October
2017.
Background
[4] RCIL is a contracting company with approximately 50 full-time employees. On 27 April 2016 it entered into a contract with CRDL to undertake the civil works associated with the subdivision of a property at 165 Clark Road, Hobsonville. The contract adopted NZS form 3910:2013 Conditions of Contract for Building and Civil Engineering Construction.
[5] By that stage work had in fact already started on the site, with the first progress payment claim being for work undertaken in the period up to 29 February
2016.
[6] In its terms, the contract was a measure and value contract which meant that the contract price was to be calculated according to the measured quantity as determined by the engineer of each item of work carried out at the rate specified in a
schedule of prices attached to it.
1 Pemberton v Chappell [1987] 1 NZLR 1 (CA) at 3.
[7] From an early stage RCIL complained that CRDL was late in meeting payment claims. It says that of the 19 claims it in fact made, CRDL failed to make payment when due on 13 occasions. On 7 April 2017 it says that it received payment by cheque, in respect of claim No 13, but that this was dishonoured on presentation. A further cheque (in respect of claim No 17) was dishonoured on or about 22 August
2017. RCIL accordingly issued a default notice. It says that on 30 August it agreed to return to the site on certain terms but that the next day it received a notice from the engineer directing that it re-establish itself as CRDL had cleared the relevant payment.
[8] On 19 December RCIL says that CRDL again failed to make a payment due and a further default notice was served. RCIL considered that CRDL was in breach of the conditions by which RCIL had agreed to uplift its previous suspension. It accordingly gave notice to terminate the contract and withdrew its employees. Again, the engineer advised the default had been cured and directed RCIL to re- establish on site. However, RCIL made a decision not to do so given what it considered to be CRDL’s payment history. On 25 September 2017 it served a payment claim (No 20) for $423,609.30. On 9 October it made a call under the Bond. On 11 October 2017 CRDL purported to terminate its contract with RCIL. RCIL considers the purported cancellation invalid and to have been an act of repudiation which it accepted on 13 October 2017.
[9] CCB declined to honour the Bond on the basis that it was, in its terms, null and void. The respective proceedings then issued. CCB’s position in respect of such proceedings is that it abides the decision of the Court.
The contract between RCIL and CRDL and the Progress Payment Certificate
[10] The construction contract comprises a number of documents commencing with a so called “Contract Agreement” of three pages which in its terms replaces NZS 3910:2013 but is then also said to “comprise” in a stated order of priority various documents including the “General Conditions of Contract NZS 3910:2013 (including other Schedules)”.
[11] Clause 2 of the Contract Agreement states:
The Principal shall pay the Contractor the sum of $5,753,645.60 (excluding GST) or such greater or lesser sum as shall become payable under the Contract together with goods and services tax at the times and in the manner provided in the Contract.
[12] Clause 1.2 of NZS 3910:2013 in turn defines Contract Price as:
The sum provided in the Contract as payable for the completion of the Contract Works calculated in accordance with 2.2, 2.3 or 2.4 as applicable, subject to such adjustments as are provided for in the Contract.
(Emphasis added)
[13] Because this was a measure and value contract, cl 2.3 provides the method of calculation of the contract price for the purposes of the cl 1.2 definition. Relevantly cl 2.3.1 states that:
In a measure and value contract the Contract Price shall be calculated according to the measured quantity, as determined by the Engineer, of each item of work carried out at the rate set out in the Schedule of Prices, subject to such adjustments as are provided for in the Contract.
[14] NZS 3910:2013 G1.2 in turn states, under the heading “Interpretation”, the
following:
Contract Price
The Contract Price may or may not be stated in the Contract as a precise sum. It may be a matter of calculating the Contract Price during the course of the Contract, particularly in the case of measure and value and cost reimbursement contracts, and always subject to any adjustments provided for in the Contract.
[15] In the present case, the “fluid” nature of the measure and value contract was apparent at an early stage, because despite the Contract Agreement referring to payment of $5,753,645.60 “or such greater or lesser sum as shall become payable
…” every one of the 20 progress payment certificates specify the “Original Contract
Sum” as $5,241,373.27 and no issue is taken in that respect by RCIL.
[16] To that Original Contract Sum each of the certificates in turn adds the value of “Variations to date”. On progress payment certificate No 1 these were identified at $32,451.52. By progress payment certificate No 20 they had increased to
$2,488,380.80. Again there is no dispute in that respect.
[17] As at the date of its call under its Bond RCIL therefore says that the Contract Price was $7,729,754.07, comprised of the adjusted Original Contract Sum and Variations to date of $2,488,380.80.
[18] In his progress payment certificate No 20, however, the engineer says that of that amount, $6,336,850.46 only is certified for payment (being the full value of the variations and $3,848,469.66 of work against the Original Contract Sum). After making allowance for retentions and other deductions he therefore identifies the sum payable to RCIL as $5,883,064.57 against previous certifications of $6,296,895.64. Accordingly, the certificate identifies an overpayment in the amount of $413,831.07.
The Bond
[19] This was initially issued on 15 April 2016 with an expiry date of 29
September 2016 and reissued on 30 August 2017 with an expiry date of 30
November 2017.
[20] The Bond is between CRDL as principal, RCIL as contractor and CCB as “surety”. It identifies a “guarantee amount not exceeding NZD 600,000”. Recitals A and B to the Bond provide that the Bond is made in the following circumstances:
(a) The Principal has entered into an agreement with the Contractor by which the Contractor has agreed to carry out and fulfil the obligations imposed on the Contractor (“the Contract”).
(b) The Contract requires the Principal to provide the Contractor with security in the form of a bond to ensure performance of the Principal’s obligations under the Contract.
[21] Relevantly, the operative parts then provide:
1.THE Principal and Surety are jointly and severally held and bound to the Contractor in the sum of NZD 600,000.00 (Six hundred thousand and 00/100 New Zealand Dollars) (the “bond sum”) and bind themselves, their successors and assigns jointly and severally for the payment of that sum.
2.THE Surety irrevocably and unconditionally undertakes, as primary obligor, to pay to the Contractor any sum or sums which may, from time to time, be demanded in writing by the Contractor, up to an amount not exceeding in aggregate the amount nominated at 1 above. The Surety shall make payment forthwith upon demand by
the Contractor, without enquiry as to, and without having regard to, the position as between the Contractor and the Principal, or whether or not the Principal is in default under the Contract Documents. Payment will be made without reference to, and not withstanding any instruction from the Principal to the Surety to the contrary.
3. THE conditions of this bond are that it shall be null and void if:
a)The Principal has paid to the Contractor the Contract Price and any other monies payable to the Contractor under the Contract; or
b)The Surety has received notification from the Contractor that this bond is no longer required; or
c) The Surety pays the Bond Sum to the Principal; or d) The expiry date of 1.00 pm on 30th November 2017
[22] RCIL’s claim under the Bond is for its full nominal value. It says that it is owed $423,609 on payment claim No 20, approximately $150,000 of retentions and in addition has claims for loss of profits, loss of income and subcontractors’ fixed costs in the amount of approximately $2 million. For its part CRDL says that it has already overpaid RCIL. These underlying disputes will inevitably need to be addressed within the dispute resolution mechanisms of the construction contract.
On-demand or conditional bond
[23] Mr Gould submits the Bond is a conditional obligation which only responds to the extent of CRDL’s underlying contractual obligations to RCIL. He relies on the fact that the word “surety” is used to describe CCB throughout the document, that the amount of the Bond is described as “the guarantee amount”, and recital B. He says that this position is confirmed by cl 3(a) whereby the Bond shall be null and void if the Principal has paid the Contract Price.
[24] In support of that submission he relies on decisions such as in Trafalgar House Construction (Regions) Ltd v General Surety and Guarantee Co Ltd2 and Quay Park Arena Management Ltd v Great Lakes Reinsurance (UK) plc where
conditional bond status was recognised.3
2 Trafalgar House Construction (Regions) Ltd v General Surety and Guarantee Co Ltd [1996] AC
199 (HL).
3 Quay Park Arena Management Ltd v Great Lakes Reinsurance (UK) plc [2014] NZHC 2204.
[25] In Trafalgar House Construction, the bond was issued on a condition that “if the subcontractor shall duly perform and observe” all the terms of the subcontract then it would be “null and void”. The House of Lords held that in order to establish liability under the bond, proof of damage was required. In Quay Park Arena Management Ltd, the ability of the beneficiary to make claim under the bond was limited by a requirement that the demand be accompanied by a certificate from an engineer certifying that Mainzeal was in default, had failed to remedy such default following notice and that the sum demanded was, in the sole opinion of the engineer, reasonable.
[26] In my view the Bond in the present case is properly categorised as an on- demand bond and these cases have no application.
[27] In the recent English Court of Appeal decision in Wuhan Guoyu Logistics Group Co Ltd v Emporiki Bank of Greece SA, the Court cited Paget’s Law of Banking under the heading of Contract of Suretyship v Demand Guarantee in terms:4
Where an instrument (i) relates to an underlying transaction between the parties in different jurisdictions, (ii) is issued by a bank, (iii) contains an undertaking to pay “on demand” (with or without the words “first” and/or “written”) and (iv) does not contain clauses excluding or limiting the defences available to a guarantor, it will almost always be construed as a demand guarantee.
[28] Not all of the elements identified in Wuhan need, however, be present for a bond to be construed accordingly.5
[29] The following phrases have led courts to conclude that a bond is on demand:
a “on demand without proof of conditions”;6 and
b“We … as the primary obligor, not as security, do hereby irrevocably, unconditionally and absolutely guarantee repayment to you by the Seller of an amount up to but not exceeding …”7
4 Wuhan Guoyu Logistics Group Co Ltd v Emporiki Bank of Greece SA [2012] EWCA Civ 1629 at
[26].
5 See for example: Gold Coast Ltd v Caja de Ahorros del Mediterraneo [2001] EWCA Civ 1806 at [16]; Spliethoff ’s Bevrachtingskantoor BV v Bank of China [2015] EWHC 999 (Comm) at [72], [74] and [81].
6 Edward Owen Engineering Ltd v Barclays Bank International Ltd [1978] 1 QB 159.
7 Spliethoff ’s Bevrachtingskantoor BV v Bank of China, above n 5, at [84]–[85].
[30] In this case CCB irrevocably and unconditionally undertakes as primary obligor to pay any sum demanded and agrees it will make payment forthwith without regard to the position between Contractor and Principal, without inquiry into that position and notwithstanding any instruction from the Principal to the contrary.
[31] I adopt the approach of Carr J in Spliethoff ’s Bevrachtingskantoor BV v Bank of China8 whereby I look at the substance and commercial context of CCB’s obligations under the document. In substance they are absolute obligations, not those of a guarantor or surety. They occur in the context of a construction contract (notoriously disputatious) and where a premium might therefore be expected in terms of certainty and predictably of contactor payment. There are no identified pre-
conditions to the making of a demand, nor in its terms does the Bond reference performance by RCIL of its obligations. Indeed to the contrary, the position between Contractor and Principal is identified as a specific matter into which inquiry cannot be made. Moreover, insofar as Recital B identifies the purpose of the Bond as being to ensure performance of the Principal’s obligations, that general provision must yield to the specificity of cl 3(a) discussed below which identifies the specific obligation in issue – payment of the Contract Price. For those reasons I am satisfied that it is properly characterised as an on-demand Bond.
[32] Having come to that conclusion, a long line of authority then establishes that the Bond is to be treated as in substance a promissory note (subject to its terms and the well-recognised exception of fraud). The obligation of the bank is in that context entirely independent of the ultimate contract between the account party and the beneficiary. For that reason performance bonds are often said to be “substitutes for
cash”.9 In Edward Owen Engineering Ltd v Barclays Bank International Ltd the
English Court of Appeal stated the position succinctly in terms:10
[T]hese performance guarantees are virtually promissory notes payable on demand…All this leads to the conclusion that the performance guarantee stands on a similar footing to a letter of credit. A bank which gives a performance guarantee must honour that guarantee according to its terms. It is not concerned in the least with the relations between the supplier and the customer; nor with the question whether the supplier has performed his contracted obligation or not; nor with the question whether the supplier is in
8 At [84]–[85].
9 Spliethoff ’s Bevrachtingskantoor BV v Bank of China, above n 5, at [69].
10 Edward Owen Engineering Ltd v Barclays Bank International Ltd, above n 6, at 170–171.
default or not. The bank must pay according to its guarantee, on demand, if so stipulated, without proof or conditions. The only exception is when there is a clear fraud of which the bank has notice.
[Emphasis added]
[33] In this case no allegation of fraud is made. CRDL’s argument is simply that in its terms the Bond does not respond because it is properly considered to be null and void as a result of CRDL having already paid the Contract Price to RCIL. To succeed in its injunction application, I accept it must positively establish that proposition. Such is the courts’ concern to maintain the commercial effectiveness of bonds and to avoid the injection of legal and factual complexity into otherwise
straightforward commercial undertakings11 that they have always been resistant to
granting injunctions on the basis of identification of a “serious question” only. For example, in Alternative Power Solutions v Central Electricity Board12 the Privy Council held that if fraud is alleged at the injunction stage the applicant must be able to establish it as “seriously arguable” that:
… the only realistic inference is that [the beneficiary] could not honestly have believed in the validity of its demands on the performance bonds and that the Bank was aware of that fact
[34] Likewise, where the question was whether the terms of the bond itself precluded demand, Ramsey J held in Permasteelisa Japan KK v Bouyguesstroi:13
In my judgment, whilst, as the Court of Appeal indicated in Sirius, a court might grant an injunction where there is an express term restricting the circumstances in which a party can draw on a letter of credit, and where it is positively established that the party was not entitled to draw down, the same will not apply where there is only a serious, arguable case to that effect. Otherwise the commercial effectiveness of letters of credit would be eroded.
[35] In substance the inquiry under the plaintiff’s summary judgment application in terms of whether there is an absence of any real question to be tried in respect of the defence is the mirror image of the high threshold test which CRDL would need to
satisfy before the Court could consider (subject to balance of convenience
11 See Wood Hall Ltd v Pipeline Authority [1979] HCA 21, (1979) 141 CLR 443 at 461.
12 Alternative Power Solutions v Central Electricity Board [2014] UKPC 31, [2014] 4 All ER 882 at [55], citing United Trading Corporation SA v Allied Arab Bank Ltd [1985] 2 Lloyd’s Rep 554 at 561.
13 Permasteelisa Japan KK v Bouyguesstroi [2007] EWHC 3508 (QB) at [51].
considerations and assessment of the overall justice of the case) granting an injunction.
Was the Bond null and void at the time demand was made?
[36] The term “Contract Price” as it appears in cl 3(a) of the Bond is undefined within the document but both CRDL and RCIL agree it is to be given the same definition as under the construction contract. The synergy between the two agreements is further illustrated by cl 3.2.4 of NZS 3910:2013 which provides that the Bond may not be called upon “if the Principal has paid to the Contractor the Contract Price and any other monies payable to the Contractor under the Contract”, in so doing repeating the operative words in cl 3(a) of the Bond.
[37] Significantly, in both cases the reference is to payment of the Contract Price and any other monies payable. It is not for example to “or such other monies as may be payable under the Contract”. This suggests that the “baseline” for determining whether the Bond is null and void is whether the Contract Price at a minimum has been paid.
[38] The primary issues for determination are therefore what the Contract Price was at the time the call was made on the Bond and whether it had been paid.
[39] At the outset I observe that the definition of Contract Price in cl 1.2 of NZS
3910:2013 is forward looking – it is the sum “payable for the completion of the Contract Works”, calculated (in this case) in accordance with cl 2.3 and subject to such adjustments as are provided for in the contract.
[40] In the context of a measure and value contract the Contract Price will be the subject of ongoing recalculation during the course of the contract. Clause G1.2 recognises as much. As each item of work is carried out, its measured quantity will be determined by the engineer in accordance with the rates set out in the annexed Schedule of Prices (as provided for in cl 2.3.1). Items of work not yet completed, including any variations which may have been approved, will remain forecast amounts to be the subject of measurement on completion. If at any given time during the course of the contract it is necessary to identify the Contract Price, it will
be a combination of established (measured) amounts and forecast sums for completion of the works.
[41] Clause 2 of the (three page) Contract Agreement reinforces that position by imposing an obligation to pay an identified amount of $5,753,645.60 “or such greater or lesser amount as shall be payable under the Contract”. Likewise cl 2.3.1 and G1.2 of NZS 3910:2013 provided for the Contract Price to be subject to adjustments as provided for in the Contract.
[42] The engineer’s certificates follow this model with each identifying an “Original Contract Sum” ($5,241,373.27), being the measured quantity of the original works, plus “Variations to date” to provide what is termed a “Forecast Contract Sum”. In my view at any given time such Forecast Contract Sum represented the “Contract Price” for the purposes of both the construction contract and the Bond.
[43] The purpose then of the Bond is to secure the Contractor’s position on an assumed completion of the works and to secure the benefits which would flow to it from so doing. If it has received the Contract Price as calculated from time to time it can expect no more and the termination of the Bond obligation follows inevitably.
[44] In the present case the engineer provided a certificate on 11 September 2017 identifying the Forecast Contract Sum as $7,687,923.14 comprising an Original Contract Sum of $5,241,373.27 and Variations to date of $2,446,549.87. His certificate of 12 October contained a minor upward adjustment to the variation amount for a combined Forecast Contract Sum of $7,729,754.07. It is common ground that this amount had not been paid at the time RCIL made its call on the Bond (or subsequently). The total previously certified by the engineer to that point is identified as $6,296,895.64.
[45] CRDL’s argument would have the Contract Price defined for the purposes of the Bond as the amount from time to time certified by the engineer as payable for work completed. Because certificate No 20 identifies an overpayment in that respect, it says the Contract Price has been paid and the Bond discharged. However,
for the reasons I have identified I do not regard that as an correct construction. In particular it does not reconcile with the cl 1.2 NZS 3910:2013 definition of Contract Price.
[46] Responsibly Mr Gould does not advance any alternative argument based on fraud. Nothing in the affidavits suggests such a claim is seriously arguable. Almost inevitably RCIL’s composite claims against CRDL will be resisted. It may ultimately be that it is required to refund to CRDL some part of previous amounts certified and the amount recovered under the Bond but these are arguments for another day and in another forum. The demand made on CCB did not exceed the aggregate amount of the Bond and was payable without inquiry as to position between RCIL and CRDL or as to CRDL’s default.
[47] It follows that in my view there is no real question to be tried in terms of a defence to RCIL’s claims against CCB and that summary judgment should therefore be entered. Consistent with that conclusion I find that CRDL has failed to establish that the Bond was null and void at the time of the call, which it was obliged to do before an injunction could be considered. In so doing I adopt the approach in Permasteelisa Japan KK v Bouyguesstroi. However, neither would I have been prepared to find that there was a seriously arguable case in this respect. In the result, it is not necessary for me to address balance of convenience issues.
Result
[48] I enter judgment against CCB on RCIL’s summary judgment application in
the amount of $NZ600,000.
[49] I decline CRDL’s application for injunctive relief.
Costs
[50] RCIL applies for indemnity costs against CCB on the basis that CCB breached the terms of the Bond by making inquiries about the position of the parties to the underlying contract, instructing a quantity surveyor and “making reference to
Principal’s instructions”. It says that its defence was in the “hopeless case” category
recognised in the authorities under r 14.6(4) of the High Court Rules 2016.14
[51] Undoubtedly the Bond contains a tension between the cl 2 prohibition on inquiry by the Bank and the Bank’s obligation not to pay if the Bond had been rendered null and void by prior payment by the Principal of the Contract Price. RCIL chose to accept a bond with that unsatisfactory tension. Although I have found against CCB, my provisional view is that, having regard to (1) some of the complexities in identification of the Contract Price under a measure and value contract and (2) the CCB’s decision to abide, indemnity costs are unlikely to be appropriate.
[52] Likewise, because of the commonality of issues between the related proceedings, discrete awards on the summary judgment and injunction applications may result in excessive recovery.
[53] Counsel are agreed that if these issues cannot be resolved between them submissions can be filed. They are to be a maximum of five pages. In the absence
of any request to the contrary, I will deal with the matter on the papers.
Muir J
Counsel/Solicitors:
K F Gould, Barrister, Auckland
J Miles QC, Barrister, AucklandA Stuart, Kensington Swan, Auckland
A E Murray, DLA Piper, Auckland
14 See for example Bradbury v Westpac Banking Corp [2009] NZCA 234, [2009] 3 NZLR 400.
2
3
1